Company pension scheme – Pensions Update | Issue 2/2016

Our roadshow this year on occupational pensions: Can external funding save the bAV?

This year’s roadshow is also being held in the context of the ongoing low interest rate environment, which continues to increase internal provisions for occupational pension plans and the resulting burdens on companies. Our events focus on outsourcing pension commitments as a response and design tool to the low interest rate environment.

Rising pension provisions are weighing on the balance sheets of companies that have made direct pension commitments – this will remain the case even after the new regulation of the interest rate for calculating pension provisions. While some companies are abandoning occupational pension schemes, others are turning to modern and more balance-sheet-friendly design and financing alternatives in order to remain attractive as an employer. Here it is important not to lose sight of any of the essential aspects: Balance sheet, tax and labor law aspects must be taken into account, and the selection of the provider requires a structured and careful analysis.

The events will be held under the title “Vorgesorgt: betriebliche Altersversorgung trotz Niedrigzins” (Providing for the future: company pension despite low interest rates) in June 2016 and July 2016 in various German cities:

Düsseldorf: June 15, 2016

Munich: June 24, 2016

Berlin: 05.July 2016

Hamburg: 07.July 2016

Stuttgart: July 13, 2016

Frankfurt a.M.: July 14, 2016

Participation is free of charge.

Pensions Update:

Pension plans on everyone’s lips – The Pensions Update asks

It seems that pensions are on everyone’s lips at the moment – hardly a day goes by without something being read about this topic in the press. Where does that come from?

Susanne Jungblut:

Yes, that is indeed the case. The other day I was in a coffee bar, there was a sign stuck to the paper cup where tips are collected: “For our pension”. The fear of not being able to maintain the standard of living to which people are accustomed in old age, and possibly even of being affected by poverty in old age, is widespread. And rightly so – demographic trends and low interest rates on savings, life insurance policies and even some company pension plans are putting all retirement systems under pressure. Added to this is the fact that, due to the low level of interest rates, pension provisions in company balance sheets continue to rise – a fatal signal, as it does not exactly encourage companies to expand their company pension schemes.

Pensions Update:

But wasn’t the problem of rising pension provisions just addressed by a change in the law?

Susanne Jungblut:

Yep. The period over which the actuarial interest rate relevant for the pension provision under commercial law is averaged was increased from seven to ten years. At present, this is easing the burden on corporate balance sheets, as the interest rate is higher. But if interest rates remain this low, the interest rate calculated over ten years will also fall to the same level as the seven-year average – just at a slower rate. And if, conversely, interest rates will rise again at some point, this will also be felt more slowly when looking at a ten-year average than when looking at a seven-year period. In my opinion, this is not a good solution overall. I could also have imagined a completely different smoothing mechanism here, for example along the lines of the procedure for the introduction of BilMoG. Incidentally, the taxable actuarial interest rate is unchanged at 6% – and will probably remain there.

Pensions Update:

Should companies even offer a company pension plan subsidized by them today?

Susanne Jungblut:

That would be exactly the right step! It can’t be said often enough – the shortage of skilled workers is rolling inexorably toward us, and that’s where the aspect of employer attractiveness is becoming increasingly important. What could be more obvious than to offer what employees, fearing poverty in old age, feel is increasingly important, namely an attractive company pension plan? The risks associated with this for the employer can certainly be minimized if the pension system is designed sensibly.

Pensions Update:

And what about pension provisions?

Susanne Jungblut:

Here, too, there are options – external financing, outsourcing, security-linked commitments are the main key points here. By the way, these are precisely the topics we will be discussing in this year’s series of events on company pension plans.

Pensions Update:

So a revival of the company pension scheme?

Susanne Jungblut:

I think so – even if the world of company pension plans will look completely different than it did in the last century. Incidentally, policymakers are also backing occupational pensions – but it remains to be seen what measures they will now implement to promote them.

Corporate transactions and balance sheet: reinsured pension commitments – the missing pension adjustment

Reinsured pension promises are often structured in such a way that the pension obligation is not recognized in the balance sheet. Against the backdrop of the low-interest phase, however, the reinsurance policy may now no longer be able to fully finance the pension adjustment required by law. The consequences: A balance sheet disclosure becomes necessary. And in corporate transactions, the buyer should negotiate an additional purchase price deduction.

For some years now, insurance-accessory commitments have enjoyed growing popularity. Under these pension commitments, employees are promised a one-time or regularly recurring contribution that is paid into a reinsurance policy. The employee then later receives the benefit that is also paid out under the reinsurance policy. Such a commitment can be organized as a direct commitment or via a provident fund; it can be financed by employer and/or employee contributions (via deferred compensation).

Why can the pension adjustment become a problem here?

Insofar as the pension commitment promises a lifelong pension payment, this pension must be adjusted regularly – either, to put it simply, every three years in line with inflation or annually by 1% (Section 16 (2) and (3) BetrAVG). There are insurance tariffs that guarantee an annual pension increase of 1% – but experience has shown that these have rarely been used in the past, as the additional guarantee is naturally at the expense of the pensions that are initially paid out. By its very nature, a life insurance policy cannot promise a pension adjustment in line with the development of the cost of living.
Now, in the past, insurers always generated a return that was significantly higher than the guaranteed interest rate. This resulted in surpluses from which the pension adjustments due could generally be met in full. Thus, the employer’s costs remained limited to the promised contribution payment.
Due to the ongoing low-interest phase, this picture is now beginning to falter. For the first time at the end of 2015, cases arose in our consulting practice in which insurers informed our clients that they would not be able to fully finance the upcoming pension increases from their surpluses. Since the obligation to adjust pensions – irrespective of whether it is a direct commitment or a provident fund commitment as well as employer- or employee-funded benefits – always falls on the employer, the employer must therefore bear the costs of the pension adjustment not disputed by the insurer. This can be done in two ways: Either the company pays an additional contribution to the insurer or the insurer transfers the missing pensions directly to the employees every month.

What are the possible accounting consequences?

Against the background of the assumption that the employer has no further obligations arising from the pension promise apart from the transfer of the contributions to the insurer, in the past a balance sheet disclosure was generally omitted for insurance-accessory commitments. Under HGB, it was assumed that the value of the assets of the reinsurance policy, i.e. its actuarial reserve or asset value, always corresponded 1:1 to the value of the pension obligations entered into (and that, if the necessary conditions were met, the obligation and the actuarial reserve could therefore be netted to zero). Under IFRS, the plans were mostly classified as defined contribution plans, i.e. only the periodic amount was recognized in the financial statements. Both approaches may now no longer be appropriate.
Instead, under HGB, the obligation and the plan assets can no longer be valued correspondingly (i.e. as a so-called security-linked pension commitment with the same amount). As a result, after the balancing of the portfolios, the employer’s obligation arising from the pension adjustment remains on the balance sheet or is, for example, not included in the balance sheet. in the case of a provident fund, alternatively disclosed in the notes. Under IFRS, the defined contribution plan will now be classified as a defined benefit plan, with the consequence that the obligation and plan assets will also be recognized in the balance sheet and, if applicable, in the income statement. are to be recognized on a net basis. In addition, a large number of disclosures have to be added to the notes.
How to determine the value of the resulting obligation is still under discussion among experts. Presumably, the actuary will have to base his calculations on a whole series of estimates – e.g., about the pension to be paid out from the insurance at the final age or the extent of the pension adjustment that can continue to be covered by the surpluses of the reinsurance policy.

Conclusion:

In the case of corporate transactions, the pension plans discussed here have so far mostly been treated as contribution plans – i.e. it has been assumed that the employer has no further obligation under the pension promise apart from the payment of contributions and that the acquired entitlements are fully funded via the reinsurance policy. Accordingly, no purchase price adjustment was made here.
At least from the purchaser’s point of view, this approach will no longer be adequate in the future – after all, the purchaser may also be required in the future to adjust the entitlements acquired up to the takeover date. This circumstance should be questioned as part of the due diligence process and, if necessary, included in the purchase price negotiations.

In search of a partner

As part of the special publication “bAVspezial” in the April issue of Personalmagazin, KPMG reports on the challenges involved in selecting an external provider for occupational pension plans. The following is a brief summary of the article.
Company pension commitments bind companies in the long term. For example, an employer who makes a pension commitment to its employees is not infrequently bound by the commitment and its settlement for more than 50 years. If the occupational pension plan is implemented via an unfunded direct commitment, the company bears the associated risks and must also recognize pension provisions in its balance sheet. In order to transfer all or part of the risks to a third party or to improve balance sheet ratios by creating plan assets, companies are increasingly looking for a bAV partner.
bAV partners (providers) can be investment companies, financial services companies, insurance companies, independent pension funds, pension funds and support funds. The number of providers is large, their products are diverse and not necessarily comparable. Therefore, the company’s own goals and requirements for the occupational pension system should first be worked out in order to narrow down the group of possible providers. This facilitates the subsequent selection process, as the potential number of providers is reduced to a reasonable level and “apples and oranges” are not compared.

Provider selection proceeds in the following steps:

When making the final decision in favor of a provider, a number of key criteria should be taken into account: For example, there should be transparency about all costs incurred, risks and any additional funding obligations – especially in the case of innovative life insurance or investment products. Furthermore, the company benefits from well-established processes and specialist know-how if the provider already has many years of experience in the area of occupational pension schemes.
Finally, it should be noted that a consultant who is technically competent and independent of all potential vendors can generate significant added value, especially if the company is unable to allocate professional and time resources to conduct the vendor selection.

The full article can be accessed online at Special publication bAV Spezial April 2016 | Personal | Haufe.

The crucial point is: before the “partner search” begins, companies should have clarified for themselves what they want.

Change in the HGB discount rate for pension obligations – implications for corporate transactions

The prolonged low-interest environment is causing the HGB actuarial interest rate to fall. The result: high pension provisions that are increasingly weighing on companies’ balance sheets. Industry and interest groups have been fighting for a new regulation of the actuarial interest rate for some time. In the run-up to the new regulations, various approaches to adjusting the actuarial interest rate were discussed. The new version of Section 253 of the German Commercial Code (HGB), which came into force on March 17, 2016, now stipulates the extension of the averaging period to ten years. What does this mean for companies in connection with transactions?
Previously, the discount rate to be used was the average interest rate of high-quality (AA+ rating) corporate bonds over seven years corresponding to the term of the obligations. The amendment extends the averaging period from seven to ten years. This will dampen the effect of the low interest rate phase for the moment, resulting in higher actuarial interest rates under German GAAP, which in turn will lead to lower accrual values for pensions. However, ten-year averaging only applies to pension obligations and not to other non-current personnel provisions, such as long-service awards or partial retirement.
The new regulation applies to financial years ending after December 31, 2015, with an application option for financial years beginning after December 31, 2014 and ending before January 1, 2016 (Article 75 (7) EGHGB). For these financial years, the new version of Sec. 253 para. 2 and para. 6 HGB are already applied.
However, the new regulation also provides for a distribution block for the difference between the valuation based on the seven-year and the ten-year actuarial interest rate. The distribution block applies not only to the first-time application of the new regulation, but generally.

The extension of the averaging period would result in an increase in the discount rate for a duration of 15 years from 3.89% to 4.31% as of December 31, 2015. Depending on the composition of the pension obligations, this change in the discount rate can reduce the obligation by 3% to 12%.
The following chart illustrates the development of the HGB invoice interest rates for a duration of 15 years based on the seven-year and ten-year averages using the development of the iboxxAA10+ (as of March 31, 2016). The chart assumes that yields on high-quality corporate bonds will remain constant at the current low level in the future.
The chart also shows that the effect of the low interest rate phase is merely being postponed by extending the averaging period and that HGB accounting interest rates will continue to fall in the future.
Conversely, a recovery in yields on high-quality corporate bonds will also have a delayed effect on HGB accounting interest rates in the ten-year averaging period, and any potential balance sheet relief effects will therefore not materialize until a correspondingly later date.
What are the effects of the change in the HGB discount rate for pension obligations in corporate transactions?
In principle, the valuation approach used to account for pension obligations as a purchase price deduction is a subject of negotiation between the buyer and seller, as there is no clear approach – valid for every obligation.
In our experience, although the pension obligation based on IFRS (or US GAAP) is used as the starting point for negotiations in transactions, it is more frequently discussed to consider the purchase price adjustment for pension obligations based on HGB accounting principles due to the ongoing low-interest phase. However, we do not want to go into this fundamental aspect of the discussion any further in this context.
If it has been agreed to value pension obligations on the basis of the German Commercial Code (HGB), the amended HGB discount rate regularly results in a lower purchase price deduction compared with the discount rate on the basis of the seven-year

Averaging for the reporting date. Sellers are therefore more likely to use the actuarial interest rate based on ten-year averaging to determine the purchase price deduction.
However, the future development of the obligation should not be ignored. As mentioned above, the change in averaging merely shifts the effects of low interest rates. Even on the basis of the amended HGB discount rate, pension obligations will increase in the near future due to falling interest rates.
The chart illustrates this development assuming that the current (March 31, 2016) interest rate level continues.

This effect should be taken into account when projecting provisions for business valuations if the pension obligations as a whole are material.
The buyer is usually interested in the highest possible purchase price deduction, which is why he will give preference to valuation on the basis of IFRS (or US GAAP). Due to the range of possible valuation approaches (e.g. IFRS as the maximum position and HGB with ten-year averaging as the minimum position), pension obligations offer themselves as a bargaining chip which can be set higher or lower depending on the negotiating position and consideration of other aspects of the transaction.
If the acquiring company prepares its accounts on the basis of IFRS and the pension obligation was taken into account in the purchase price on the basis of HGB (with ten-year averaging), the difference to be reported in the opening balance sheet between the value of the pension provision taken over measured in accordance with IFRS and the purchase price deduction (on the basis of HGB) will be higher than if the previous accounting rate with seven-year averaging was applied.

The valuation of pension obligations is often a subject of negotiation in corporate transactions. The change in the HGB invoice interest rate expands the scope for negotiation between the position of the buyer and seller.
Particularly in the case of projections of pension obligations for company valuations based on HGB, it should not be disregarded that the one-time effect of the initially lower pension provision will be cancelled out again in the future in the continuing low interest rate environment.

The employee’s claim to procurement in the case of the external implementation path – risks for the employer and possible arrangements under labor law

Employers are liable to employees for the provision of pension benefits under a pension commitment made via an external implementation channel. If the external pension provider does not (fully) fulfill the promised benefits, the employer is liable for the pension shortfall then to be recorded. In recent times, this liability risk has often led to friction in the settlement of pension commitments in view of the low interest rate environment. The employer can avoid such frictions by actively managing the pension commitment.

According to § 1 para. 1 sentence 3 of the German Occupational Pensions Act (BetrAVG), the employer is liable for the fulfillment of the benefits it has promised even if the benefits are not implemented directly via the employer. This so-called procurement claim exists for all external implementation channels, i.e. for all pension commitments via a pension fund, via an insurance company, via a support fund and via a pension fund. According to the case law of the BAG, the claim for procurement includes a direct claim of the employee against the employer for procurement of the benefits specified in the pension commitment (see only BAG ruling dated September 30, 2014, 3 AZR 617/12). The claim has the same rank as the employee’s pension claim against the external pension provider. If the external pension provider is unable to provide the benefits stipulated in the pension commitment, the employee may opt out directly with the employer. The procurement claim ensures that, in the case of
In the event of difficulties in the implementation channel, benefits are nevertheless provided in accordance with the pension commitment.

On the one hand, the procurement claim can come into play if the employer has not provided the external pension provider with sufficient funding to fulfill the pension claims. The entitlement to a pension may also come into play if sufficient funds have been allocated but the external pension provider is unable to provide the pension benefits to the extent promised, for example, due to an inappropriate investment of funds.
According to the case law of the Federal Labor Court (Bundesarbeitsgericht – BAG), the employee’s claim to compliance with the implementation method specified in the pension commitment is upstream of the claim to procurement (BAG ruling dated November 12, 2013, 3 AZR 92/12). The claim is for the employer to take the agreed necessary actions before the insured event occurs, which ensure the subsequent fulfillment of the pension promise via the agreed implementation path. The requirement to comply with the implementation path is intended to ensure that the employer’s obligation to pay benefits does not come into play when the insured event occurs. Whether the employee has a claim to compliance with a specific implementation method depends on the specific provisions of the pension commitment and must be determined by interpretation.

In practice, the claim to compliance with the implementation path plays a lesser role than the procurement claim – despite the temporal priority determined by the BAG. The entitlement to compliance with the implementation path generally only exists for the duration of the employment relationship. The employee entitled to pension benefits generally does not claim fulfillment of the promised pension benefits until the time the benefits fall due.

Scope of the Procurement Claim and Service Content

The procurement claim covers all types of benefit (pension benefit, disability benefit, surviving dependents’ benefit) and all benefit components of the promised pension benefit. In the case of a defined benefit plan, it includes the benefit specifically defined in the pension commitment; in the case of a defined contribution plan with profit participation, it includes not only the guaranteed pension (based in particular on the promised minimum interest rate) but also the relevant profit participation.

According to the case law of the BAG (ruling dated December 14, 1999, 3 AZR 713/98), the claim for compensation does not cover the reimbursement of tax disadvantages incurred by the employee concerned as a result of the subsequent funding compared with the promised implementation, e.g. as a result of the additional funding exceeding the tax exemption limit under Section 3 No. 63 of the German Income Tax Act (EStG) in the relevant assessment period. The employee must bear the income tax arising from this top-up. However, the employee can assert the tax loss as a claim for damages in individual cases if the employer is responsible for the lack of performance of the external pension provider.

However, in cases where the pension shortfall results from insufficient funding of the external pension provider by the employer, the BAG assumes a no-fault claim against the employer for unjust enrichment to the extent that the employer would have had to bear the lump-sum tax if the funding had been made in good time and the employer has been released from this obligation.

Procurement claim and review/implementation of the adjustment of pension benefits in accordance with section 16 of the German Occupational Pensions Act (BetrAVG)

The procurement claim also includes any pension increases to be granted after the respective adjustment test has been carried out in accordance with Section 16 of the German Occupational Pensions Act (BetrAVG). If the adaptation test according to § 16 para. 1 of the German Occupational Pensions Act (BetrAVG), the economic situation of the pension provider is assessed on the basis of the situation of the contractual employer; the economic situation of the external pension provider is irrelevant (BAG ruling dated September 30, 2014, 3 AZR 615/12).

If the pension commitment is made via a pension fund or direct insurance, the adjustment test can be carried out by the pension fund or direct insurance company specified in Section 16 para. 3 No. 2 of the German Occupational Pensions Act (BetrAVG). Under this provision, the obligation to conduct an individual adjustment test pursuant to Section 16 para. 1 of the German Occupational Pensions Act (BetrAVG) for these two implementation channels if all profit shares attributable to the pension portfolio are used to increase current benefits from the start of the pension. The provision was amended by the Act Implementing the EU Mobility Directive to remove the requirement previously specified as a further prerequisite that, for the purpose of calculating the guaranteed benefit, the amount of the benefit payable under Section 65 para. 1 No. 1 lit. a) VAG is not exceeded for the calculation of the actuarial reserve (Section 16 (3) no. 2 BetrAVG old version). It has not yet been clarified by the Supreme Court as of which adjustment test cycle the simplified regulation of Section 16 para. 3 No. 2 BetrAVG applies. According to the first ruling published on this subject by the Gelsenkirchen Labor Court on January 12, 2016 (see the discussion in the article “Current labor law case law” in this Pensions Update), Section 16 para. 3 No. 2 BetrAVG a.F. shall be applicable for all adjustment tests relevant until December 21, 2015. If the interest rate used to calculate the actuarial reserve for these adjustment tests exceeded the aforementioned maximum interest rate in the past or if not all of the profit shares used to increase the pension benefits are credited to the beneficiary, the adjustment test pursuant to § 16 para. 1 BetrAVG to be carried out.

Fulfillment of the procurement claim: additional funding versus direct payment of the pension benefit

In terms of content, in the event of an underfunding of the external pension provider, the employer can generally fulfill the procurement claim either by making a top-up payment to the external pension provider or by making a direct payment of the pension benefit in the amount of the difference to the employee. In the opinion of the BAG, this right of choice should not exist in the case of the supplementary pension scheme of the public sector; here, the employer should fulfill the procurement claim by making a subsequent allocation to the competent supplementary pension fund (BAG ruling dated April 17, 1996, 3 AZR 774/94). In practice, employers will tend to backfill – at least in the current low interest rate environment.

Procurement claim and modification of the pension commitment

The employer’s option to modify the pension commitment remains unaffected by the claim to provision.

In particular, the employer may amend the pension commitment in the current employment relationship or in the pension benefit relationship, taking into account the statutory requirements of sections 3, 30g para. 2 BetrAVG. In the case of a legal basis under collective bargaining law, the employer may also reduce the level of pension benefits in compliance with the legal principles on the protection of legitimate expectations and proportionality established by the BAG in accordance with the three-step theory. The (insufficient) economic performance to be assessed for the evaluation of the possible reduction of the pension level refers to the employer and not to the external pension provider.

The economic situation of the external pension provider is also generally not taken into account in the ongoing processing of benefits. If the external pension provider is unable to provide the pension benefits under the pension commitment due to a lack of sufficient economic capacity, the claim to provision secures precisely the pension shortfall resulting from this insufficient economic capacity.

Measures taken by the employer to prevent a claim arising from the procurement claim

The employer can use various instruments to counter the economically serious consequences in individual cases of a claim arising from the procurement claim:

– When the pension commitment is issued, by carefully selecting the external pension provider; in particular with regard to its economic performance. In addition, the employer should make use of the negotiating leeway that exists in individual cases with regard to the contractual agreement with the external pension provider on the implementation of the pension commitment and, as far as possible, determine resilient security instruments in the contractual agreement to prevent a pension gap.
– In implementing the pension commitment through active administration of the contractual agreement with the external pension provider, the Company
The aim was to ensure that the employer was aware of the financial performance of the external pension provider at all times. If the external pension provider has the legal form of a registered association and if the employer’s membership in the association is part of the pension commitment, the employer should actively exercise the membership rights.
– In the event of a claim arising from the procurement claim, through a careful analysis of the economic situations of the parties involved and a prudent decision on the fulfillment of the procurement claim through a top-up payment or through a direct payment to the employee.

Conclusion:

Procurement claim and modification of the pension commitment
The employer’s option to modify the pension commitment remains unaffected by the claim to provision.
In particular, the employer may amend the pension commitment in the current employment relationship or in the pension benefit relationship, taking into account the statutory requirements of sections 3, 30g para. 2 BetrAVG. If the legal basis is collective bargaining law, the employer may also reduce the level of pension benefits in compliance with the legal principles on the protection of legitimate expectations and proportionality established by the BAG in accordance with the three-step theory. The (insufficient) economic performance to be assessed for the evaluation of the possible reduction of the pension level refers to the employer and not to the external pension provider.
The economic situation of the external pension provider is also generally not taken into account in the ongoing processing of benefits. If the external pension provider is unable to provide the pension benefits under the pension commitment due to a lack of sufficient economic capacity, the claim to provision secures precisely the pension shortfall resulting from this insufficient economic capacity.
Measures taken by the employer to prevent a claim arising from the procurement claim
The employer can use various instruments to counter the economically serious consequences in individual cases of a claim arising from the procurement claim:
– When the pension commitment is made, by carefully selecting the external pension provider; in particular with regard to its economic performance. In addition, the employer should make use of the negotiating leeway that exists in individual cases with regard to the contractual agreement with the external pension provider on the implementation of the pension commitment and, as far as possible, determine resilient security instruments in the contractual agreement to prevent a pension gap.
– In implementing the pension commitment through active administration of the contractual agreement with the external pension provider, the Company
The aim was to ensure that the employer was aware of the financial performance of the external pension provider at all times. If the external pension provider has the legal form of a registered association and if the employer’s membership in the association is part of the pension commitment, the employer should actively exercise the membership rights.
– In the event of a claim arising from the procurement claim, through a careful analysis of the economic situations of the parties involved and a prudent decision on the fulfillment of the procurement claim through a top-up payment or through a direct payment to the employee.

Conclusion: The procurement claim will be or become relevant for a large number of employers in the current low-interest environment, in particular for pension commitments via association- or industry-related pension funds. Employers should identify gaps in coverage at an early stage and take appropriate measures to prevent or best reduce utilization under the procurement claim.

Experience from the international pension team in Zurich

Cross-border secondments are a typical part of career development in our Pensions Consulting team. With this article, we would like to share with you the “view beyond our own nose” in our consulting practice on company pension plans.

Due to personnel changes, I had the opportunity to support the international pension team in Zurich in its work in the period from December 2015 to March 2016. The focus of the Swiss team’s activities is mainly on international M&A projects, as well as the consolidation of international pension obligations. I had already had contact with both during my work in Germany, but my view was often limited to German pension obligations, albeit with a high degree of detail. In the international context, on the other hand, a detailed understanding of country-specific characteristics is difficult due to the diversity of pension landscapes worldwide. Rather, it is about a basic understanding of pension funding risks and opportunities and projecting those risks and opportunities into a negotiation strategy.

Another focus of my work was the valuation of international pension obligations, specifically Saudi Arabian pension and post-retirement medical plans. In Germany, there are relatively strict guidelines for the valuation of pensions: Discount rates are derived by mathematical methods from a large number of corporate bonds, mortality tables are based on scientific studies and are applied (almost) uniformly. In Saudi Arabia, there are significantly lower actuarial standards, which on the one hand places fewer limits on one’s own creativity in valuation, but on the other hand makes it much more difficult to raise awareness of certain actuarial issues. Effectively, each valuation assumption had to be fundamentally examined for its materiality and plausibility. The greatest technical challenge is the translation of the Arabic calendar into the Gregorian calendar.

By the end of March, however, my visit to Switzerland was already over. Now I am looking forward to using my newly gained knowledge to support the pension team in Germany.

Current labor law jurisprudence

The courts have also been active in other areas of occupational pension provision in recent months. Our case law section deals with judgments (1) on the (invalidity) of a late retirement clause in a pension commitment, (2) on the (invalid) exclusion of employees in a minor employment relationship under social security law from an employer-financed pension commitment, (3) on the infection of a reference clause in an employment contract by an ambiguity provision in the company agreement regulating the pension commitment in detail, (4) on the possible replacement of a pension commitment made on the basis of a company practice by a company agreement, and (5) on the adjustment test for pension benefits via a pension fund against the background of the Act on the Implementation of the EU Pension Reform Act.
Mobility Policy.
1. (In)effectiveness of a late termination clause and
Age discrimination (BAG ruling dated August 4, 2015, 3 AZR 137/13)
The General Equal Treatment Act (AGG), which came into force on August 18, 2006, stipulates in Section 2 para. 2 sentence 2 that the Company Pension Act applies to the company pension scheme. In its first decisions on the compatibility of pension commitments with the legal requirements of the AGG, the BAG had already clarified that the AGG is also applicable to company pension commitments insofar as the company pension law does not contain any overriding special provisions (BAG ruling dated December 11, 2007, 3 AZR 249/06). The AGG’s audit regime applies to company pension commitments in all implementation channels. Company pension commitments may not discriminate against individuals on grounds of gender or age, among other things. Different treatment of individual groups of employees on the grounds of age is permissible under Section 10 S. 1 and 2 AGG if it is objective and appropriate and justified by a legitimate objective, whereby the means of achieving the objective must also be appropriate and necessary. Pursuant to Sec. 10 Sentence 3 No. 4 AGG, the legislator expressly recognizes, among other things, the setting of age limits in occupational pension commitments as a prerequisite for the receipt of benefits as permissible.
In its decision of August 4, 2015, the BAG had the opportunity to further develop its case law on the AGG conformity of late retirement clauses. In the pension commitment on which this decision was based, the employer promised, among other things, survivors’ benefits. It specified as a prerequisite for survivor benefits that the employee had entered into the marriage before reaching the age of 60 and that the marriage had existed for at least one year on May 1 prior to his death. The employee benefiting from the pension commitment married the plaintiff in the legal dispute when he was 61. After his death, which occurred 30 months after the marriage, the plaintiff sought survivor benefits. The employer denied survivor benefits, citing the employee’s 61 years of age at the time of the marriage. The Munich Labor Court and, in the second instance, the Munich Higher Labor Court followed the employer’s view.
The BAG upheld the claim and recognized the entitlement to surviving dependents’ benefits. In the opinion of the BAG, the age limit of 60 years specified in the pension commitment for the granting of surviving dependents’ benefits directly discriminates against employees who marry after reaching the age of 60 and are thus completely excluded from widow’s benefits.
In justifying its opinion, the BAG first states that the discrimination is not justified pursuant to Sec. 10 S. 3 No. 4 AGG. According to the BAG, the admissibility of age limits as prerequisites for the receipt of benefits, as stipulated in Sec. 10 Sentence 3 No. 4 AGG, only refers to old-age and invalidity benefits and does not cover survivors’ benefits.
A justification was also not given according to the general requirements of § 10 p. 1 and 2 AGG. The BAG recognizes the purpose pursued by the employer with a late retirement clause as a legitimate objective within the meaning of Sec. 10 Sentence 1 AGG, namely to allow its employees to receive company pension benefits only if it also has the possibility to reliably forecast the pension expense resulting from the pension commitment. Such a forecast can sometimes not be made reliably, particularly in the case of late marriages, if the spouse of the late marriage is considerably younger than the employee entitled to the pension. However, the BAG denies the appropriateness of the general exclusion of survivor benefits for a marriage that the employee entered into after reaching the age of 60. This is based on the core consideration that the company pension plan – and therefore also a survivor benefit – as a component of remuneration is a consideration paid by the employer for the employee’s loyalty to the company, and that an age-related
The employer is entitled to claim that the late retirement clause generally disregards any service rendered by the employee after the age limit without exception. This length of service, which can still be earned after the age limit has been exceeded, distinguishes the age-related late marriage clause from clauses which provide for the exclusion of survivors’ benefits in cases in which the employee did not marry until after leaving the company or after the occurrence of the insured event and which the BAG considered to be in compliance with the AGG in its decisions of October 15, 2013 (3 AZR 294/11 and 3 AZR 653/11).

In its decision, the BAG expressly left open the assessment of the AGG validity of the following clauses:
– Clauses on the exclusion of survivor benefits from a pension marriage (as a marriage in which the marriage took place solely or predominantly for the purpose of providing the spouse with a survivor benefit): The BAG notes in this regard that the exclusion of such a pension marriage may contain a legitimate purpose to treat employees differently. However, the blanket age limit of 60 years in dispute would also cover any other late marriage in addition to such utility marriages and was therefore not appropriate to achieve the intended exclusion of a utility marriage.
– Age gap clauses according to which survivor benefits are reduced as the age gap between the spouses increases and are not granted above a certain age gap: In the opinion of the BAG, the reduction of the demographic risk of granting survivor benefits for an above-average period of time to significantly younger spouses of the employee, which is intended by the employer with such an age gap clause, does contain a legitimate purpose. However, the blanket age limit of 60 at issue would encompass any other late marriage and therefore is not appropriate to achieve
the intended management of this demographic risk.
Finally, the BAG clarifies in the decision that the decisive factor for the temporal applicability of the AGG to survivors’ benefits is that the legal relationship between the employer and the employee on which the pension commitment is based (still) existed at the time the AGG came into force on August 18, 2006. Late termination clauses therefore continue to apply to surviving dependents even after this BAG ruling in cases where the employee benefiting from the pension commitment died before August 18, 2006.
Conclusion: General age-related restrictions in pension commitments for the receipt of survivors’ benefits should generally no longer be permissible following the ruling of the BAG.
At the same time, the reasoning of the ruling shows possible arrangements for the employer which, if the pension commitment is formulated transparently, can include an effective limitation of surviving dependents’ benefits:
(1) Exclusion of pension benefits for surviving spouses if the marriage was entered into after the occurrence of a pension event or after the employee left the employment relationship;
(2) Exclusion of pension benefits from pension marriages; this, for example, by stipulating the requirement that the marriage must have existed for a minimum period (e.g. six months) in line with requirements at the time of the occurrence of the pension event;
(3) Include age gap clauses with a ratable reduction in survivor benefits if there is a corresponding age gap between the employee and spouse.

2. exclusion of employees in a marginal employment relationship from an employer-financed pension commitment (LAG München Urt. v. 13.01.2016, 10 Sa 544/15)

Employer-financed pension commitments frequently determine in practice the general exclusion of employees in a marginal employment relationship under social security law pursuant to Section 8 para. 1 SGB IV. Such a general exclusion typically covers both employees in a regular marginal employment relationship within the meaning of Section 8 para. 1 No. 1 SGB IV (“450 EUR employee”) as well as employees in a marginal employment relationship due to a calendar-based fixed term pursuant to Section 8 (1) SGB IV. 1 No. 2 SGB IV (“calendar-limited marginal employees”). In its ruling of February 22, 2000 (3 AZR 845/98), the BAG deemed the associated unequal treatment of such employees from employees in an employment relationship subject to social security contributions to be effective; this with the core argument that such employment relationships in a marginal employment relationship are generally not subject to the social security contributions of the statutory pension insurance and therefore an employer-financed company pension scheme cannot fulfill its core purpose of topping up statutory pension benefits with regard to a marginal employment relationship.

With effect from October 1, 2013, the legislator amended the marginal employment relationship within the meaning of Section 8 para. 1 No. 1 of the German Social Security Code (SGB IV) is generally subject to the social security obligation of the statutory pension insurance. 450 EUR-employees in a marginal employment relationship (only) have the possibility to avoid the statutory pension insurance obligation of the 450 EUR-job by an active effecting of the exemption according to Section 4.3.1. § 6 para. 1b) SGB VI. This general social security obligation does not affect the marginal employment relationship of calendar-limited marginal employees.

In its decision of January 13, 2016, the LAG Munich had the opportunity to review the previous case law of the BAG on the general exclusion of employees in a marginal employment relationship, which was found to be permissible, against the background of the new version on the treatment of marginal employment relationships under social security law.

In the facts underlying the decision, the pension commitment of the defendant employer provided for a general exclusion of employees in a marginal employment relationship within the meaning of Section 8 para. 1 SGB IV. The plaintiff, a 450 EUR employee, considered this exclusion – at least for the marginal employment relevant for his status within the meaning of Section 8 (8) of the German Income Tax Act – to be inappropriate. 2 No. 1 SGB VI – for ineffective. In justification, he argued that the new statutory regulation on the general social security obligation of the 450 EUR employment relationship had rendered obsolete the previous case law of the BAG on the effectiveness of the general exclusion of employees in a marginal employment relationship and that an exclusion of 450 EUR employees from the pension commitment was in any case a violation of the statutory prohibition of discrimination against part-time employees pursuant to Section 4 (4) of the German Social Security Act. 1 TzBfG.

The LAG Munich followed the employee’s view and declared the exclusion of EUR 450 employees from an employer-financed pension commitment to be a violation of Section 4 (4). 1 sentence 1 TzBfG to be invalid.

The appeal is currently pending before the BAG (German Federal Labor Court). 3 AZR 83/16. There is much to suggest that the ruling of the Munich Higher Labor Court will be upheld, as the general exclusion of employees in a marginal employment relationship within the meaning of Section 8 (8) of the German Income Tax Act (Einkommensteuergesetz – AktG) is not justified. 1 SGB IV from an employer-financed pension commitment can no longer be maintained after the legal revision of the general social insurance obligation of marginal employment relationships of EUR 450 employees. The previously assumed exception to the prohibition of discrimination under Sec. 4 para. 1 sentence 1 TzBfG due to special national system requirements is no longer applicable.
On the other hand, the exclusion of temporary employees for a limited period of time pursuant to Section 5 (5) of the German Income Tax Act is likely to be permissible even under the new legislation. 2 SGB VI in conjunction with. § 8 para. 1 No. 2 SGB IV. In our opinion, the legal principles established by the BAG in its ruling of February 22, 2000 for the admissibility of an exclusion from the company pension scheme can still be used for this marginal employment relationship. Employers who wish to continue such an exclusion for calendar-limited marginal employees should explicitly state this employee group in the pension commitment.

(3) BAV commitment through employment contract reference clause to a works agreement – no infection of the reference clause by an unclear provision of the works agreement (BAG judgment dated December 8, 2015, 3 AZR 267/14)

In its ruling of December 8, 2015, the Federal Labor Court (Bundesarbeitsgericht – BAG) made a decision that is important for practice regarding the scope of the general terms and conditions control of company pension commitments made by an employer via a clause in the employment contract referring to a works agreement applicable to the employment relationship.

Such pension commitments consist of two components:
– The reference clause in the employment contract, which is generally subject to the statutory requirements of the general terms and conditions control pursuant to § 305 et seqq. BGB is subject to. According to § 305c para. 2 BGB, ambiguities in the interpretation of the clause shall be at the employer’s expense (ambiguity rule).
– The company agreement containing the specific benefit plan for the pension commitment. Pursuant to Section 310 para. 4 sentence 1 of the German Civil Code (BGB) is not subject to review under the General Terms and Conditions of Business (AGB) and, in this respect, the ambiguity provision of Section 305c (1) of the German Civil Code (BGB) in particular is not applicable. 2 BGB shall not apply in favor of the employee.

The facts underlying the decision concerned a group of companies: the plaintiff employee had received a promise of a company pension (“1992 promise”) from a group company in 1992.

In 2006, the Group companies sought to standardize the company pension scheme throughout the Group and concluded a Group Works Council Agreement (“KBV 2006”) to this end. The KBV 2006 determined that the
employees of the Group companies were to receive a pension commitment via a provident fund from March 1, 2006. The pension commitment via the provident fund provided for a lower benefit level than the 1992 commitment.

The KBV 2006 should not be applicable to individual employee groups regulated in the KBV 2006. The KBV 2006 stipulated in this regard, among other things, in § 1 para. 2 KBV 2006:

“It does not apply to employees of the Group for whom
Commitments to employer-financed company pensions outside commitments via the […] provident fund on the basis of a […] pension plan of a company in the Group continue to exist. Such employees shall continue to be governed solely by the benefit plans previously applicable to them.”

The employee changed her contractual employer within the Group in 2008. The employment contract concluded for the change of employer within the Group contained the following reference clause in the employment contract regarding the company pension plan:
“Entitlements to the company pension plan are based on the reason and the amount according to the [KBV 2006].”
After the conclusion of the employment contract, the employee demanded that her new intercompany contract employer continue the 1992 commitment. This in essence with the reference to § 1 para. 2 KBV 2006, according to which the 1992 commitment remained unaffected by KBV 2006.

The provision of § 1 para. 2 KBV 2006 could be interpreted – in the interests of the employee – in such a way that it covers all intra-group employees who had already received a pension commitment from a group company before the KBV 2006 came into force. The also possible interpretation of § 1 para. 2 KBV 2006 that it only covers those pension commitments which, according to their individual legal basis, would continue to apply after the KBV 2006 came into force – and according to which the employee would have no claim to the continuation of the 1992 commitment, since she had not agreed the continuation of the 1992 commitment in the employment contract with her new intra-group contractual employer – must be interpreted in accordance with the ambiguity rule of Section 305c (2) KBV 2006. 2 BGB shall be disregarded.

The BAG dismissed the action. The ambiguity rule of Section 305c of the German Civil Code (Bürgerliches Gesetzbuch – BGB) is exclusively applicable to provisions in employment contracts. Therefore, in the present case, it exclusively covers the referral clause in the employment contract. Any ambiguities in the KBV 2006 are to be resolved by way of general interpretation in accordance with the BAG’s interpretation standards for the interpretation of collective agreements. The KBV 2006 is subject to the provisions of section 310 para. 3 BGB is not subject to the statutory content review of the law governing general terms and conditions.

Conclusion:

The BAG’s decision is convincing in its result and in its reasoning. In the case of pension commitments that are granted on the basis of a reference clause in an employment agreement, the statutory review of general terms and conditions applies only to the reference clause in the employment agreement.

Legal disputes of this kind can be avoided for employers from the outset if employers waive a reference clause in the employment contract from the outset when they intend to make a company pension commitment via a company agreement. The works agreement is directly applicable to the employment relationship even without the referral clause due to its normative effect (Sec. 77 (3) sentence 1 BetrVG). At the same time, for reasons of legal clarity, the employer and the works council should generally formulate the exclusion criteria in a works agreement so transparently that no scope for interpretation can arise from the outset.

4. replacement of occupational pension commitments based on a company practice – no static effect of the granting of the pension commitment; interpretation of a grandfathering commitment (BAG ruling dated February 23, 2016, 3 AZR 44/14)

The effectiveness of the modification of an individual pension commitment – above all for a cost-optimizing reduction of the benefit level – by means of a collective agreement (and here in particular by means of a works agreement) generally requires the fulfillment of two prerequisites (cf. For more details, see the article “Modification of company pension schemes: Opportunities and risks under labor law” in Pensions Update
02/2015: http://www.kpmglaw.de/docs/Pensions_Update_Sommer_2015.pdf#pa ge=7):

(1) Legal feasibility of replacing the individual pension commitment (formal replaceability) and
(2) Proportionality of the replacement according to the three-step theory of the BAG.

The effective implementation of the replacement of the individual pension commitment by a company agreement generally requires the consent of the employee. Exceptionally, the BAG allows a replacement without the employee’s consent if the pension commitment contains a reservation regarding the possibility of replacement at a later date by means of a collective agreement (works agreement). In its ruling of March 10, 2015 (3 AZR 56/14), the BAG assumed that any overall commitment is replaceable under collective bargaining law. This is based on the argument that the provisions of the company pension plan set out in an overall commitment are designed for a longer, indefinite period of time and are therefore exposed from the outset – also recognizable to the beneficiaries – to a possible need for change in the future (see our discussion in Pensions Update 01/2016):
http://kpmglaw.de/docs/KPMG_Law_Pensions_Update_01_2016. pdf#page=18). In its decision of February 23, 2016 (3 AZR 44/14), the BAG had the opportunity to assess the application of this case law to a pension commitment originally granted by virtue of a company practice.

In the facts underlying the decision, the defendant employer had originally promised its employees a company pension on the basis of an overall commitment (“Directive 1970”). Under the 1970 Directive, after ten years of service, the retirement pension was 20% of the pensionable earnings earned in the last year of employment and increased for each additional full year of service up to the 25. year of service by 2 % and from the 26 to 35 years of service by 1% each; the maximum rate was 60% of pensionable income (with half of the statutory retirement pension offset). The Employer modified the 1970 Guideline in another blanket award issued in 1984 (“1984 Blanket Award”), under which the retirement pension was 0.4% of pensionable earnings earned in the last year of employment. In mid-1989, the employer modified the 1984 overall commitment in a works agreement (“BV 1989”) agreed with the works council elected at the employer in the meantime. The BV 1989 provided for a reduction in pension benefits for early retirement – with a deterioration in benefits compared with the overall commitment in 1984 – while the pension formula otherwise remained unchanged.

The plaintiff employee, who was born in 1947, entered into an employment relationship with the employer on March 1, 1989. The parties had agreed in the employment contract that the length of service earned by the employee with his previous employer since 1973 would be recognized for the employment relationship. Moreover, the employment contract did not contain any provisions on the company pension plan. The employee left the employment relationship on December 31, 2010 and has been drawing a statutory retirement pension since January 1, 2011. The employer granted the employee a company pension in accordance with the BV 1989, which it reduced in installments due to the early retirement.

The employee sued for an old-age pension under the 1970 Directive or, in the alternative, under the 1984 Overall Pension Plan. The employee derived the claim under the 1970 Directive from the recognition in the employment contract of the employee’s length of service with his previous employer since 1973, according to which the employee would have to be treated as if he had been employed by the employer since 1973. The old-age pension was to be granted in any case in accordance with the 1984 overall commitment, since the commitment contained therein was also applicable to his employment relationship by virtue of company practice and this pension commitment – in the absence of an opening clause not to be recorded in a company practice – had not been replaced by the subsequent BV 1989.

The BAG rejected a pension entitlement under both the 1970 Directive and the 1984 General Agreement:

– The 1970 Directive was not applicable because the employment relationship was not established until 1989 and therefore after the 1970 Directive had been modified by the 1984 Overall Commitment. The contractual recognition of the employee’s length of service with his previous employer is limited to the employee’s social vested rights directly linked to the length of service (notice period, application of the German Unfair Dismissal Act (KSchG)) and typically does not include a fiction of the existence of the employment relationship with the employer from the time of the recognized length of service.
– The commitment that arose by virtue of company practice in accordance with the parameters of the overall commitment in 1984 could generally be replaced by the BV 1989 under collective bargaining law. A pension commitment made on the basis of a company practice – comparable to a commitment made on the basis of a general commitment – is intended for the employee for a longer, indefinite period of time. The pension regulations applicable by virtue of company practice were from the outset recognizably exposed to any future need for change for the beneficiaries.

Conclusion:

The BAG’s decision is convincing in its result and in its reasoning. Employers can counteract the considerable economic burdens – resulting in particular from the low-interest environment – from commitments based on a company practice by means of an amending company agreement, taking into account proportionality.
The BAG’s clarification that the mere recognition of years of service with a previous employer does not imply the fiction of an employment relationship with the employer granting the pension commitment from the time of the recognized years of service is also helpful in practice. For practical purposes, it is recommended to limit the content of the recognition of seniority to a specific social vested right (e.g. termination status of the employment relationship).

5 The simplified adjustment test for pension benefits via a pension fund – no retroactive effect of the Act on the Implementation of the EU Mobility Directive (ArbG Gelsenkirchen Urt. v.
12.01.2016, 5 Ca 1061/15)

The Act on the Implementation of the EU Mobility Directive, which came into force on December 21, 2015, includes, among other things, an amendment to Section 16 para. 3 No. 2 of the German Occupational Pensions Act (BetrAVG), according to which the adjustment obligation for pension commitments via direct insurance and pension funds should already cease to apply if all profit shares are used to increase benefits. The observance of the limitation of the actuarial interest rate to be applied for the calculation of the actuarial reserve for the guaranteed benefit, which was determined until the amendment of the Act, to the interest rate specified in Section 65 (1) of the Act. 1 ISA in conjunction with § 2 para. 1 DeckRV (“statutory maximum regulatory interest rate”) shall apply to the simplified adjustment test pursuant to Section 16 (1) of the German Pension Insurance Act (DeckRV). 3 No. 2 BetrAVG n.F. no longer to be observed. In the legislative process and also for the adopted amendment to the Act, it was and is not clearly clarified whether the simplified adjustment test also applies retroactively for adjustment test dates prior to December 21, 2015 in accordance with Section 16 of the German Occupational Pensions Act (BetrAVG). Such retroactive application was affirmed by individual voices in the literature after the law was passed.

In its decision of January 12, 2016, the Gelsenkirchen Labor Court was – as far as can be seen – the first labor court to have the opportunity to assess the scope of retroactivity.

In the case underlying the decision, the defendant employer had promised the plaintiff employee a pension commitment via the Pensionskasse der deutschen Wirtschaft (PkdW). In calculating the actuarial reserve, PkdW used an actuarial interest rate – approved at this level by the insurance supervisory authority – which was consistently higher than the statutory maximum interest rate required by supervisory law.

PkdW ran into economic difficulties in 2002. In 2003, its General Meeting resolved to successively reduce the pension benefits to be paid by it to beneficiaries of the member companies. The reduction in benefits also affected the plaintiff employee, who had been receiving retirement benefits from the pension commitment since 2008. PkdW used the surpluses earned in the subsequent period, among other things, to increase pension benefits and thus reduce the reduction in benefits. PkdW’s benefit arrears from the benefit reduction showed a monthly amount of EUR 44.99 as of December 31, 2014. Neither PkdW nor the employer had adjusted the employee’s pension benefits during the benefit period ending December 31, 2014.

In his action, the employee sought the proper review and implementation of the adjustment of his pension benefits pursuant to Section 16 para. 1 BetrAVG with effect from July 1, 2015. The employer refused to make such an adjustment. This was initially done with reference to the simplified adjustment for pension benefits via a pension fund since December 21, 2015, pursuant to sec. § 16 para. 3 No. 2 BetrAVG n.F., which also covers retroactive adjustment periods. By using the surplus exclusively for pension benefits, PkdW had also complied with the requirements of Section 16 para. 3 No. 2 BetrAVG a.F. was fulfilled; the actuarial interest rate approved by the insurance supervisory authority for the calculation of the actuarial reserve was to be equated with the statutory maximum interest rate under supervisory law.

The Gelsenkirchen Labor Court upheld the action and ordered the employer to implement the adjustment in accordance with Sec. 16 (1). 1 BetrAVG. The provision of § 16 para. 3 No. 2 BetrAVG n.F. on the simplified adjustment of company pension benefits via a pension fund was applicable to adjustment periods prior to the entry into force of Sec. 16 (2) BetrAVG. 3 No. 2 BetrAVG not applicable. The PkdW and thus also the employer could also not use the adjustment relief under Section 16 para. 3 No. 2 BetrAVG (old version). On the one hand, this was because in the past PkdW had regularly used an actuarial interest rate above the statutory maximum interest rate under supervisory law for calculating the actuarial reserves; the approval of this higher actuarial interest rate by the insurance supervisory authority was not sufficient to meet the requirements of § 16 para. 3 No. 2 BetrAVG a.F. to the statutory maximum regulatory interest rate.

Conclusion:

The decision is incorrect with regard to the denial of a retroactive effect of the simplified adjustment test pursuant to Section 16 para. 3 No. 2 n.F. for preceding adjustment-relevant
Performance periods plausible.

The Gelsenkirchen Labor Court also correctly pointed out that a simplified adjustment test pursuant to Section 16 (1) of the German Civil Code (§ 16 Abs. 3 No. 2 a.F. can only be taken into account if the Pensionskasse uses an actuarial interest rate for the calculation of the actuarial reserve that is no higher than the statutory maximum interest rate under supervisory law. An actuarial interest rate exceeding this amount could not effectively be used for the simplified adjustment test even if the insurance supervisory authority had approved this increased actuarial interest rate.

The employer has lodged an appeal against the judgment with the Higher Labor Court (LAG) in Hamm (case number: 4 SA 264/14).

bAV News Ticker

What lasts long, finally becomes good?

After lengthy discussions, the determination of the discount rate for pension provisions under HGB has now been changed after all. As part of the Act Implementing the Residential Real Estate Directive of March 11, 2016 (BGBl. I 2016 p. 396 of March 16, 2016), the period over which the actuarial interest rate is calculated in accordance with Sec. 253 (1) of the German Commercial Code (HGBl. I 2016 p. 396 of March 16, 2016) was extended. 2 HGB is to be determined, extended from seven to ten years. The new regulation applies exclusively to pension obligations. It is applicable for financial years ending after December 31, 2015; for financial years beginning after December 31, 2014 and ending before January 1, 2016, there is an option to apply it. We provide information on the effects of this change, particularly in the context of corporate transactions, in a separate article in this Pensions Update (page 7).

Company pension schemes are once again the focus of political attention. Two expert opinions have been presented in recent weeks: The “Legal Opinion on the ‘Social Partner Model Company Pension’ of the Federal Ministry of Labor and Social Affairs” by Prof. Dr. Dres. hc. Peter Hanau and Dr. Marco Arteaga, as well as the “Expert Opinion on Optimization Possibilities for the Subsidy Regulations of Company Pension Plans” by Prof. Dr. Dirk Kiesewetter, commissioned by the German Federal Ministry of Finance. Both reports deal with possible measures to strengthen and disseminate occupational pensions. The focus of the “BMF Report” is on low and low-paid employees as well as employees working in small and medium-sized enterprises (SMEs). The two ministries are now in consultation – which of the proposed measures will be implemented remains to be seen.

Selection tips: Criteria for external supply carriers

With the occupational pension scheme, companies make a long-term commitment to their employees. Accordingly, the business relationship with an external occupational pension provider is also expected to be of medium to long-term duration. External pension providers include investment companies, financial service providers, insurance companies, independent pension funds, pension funds and provident funds, which sometimes also provide additional administration services.

Therefore, when deciding on a provider, the following key criteria should be considered:

– After the tender, the company should have information on all costs incurred, i.e. the amount of set-up costs and ongoing administrative costs. In addition, it should be found out for which extraordinary business transactions additional costs are incurred and in what amount they are charged.
– Particularly in the case of innovative life insurance or investment products, the company should be aware of all risks and any additional funding obligations. In the course of this, it would seem advisable to ask for the product’s mode of operation and information on which part of the contributions paid is saved to finance the subsequent pension benefits and which parts of the contributions are used to pay the costs.
– A health examination is regularly required when taking out life insurance policies. Here, the regulations sometimes differ greatly depending on individual benefit limits: while some insurers dispense with an examination altogether, others require confirmation of the employee’s fitness for duty by means of a so-called duty obligation declaration. Still others insist on an individual health assessment. The more complex the audit, the greater the administrative burden on the company. It is therefore worth asking and renegotiating.
– The occupational pension provider should have many years of experience in the field of occupational pensions. Processes that have already been tried and tested reduce the susceptibility to errors. Experience has shown that providers with many years of experience in the private customer sector are not automatically predestined to serve corporate customers with occupational pension issues. This is due not least to the comprehensive labor, tax and social security regulations governing occupational pension schemes.

News from the legislator on the determination of the income of provident funds

In the past, there was some dispute as to how relief funds should determine their income for tax purposes. This question regularly became relevant in practice insofar as the provident fund became partially liable to tax as a result of overfunding (Sec. 6 (5) Sentence 1 KStG).

In practice, the tax authorities have always treated the contributions made by the sponsoring company to the provident fund at the level of the provident funds as tax-neutral on the one hand (with different justifications in detail), and the fund payments made by the latter to the beneficiaries as tax-neutral on the other hand, with reference to Sec. 10 No. 1 KStG 1999. In its ruling of December 22, 2010 (I R 110/09), the Federal Fiscal Court (Bundesfinanzhof, BFH) rejected this legal interpretation for support funds in the legal form of a GmbH (limited liability company) and ruled that, in the absence of a corporate reason, the contributions made by the sponsoring company are to be treated as operating income and the payments made by the fund to the beneficiaries are to be treated as operating expenses in accordance with the general rules. Whether these
principles should also be applicable to support funds in the legal form of a registered association was not to be decided in the case and was explicitly left open by the BFH. The tax authorities published the decision in the Federal Tax Gazette II at the beginning of 2014.

With effect from the 2016 assessment period (Sec. 52 (1) EStG, Sec. 34 (1) KStG), numerous new statutory provisions have now come into force:

a) First of all, § 6 para. 5 sentence 2 KStG that – irrespective of the legal form of the provident fund – contributions by the sponsoring company may not increase the income of the provident fund, and pension payments by the provident fund and transfers of assets to the sponsoring company may not reduce the income.

b) This can lead to the situation where contributions to the provident fund were treated as taxable income in the past, but pension benefits can no longer be claimed as income-reducing in the future. Therefore, support funds in the legal form of a limited liability company (GmbH) will be excluded by the newly inserted Sec. 6 (6). 5a of the German Corporate Income Tax Act (KStG) additionally provides for the possibility to separately deduct benefits paid by the sponsoring company from pension benefits upon request.
to the extent that these were included in taxable income in the assessment periods 2006 to 2015. As of the 2016 assessment period, the taxable income of the fund is then reduced by the pension payments made in the fiscal year, but by no more than the determined contribution amount.

c) Finally, it was also stipulated that the tax exemptions under Section 3 No. 40 Sentence 1 of the German Income Tax Act (EStG) and the provisions of Section 8b of the German Corporation Tax Act (KStG) do not apply with regard to the shares in support funds under company law.
(Sec. 3 No. 40 Sentence 5 EStG, Sec. 8b (11) KStG).

As a result, the new regulation described in a) above renders the above-mentioned BFH ruling from 2010 obsolete to the extent that the previous contrary tax administration opinion is now legally binding.
The provision described under b) accompanies this to the extent that any double taxation that may occur is prevented against the background of constitutional concerns.