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22.12.2016 | KPMG Law Insights

Company pension scheme – Pensions Update | Issue 3/2016

Dear Readers,

An eventful calendar year, particularly in terms of the development of company pension plans, is drawing to a close. This year’s final point in the (further) development of occupational pension provision is set by the legislator with the publication of the draft of the Company Pension Strengthening Act passed by the German government on December 21, 2016. We highlight the key points of the current draft legislation in an editorial. We will, of course, keep you informed about the further course of the legislative process. Among other things, we are planning a webinar for March 2017 in which we will inform you about the main contents of the Company Pension Strengthening Act in what will certainly be its final form. You will receive the invitation to this webinar in due time.

The subject of our focus article on labor law is the employer’s liability risks arising from a so-called comprehensive commitment. In this interview, Christine Hansen explains how to deal with liability risks arising from pension commitments based on deferred compensation in line with requirements. Contributions on the change of direction of occupational pension products in life insurance, on current developments in the administration of occupational pension commitments, and on other recent developments in case law and legislation conclude the last issue of our Pensions Update for 2016.

We wish you a stimulating read!
With best wishes for the New Year 2017

Your pension team of the
KPMG Rechtsanwaltsgesellschaft mbH and KPMG AG Wirtschaftsprüfungsgesellschaft

Sincerely yours

Susanne Jungblut Dr. Lars Hinrichs

The aim of the German government is to strengthen company pension schemes and make them more widespread. Following two expert reports commissioned by the ministries and an intensive discussion between the ministries involved, social associations, trade unions, interest groups and academics, the draft bill for a law to strengthen occupational pensions is now available. Does it fulfill the hopes placed in the bill?

Draft of the Company Pension Strengthening Act – a boost for company pensions?

The aim of the German government is to strengthen company pension schemes and make them more widespread. Following two expert reports commissioned by the ministries and an intensive discussion between the ministries involved, social associations, trade unions, interest groups and academics, the draft bill for a law to strengthen occupational pensions is now available. Does it fulfill the hopes placed in the bill?

Goals of the bill

For some time now, there has been an intensive discussion in the press and in politics about the future pension level and the threat of old-age poverty. The declining coverage of the statutory pension, the lower-than-expected benefits from the “Riester pension” and the still unsatisfactory spread of occupational pensions, as well as changes in employment biographies, are leading to ever larger pension gaps in old age. Private savings often cannot compensate for these gaps in provision. As a result, a number of proposals and demands have been and are still being made by politicians and trade unions with the aim of improving retirement provision for the population. In this context, the German Federal Ministry of Labor and Social Affairs (BMAS) and the German Federal Ministry of Finance (BMF) have now presented a joint draft bill (draft bill to strengthen occupational pension provision and amend other laws [Betriebsrentenstärkungsgesetz], draft bill dated November 4, 2016). The aim of this Occupational Pension Strengthening Act is to achieve the widest possible distribution of occupational pensions and thus a higher level of provision for employees. The focus here is particularly on small companies and low-income employees, as company pension schemes are less widespread than average in these areas.

Timing

The draft of the Company Pension Strengthening Act was sent to associations and trade unions by the BMAS on November 3. These were asked to submit their comments by November 24. The cabinet decision was made on December 21. The aim is to pass the law before the end of this legislative period so that it can enter into force on January 1, 2018.

Essential content of the law

In order to achieve the objectives outlined above, the possibility is created of agreeing pure defined contribution plans in collective agreements – i.e. without any minimum benefit and thus without any obligation on the part of employers to pay contributions. So-called “opting out” models can also be created by the collective bargaining parties. In addition, the tax framework for pension schemes implemented via direct insurance, Pensionskassen or pension funds will be improved. Furthermore, a specific support model for low-income earners will be introduced. In addition, there is a new regulation on how to deal with a reinsurance policy in the event of the employer’s insolvency. Furthermore, the Riester basic amount will be increased and benefits from occupational pensions as well as Riester and Rürup pensions will in future only be counted to a lesser extent towards subsistence assistance and basic benefits in old age and in the event of reduced earning capacity.

It is not only the Company Pension Act that is affected by these changes. In addition, a whole series of other laws, for example the Income Tax Act, some social security codes and the Insurance Supervision Act, were adjusted.

The most significant new regulations on company pension plans that directly affect employers are:

1. introduction of a pure defined contribution plan

Up to now, it has also been necessary to guarantee the employee a minimum benefit within the framework of a so-called defined contribution commitment (as a defined contribution benefit commitment in accordance with Section 1 (2) (1) of the German Occupational Pensions Act (BetrAVG) or a defined contribution commitment with a minimum benefit in accordance with Section 1 (1) (2) of the German Occupational Pensions Act (BetrAVG)). The employer is liable for this minimum benefit even if it is financed externally, e.g. via a direct insurance policy. Since this liability of the employer has been identified as an obstacle to the spread of occupational pensions, pure defined contribution plans in which no minimum benefit is guaranteed are to be possible in the future.

However, such defined contribution plans must be based on a collective bargaining agreement, i.e. agreed between the parties to the collective bargaining agreement. These new defined contribution plans are to be implemented via a joint institution of the collective bargaining parties, which may be organized as a pension fund, pension fund or direct insurance. The collective bargaining parties must either carry out the joint establishment themselves or have suitable means of influencing and controlling it.

To compensate for the fact that any liability on the part of the employer (apart from the obligation to pay contributions) is eliminated, an additional contribution by the employer is to be stipulated in the collective agreement. This “security contribution” is not credited to the individual employee, but is used to build up a higher capital stock (which then allows for higher benefits and/or a more conservative capital investment strategy). However, this is only a “shall” provision, i.e. it is up to the parties to the collective agreement whether they agree on such a security contribution.

If deferred compensation amounts are brought into the contribution system, the employer is obliged to pass on the social security contributions saved as a result of deferred compensation to the employee to a large extent. For this purpose, he must increase the “employee contribution” by at least 15% of the remuneration that is no longer subject to social security contributions due to the deferred compensation. Unlike the security contribution, this employer contribution is credited to the individual “employee account”.

Defined contribution plans vest immediately. In the event of a change of employer, the accumulated capital can be transferred to the new employer’s defined contribution plan (if available). Incidentally, it is also possible to transfer the entitlement from a system with a minimum guarantee (i.e., from a “traditional” direct insurance policy, for example) to the new employer’s defined contribution plan.

Provided the joint institution agrees, employers and employees who are not bound by collective agreements may also participate in the collectively agreed defined contribution scheme.

2. introduction of an option system

Also left to the collective bargaining parties is the introduction of an option system – better known as an opting out system. Here, employees automatically participate in the agreed deferred compensation program unless they explicitly object to this within a set period of time. The bill attaches some conditions to these option systems. These relate to the specification of minimum periods within which the employee can object to the deferred compensation and the “minimum content” of the employee information.

Employers and employees who are not bound by collective bargaining agreements may agree to apply the collective bargaining option system.

3. improved tax framework for pension schemes implemented via direct insurance, Pensionskassen or pension funds

Currently, contributions to direct insurance policies, pension funds and pension funds remain – under certain conditions – exempt from wage tax if they do not exceed 4% of the contribution assessment ceiling in the general pension insurance (BBG); an additional amount of EUR 1,800 p.a. is added if the underlying pension commitment was agreed after 2004 (Section 3 No. 63 EStG). In the future, the tax-free maximum contribution will be increased to 7% of the BBG; in return, however, the fixed amount of EUR 1,800 p.a. will no longer apply. If contributions to a direct insurance policy or pension fund are taxed at a flat rate (Section 40b EStG, old version), these must be offset against the new tax-free maximum contribution.

However, as before, only parts of contributions up to 4% of the gross salary are exempt from social security contributions, i.e. if the maximum limit is reached, 7% of the gross salary is not subject to income tax, but 3% of the gross salary is subject to social security contributions.

If a severance payment is to be paid into a direct insurance policy, pension fund, or pension fund upon termination of the employment relationship, an additional wage-tax-free maximum amount will ever be available for this purpose. Furthermore, in future the tax-free contribution of 7% of the BBG for up to 10 calendar years of inactive employment (e.g. due to posting abroad, parental leave or sabbatical) can be paid in arrears after resumption of active employment.

4. specific support model for low-income earners

An occupational pension contribution is to be introduced for employees with low pay from 2018. The income limit for this is EUR 2,000 per month (or EUR 66.67 per day or EUR 466.67 per week). If the employer pays a contribution of at least EUR 240 p.a. to a direct insurance company, a pension fund or a pension fund for such an employee, it may withhold 30% of this amount, up to a maximum of EUR 144, from the employee’s income tax. The prerequisite for this subsidy is that the contribution is borne economically by the employer, i.e. contributions from deferred compensation do not qualify for this.

Up to an amount of EUR 480 p.a., the “low-income employer contribution” to direct insurance, pension fund or pension fund remains tax-exempt, in addition to the tax-exempt amounts under Section 3 No. 63 of the German Income Tax Act (EStG) (see No. 3 above).

Does the bill achieve its stated goals?

Pure defined contribution plans have been possible and common in many other countries for a long time and are generally also widespread. Whether the guaranteed minimum benefit that has been required in Germany up to now is the main obstacle to a greater spread of occupational pensions may be left open. In any case, the new defined contribution plan promises a lower-risk form of company pension for the employer. For the employee, foregoing a guaranteed benefit can mean a higher-return investment and, as a result, a higher pension. It is a pity that the defined contribution plan must always be agreed between the parties to the collective bargaining agreement. However, small companies in particular, which according to the explanatory memorandum to the law are one of the focal points, are generally not bound by collective bargaining agreements – and it remains to be seen whether the parties to the collective bargaining agreements will open up their joint institutions to employers and employees who are not bound by collective bargaining agreements.

The agreement of an option system is also reserved for the collective bargaining parties in a first step. The ministries have deliberately not chosen the path of introducing an opting-out model in general. Here, too, it is impossible to say in advance to what extent the new option systems will be used by the collective bargaining parties and subsequently extended to non-tariff employment relationships.

The extension of the tax-free funding option for direct insurance, Pensionskassen and pension funds is to be welcomed without reservation. However, taking into account that the fixed amount of EUR 1,800 p.a. previously granted in this context will be eliminated, the new regulation for 2017 would only mean an increase in the maximum tax-free contribution by EUR 486 p.a. (based on the expected income threshold for contributions to the general pension insurance for 2017 of EUR 76,200 p.a.). However, the new regulation is linked to the BBG and is therefore dynamic, whereas the amount of EUR 1,800 has already been fixed for more than ten years. However, it would have been desirable – also in view of the administrative burden – to exempt the entire contribution from social security contributions.

Equally positive are the expanded options for contributing a severance payment to the company pension plan and for making up for tax-free contributions not made. The second point in particular should be emphasized positively against the background that, on the one hand, more and more employees are taking parental leave or sabbaticals and, on the other hand, contributions to insurance-type implementation paths are often not tax-exempt during an assignment abroad in the host country. Experts had wanted an unlimited period here for catching up on deferred compensation contributions, i.e. a kind of tax-free “lifetime contribution”. Given the administrative burden associated with such a model, the ten-year period now envisaged seems a reasonable compromise.

This summary does not reflect the full content of the bill, but is limited to the points that we believe are of direct interest to employers who offer or wish to offer occupational pension benefits. In addition, the summary is based on the draft law as amended on November 4 of this year. Although no fundamental changes are expected, there will still be adjustments in the details. We will keep you informed about the status of the discussion and the legislative process. If you would like more detailed information on the content of the bill, please feel free to contact us.

 

The prolonged low-interest environment has now prompted numerous insurers to discontinue business with traditional life insurance products. In the future, life insurance products with trimmed-down guarantees but higher potential returns from investments are to serve the German pension and savings mentality, including in company pension plans.

Change of direction in life insurance heralded

The prolonged low-interest environment has now prompted numerous insurers to discontinue business with traditional life insurance products. In the future, life insurance products with trimmed-down guarantees but higher potential returns from investments are to serve the German pension and savings mentality, including in company pension plans.

At the turn of the millennium, the maximum actuarial interest rate for life insurance policies was reduced from 4.0% to 3.25% per annum. At that time, the net return on investments was still around 7.5%. 16 years later, a decision was taken to reduce the maximum actuarial interest rate from 1.25% to 0.9% from the 2017 calendar year. Although the net return on investments is still around 4.5% p.a. (most recently determined for the 2015 calendar year), this is on a sharply declining trend.

The low interest rate environment, but also the supervisory law Solvency II, which provides for a higher equity deposit of lifetime guarantees, has now finally led to the majority of German life insurance companies discontinuing business with traditional life insurance products. Substitutes are “new generation” life insurance products, also known as “new classic” or “innovative life insurance.”

In the case of traditional life insurance products, insurance benefits are calculated on the basis of the maximum actuarial interest rate prescribed by law at the inception of the contract. In the case of annuity insurance, life expectancy must also be taken into account; this is done by taking into account the mortality tables valid at the inception of the contract and, under certain circumstances, additional safety margins applied by the insurance companies. These guarantees are usually waived in the case of new-generation contracts. As a rule, only the sum of the contributions paid is guaranteed at the start of the pension, and more rarely also in the event of premature death. In the case of annuity insurance, the annuity is calculated on the basis of the capital available at the start of the annuity and the mortality tables applicable at that time. It should be noted here that insurance companies have constructed very different “new generation” products and it is likely that these developments will continue. This makes it almost impossible to compare life insurance policies, which makes it more difficult to provide advice and, ultimately, to decide on a competitive product.

By limiting guarantees, insurance companies relieve themselves at the expense of policyholders’ need for security. However, it is precisely this relief that is needed. This is because it enables insurers to invest premium income on the capital market where a noticeable return can still be achieved. Guarantees cost money; if they are granted, they reduce the chance of a higher insurance benefit at the start of the pension.

Nevertheless, there are minimum regulations with regard to guarantees to be granted, which companies should keep in mind when granting company pension commitments. According to the current wording of the German Occupational Pensions Act, employers may “only” issue a defined contribution plan or a defined contribution plan with a minimum benefit in addition to a defined benefit plan. De facto, the employer must ensure that at least the sum of the contributions paid in (excluding the contributions for risk insurance) is available in the event of retirement. If this is e.g. If this is not the case with a direct insurance policy, the employer must pay for the existing gap.

Conclusion: Due to the diversity of the new generation of products, it is important for employers to take a close look and examine each product for its suitability for occupational pension plans.

Pension commitments made through a reinsured provident fund are often treated as a defined contribution plan under IFRS, i.e. they are not recognized in the balance sheet. Against the backdrop of the ongoing low-interest phase, this assessment may change for numerous pension plans and a balance sheet disclosure may become necessary. We recommend that this topic be coordinated with the auditor in good time.

Reinsured provident funds – How does the low-interest phase affect accounting under IFRS?

Pension commitments are often structured in such a way that the employee is promised a contribution payment into a reinsurance policy and in this context is promised that he will receive exactly the benefit that will be paid out from the reinsurance policy (“insurance-accessory commitment”). One of the options for implementing such a pension promise is the reinsured provident fund.

Up to now, such pension plans have mostly been treated as defined contribution plans under IFRS (DC accounting). The basis for this is the assumption that the employer’s contribution to the provident fund (indirectly, therefore, the contribution payment to the reinsurance policy) will in all probability cover the company’s obligation in full, i.e., there will be no additional contributions or (partial) payment of benefits by the employer.

Against the backdrop of the low-interest phase, this assessment is changing to some extent. On the one hand, there are often insurance-accessory commitments in which the initial pension benefit is derived from the reinsurance policy, but a pension adjustment of 1% p.a. is not guaranteed by the insurance tariff, but is financed solely from the insurer’s profit participation. In the future, however, the profit shares may no longer be sufficient to fully cover the pension adjustment. On the other hand, constellations are conceivable in which the insurance tariff is based on a high maximum actuarial interest rate by today’s standards, which cannot be serviced by the insurer in the short to medium term. In both cases, the employer is obligated to make either additional contributions to the provident fund or direct pension payments on the basis of its obligation to comply (Section 1 (1) sentence 3 BetrAVG). The requirements for DC accounting are then no longer met in either case.

In these constellations, it may therefore be necessary to switch to defined benefit accounting, i.e. the pension obligation is recognized in the balance sheet and, if necessary, offset against the (plan) assets of the provident fund. The key factor here is the employer’s assessment of the probability of utilization. In this context, the IDW recently published a draft of a first module pronouncement (IDW RS HFA50, IAS 19 – EM1), which deals with the procedure for a changeover from defined contribution to defined benefit accounting.

The decision on future accounting must be coordinated with the auditor.

As part of the special publication "bAVspezial" in the October issue of Personalmagazin, KPMG reported on the outsourcing of bAV administration. The following is a brief summary of the article.

Sometimes it’s better to give up – this is true in soccer and also in occupational pension administration.

First, a short practical report: An employee wants to change to another company and therefore marches into the personnel department of the new employer. There he asks to what extent his existing direct insurance can be taken over by his future employer. The terse answer from the HR department is: “Unfortunately, that’s not possible at all. The transfer of the contract is not possible”. But is this really the right answer? Unfortunately no. It is not uncommon for employees to receive false statements from HR administrators because they simply do not have the necessary know-how regarding occupational pension issues. But can you really blame the people in charge from the HR department? Probably not, because often these employees already have to cover many subject areas: personnel planning, recruitment, personnel development, payroll, etc.

The occupational pension system is a complex subject. The legal framework is provided in particular by the German Occupational Pensions Act, which is supplemented and specified by letters from the German Federal Ministry of Finance (BMF) and extensive case law. In most cases, HR managers have basic knowledge. Legislative amendments and additions, as well as new court rulings, are rarely tracked in detail. The extent of all these legal requirements complicates the proper bAV administration with its numerous business transactions. If, due to the complexity described above, the processing of business transactions is inadequate, the employer is directly liable.

If one decides to outsource the bAV administration due to the problems described above, one can basically distinguish between two concepts: Concept ONE, partial outsourcing, provides for an external administrator to provide only support services for the HR department. The HR manager remains the face to the employee and clarifies his or her questions vis-à-vis. Concept TWO provides for the complete outsourcing of occupational pension administration. All bAV services, including the provision of an employee and retiree hotline, are handled by an external administrator. In this model, the company’s HR manager no longer appears as a contact person.

In principle, it is important to note that there is no one right way to outsource occupational pension administration. Experience shows that the size of the company as well as the complexity of the supply landscape can be used as an indicator as to whether a company decides in favor of full or partial outsourcing or against outsourcing administration. Large corporations, for example, usually have sufficiently trained staff to administer the bAV independently. Large mid-sized companies that have an extensive supply landscape due to corporate acquisitions, for example, are often interested in complete outsourcing of administration. In small and medium-sized enterprises (SMEs), where the pension landscape is regularly less complex, company pension commitments are co-managed by the all-rounder in the HR department.

The full article can be accessed online at Special Publications October 2016 | Personal | Haufe

Conclusion: Companies wishing to outsource occupational pension administration should recapitulate which outsourcing concept is suitable for them from a cost perspective and to minimize the risks arising from the complexity of the issue. All in all, however, it is always advisable to consult a pension expert as a sparring partner.

Pensions Update:

Options for minimizing the risks associated with deferred compensation

Pensions Update: How are companies responding to the current challenges in the area of deferred compensation, such as the reduction in guaranteed interest rates by the first pension providers?

Christine Hansen: There is no single answer. However, it is clear that many companies are dealing with the specific legal classification of deferred compensation as a pension commitment within the meaning of the company pension scheme – in some cases for the first time ever or at least for the first time in greater detail – and are investigating the resulting implications. There is a need almost across the board at all companies to obtain an up-to-date overview of their pension systems and the scope of existing obligations.

Pensions Update: What is your advice to companies in this situation?

Christine Hansen: First of all, analyzing the status quo of pension obligations is strongly recommended to all companies, regardless of whether and to what extent subsequent measures are taken to optimize them. The analysis should be complete and also include the mandatory employee-financed company pension plan by way of deferred compensation. Second, the analysis must be robust and its results sustainable. A major challenge is still the often still missing or insufficient digital recording of all documents and information on the vested rights and entitlements of individual active and retired pension beneficiaries and recipients.

Pensions Update: Why is the analysis necessary and so important?

Christine Hansen: The difficulty is in fact the “longevity” of the subject matter of occupational pensions. Some pension commitments were made some time ago, and some personnel files were still kept in paper form, which were either not recorded or incorrectly filed when they were later scanned in, or are simply not available digitally for a short time. Sometimes there is also a lack of written documentation of the commitment itself. In addition, in the course of the working life of the individual beneficiary, there are any changes of job, restructuring of the companies in the course of mergers, etc. The same change in personnel has also occurred in the area of knowledge carriers. In terms of personnel, the Human Resources area also has to deal with the same change in knowledge carriers. It is necessary for companies to have an accurate overview of their obligations in order to be able to consider the relevant options for action in individual cases on this basis.

Pensions Update: What design options are available to minimize risks from the obligation to pay in as far as possible?

Christine Hansen: For various reasons, it is advisable to design and implement a company pension policy or to revise the existing one in order to ensure that the number of providers of external pension plans is reduced to a minimum, particularly for liability reasons, and ideally that no old commitments are taken over by lateral entrants (at least not unchecked). If there have already been takeovers of old commitments, it should be examined whether they reveal any particular liability risks for the company. With regard to the implementation channels as well as the contribution, from the point of view of the companies, a restriction to the requirements of Section 1a of the German Occupational Pensions Act (BetrAVG) should generally be reconsidered. Accordingly, an entitlement to deferred compensation exists in principle only via the implementation channels of the Pensionskasse and the Pensionsfonds. If these pension plans are not set up, the employee may alternatively request that they be implemented via direct insurance.

Pensions Update: What guidelines can be used here with regard to the entitlement to deferred compensation from Section 1a of the German Occupational Pensions Act (BetrAVG)?

Christine Hansen: The mandatory entitlement to deferred compensation is limited to contributions amounting to 4% of the contribution assessment ceiling (BBG) per calendar year plus EUR 1,800 per year. There is only an alternative entitlement to make own contributions, i.e. not to double the contributions in the amount of 8% BBG. The current values of BBG RV West for 2017 are compiled in this issue on p. 18.

Pensions Update: Even though an answer certainly cannot be given here in a generic form – what in particular are other points to consider with regard to deferred compensation?

Christine Hansen: The design options are indeed numerous and depend, among other things, on the parameters of the individual company, such as its size, strategy, employee fluctuation, existing pension systems, etc. The company’s pension plans may also have to be adapted to the specific requirements of the individual company. From the company’s point of view, it may be sensible and indispensable for various reasons to provide additional attractive pension options for certain employee groups, if necessary on a layered basis, over and above the legally mandatory requirements for deferred compensation.

Companies often subsidize deferred compensation, for example, in order to increase the effectiveness of the company pension plan, either by passing on the social security contributions saved through deferred compensation or through other additional subsidies. These subsidies can be specifically designed in the interests of the company. For this purpose, a customized subsidy system can be set up by means of legally permissible options. In principle, it would be better to pay the subsidies to the employee and not to pay them directly into the pension scheme in order to avoid any (mixed) direct commitments with consequences in terms of the forfeitability of vested rights, etc. The subsidies should be paid to the employee and not to the pension fund.

A basic recommendation is to verify at regular intervals whether you are (still) working with the contractor of choice. In this regard, we had explained aspects of a provider risk assessment (“Who is the right one?”) as part of our bAV Roadshow this year. From a legal point of view, the decisive factor is whether there are changed legal requirements with regard to the conclusion of the contract and the implementation of deferred compensation.

Employers should pay particular attention to ensuring that communications with employees ensure accurate, comprehensive information and are adequately documented (such as through the use of consultation protocols) when conducting legal reviews of agreements and processes. For new commitments, care should be taken to ensure that the sample deferred compensation agreement used is properly designed and that the requirements for the effectiveness of the agreement are observed. If necessary, there is also a need for improvement with regard to the commitment itself and its design and documentation.

The focus of the employment law article in our Pensions Update 06/2016 was - on the current occasion of the guarantee interest rate reductions resolved by the first inter-company pension funds and support funds in summer 2016 - the employer's obligation to indemnify for pension commitments via external pension providers (Pension Update Issue 6/2016 - KPMG Law). In this article, we discuss the question of whether and to what extent the employer's liability towards the pension beneficiaries is limited to the fulfillment of the promised pension benefits under the BVV commitments in accordance with Sec. 1 para. 1 sentence 3 BetrAVG also applies to the employee's own contributions.

The Employer’s Obligation to Pay Own Contributions in the Case of a So-Called Comprehensive Commitment

The claim to procure benefits may come into play if either the external pension provider has not been adequately funded to meet the pension entitlements or if the external pension provider is unable to perform adequately when the benefits fall due, for example, because it has invested funds inappropriately or has not earned sufficient interest on the market. Employers are not only liable for direct pension commitments made by them in the form of a direct commitment, but are also liable under section 1 (1) of the German Income Tax Act. 1 sentence 3 of the German Occupational Pensions Act (BetrAVG) also applies to all indirect pension commitments via external implementation channels for the provision of the individual pension benefits promised. Included is the direct claim of the employee against the employer for the provision and fulfillment of the benefits specified in the – unchanged – pension commitment (see only BAG judgment dated September 30, 2014, 3 AZR 617/12).

For the legal substantiation of the claim, a distinction is essentially made between the basic employment contract relationship and the legal relationship between the employer and the external pension provider of the chosen implementation path (BAG judgment March 15, 2016, 3 AZR 827/14). Both legal relationships generally exist independently of each other (BAG ruling dated June 19, 2012, 3 AZR 408/10). A change in the status quo of the legal relationship between the employer and the pension provider does not generally affect the basic employment-law relationship between the employer and the pension beneficiary with regard to the pension commitment made in the employment relationship. The employer uses the external pension provider only to fulfill its obligation arising from the employment relationship. If the pension provider then later fails to fulfill the promised benefits – for whatever reason – or at least fails to fulfill them in full, the employer must compensate the beneficiary for the financial shortfall in the pension due to the involvement of the external pension provider. The beneficiary has a direct statutory claim for performance against the employer (BAG judgment dated June 19, 2012, 3 AZR 408). This applies – regardless of fault and in accordance with § 17 para. 3 p. 3 BetrAVG is also indispensable – for all external implementation channels.

The decisive factor in determining the obligation to pay is always the specific promise made by the employer in the individual case with regard to the pension benefits.

In essence, the following constellations of contribution exist:

  1. Purely employer-funded commitments;
  2. Partially employer-financed commitments in the form of the allocation of additional contributions (such as a subsidy directly into the pension of the beneficiary);
  3. Purely or partially employee-financed commitments by way of deferred compensation (from gross) and
  4. Contribution from other own contributions of the pension beneficiary (from net remuneration).

With regard to deferred compensation pursuant to Sec. 1 para. 2 No. 3 of the German Occupational Pensions Act (BetrAVG), future salary entitlements are converted into a pension entitlement of equal value. In addition, the employee may, pursuant to Sec. 1 para. 2 No. 4 BetrAVG to make (further) contributions from his (net) remuneration to finance company pension benefits. In its most recent decision on Ausfallhaftung of March 15, 2016 (3 AZR 827/14), the BAG states that, with regard to net contributions (in addition to or in lieu of deferred compensation) of the employee entitled to pension benefits pursuant to Sec. 1 para. 1 sentence 3 of the German Company Pensions Act (BetrAVG) is generally only liable to pay contributions to the extent that the part of its pension benefits from the external pension scheme is based on employer-financed but not employee-financed contributions – unless the employer’s own contributions are covered by the employer’s commitment.

Whether a personal contribution commitment exists and is to be classified as a company pension plan that triggers the obligation to pay contributions is determined by the statutory regulation in Section 1 (1). 2 No. 4 BetrAVG. In § 1 para. 2 No. 4 BetrAVG, the concept of occupational pension provision is extended to include the employee’s own contributions, but not to personal provision in general. § 1 para. 2 No. 4 BetrAVG also applies to pension commitments made before the provision came into force (Section 30e BetrAVG only contains restrictions regarding the temporal scope of the second half-sentence of Section 1 (2) No. 4 BetrAVG).

In particular, in the event of mixed financing of the external pension by the employer and the employee, the employer generally has the right to choose whether to issue a corresponding “comprehensive commitment” relating to the benefits based on the employee contributions and, correspondingly, whether the statutory obligation to pay arises (BAG ruling dated February 10, 2015, 3 AZR 65/14). Such a comprehensive commitment may result from a corresponding express or implied declaration by the employer or from an interpretation of the overall circumstances (BAG ruling dated March 15, 2016, 3 AZR 827/14).

Conclusion: In order to answer the question of whether the employer has an obligation to pay pension benefits in the event that the beneficiary makes contributions of his or her own, it is necessary to interpret the overall circumstances in each specific individual case.

In this context, the following points are important from the companies’ point of view:

(1) The interpretation shall take into account when and under what circumstances in the specific individual case the employer made the respective promise;

(2) The burden of proof for the existence of a comprehensive commitment shall be borne by the beneficiary;

(3) In the case of commitments made before the entry into force of § 1 para. 2 No. 4 BetrAVG, i.e. prior to June 21, 2002, stricter requirements must be met with regard to the inclusion of the portion financed by employee contributions, because in these cases the commitments were not made against the background of the – only subsequently with the entry into force of Sec. 1 (2) No. 4 BetrAVG, i.e. prior to June 21, 2002, stricter requirements must be met with regard to the inclusion of the portion financed by employee contributions. 2 No. 4 BetrAVG – legal clarification of the legal situation.

Current labor law jurisprudence

The courts have also been active in other areas of occupational pension provision in recent months. In this issue, our case law section deals with decisions (1) on the liability trap and the need for employers to take action in the event of an ineffective declaration of insured benefits in the case of vested rights under direct insurance policies, (2) on compliance with the prohibition of severance payments under employment law when a life insurance policy is taken out, (3) on the scope of the employer’s obligation to make own contributions in the event of a so-called “comprehensive commitment”, (4) on the requirements for an effective exclusion from a company pension under an occupational agreement, (5) on the permissibility of reducing the company pension due to early drawdown, (5) on the permissibility of reducing the company pension due to early drawdown. (4) on the requirements for an effective exclusion from the occupational pension under a company agreement, (5) on the permissibility of reducing the occupational pension due to early drawdown, (6) on the principles of equal treatment for part-time employees in the occupational pension system, and (7) on the permissibility of (un)genuine retroactivity with regard to the amended simplified adjustment test pursuant to Section 16 (1). 3 No. 2 BetrAVG.

1. need for action to avoid the continuing procurement claim for employers: factual and temporal proximity of the agreement of the solution in the form of insurance required when the employee leaves (BAG judgment dated May 19, 2016 – 3 AZR 794/14)

The employer may choose the insurance-type solution in accordance with § 2 para. 2 sentence 3 of the German Company Pensions Act (BetrAVG) prior to the termination of the employment relationship with the employee entitled to the pension. In its ruling of May 19, 2016, the BAG clarified that at the time of receipt of the declaration by the employee and the insurance company, there is already a factual and temporal connection with the specific impending termination of the employment relationship.

In the case underlying the decision, the group insurance contract concluded between the employer and the external pension provider contained the following provisions relevant to the decision: “[…] If an insured employee leaves the employer’s service before the insured event occurs, the employer shall immediately deregister the insurance taken out on the life of this employee. With the deregistration, the employer informs [Versicherungsgesellschaft] whether it will cancel the insurance or transfer it to the insured employee […]. If the insured employee has a vested entitlement, the employer shall leave the entitlement to the insurance benefit to the departing insured employee. The latter may continue the insurance without a health check, taking into account any waiting periods that have already expired, within three months of the deregistration taking effect, as far as possible as an individual insurance against a regular premium with a new premium to be calculated. […]”

The employer provided the plaintiff with proof of the status of her company pension plan as of the reporting date of January 1, 2007. It states, among other things: “This letter informs you about the […] existing coverage from the company pension plan. […] The requirements for maintaining a legally vested pension entitlement have been met. If you leave the company prematurely, your entitlement to benefits will be maintained on a pro rata basis in accordance with the years of service you have completed. […] The occupational disability pension and the lump-sum death benefit will be forfeited upon departure unless you take over the payment of contributions (insurance-contract solution).”

The plaintiff employee terminated the employment relationship with the legal predecessor of the defendant employer as of September 30, 2008. The legal predecessor of the defendant employer contacted the plaintiff in a letter dated October 24, 2008, confirming that the plaintiff had left the company with vested rights as of September 30, 2008. It further stated: “As you can see from the enclosed calculation sheet, your entitlement to a company pension upon reaching the age of 65 is expected to amount to a total of […] With regard to the pension benefits in the event of early retirement, in the event of a reduction in earning capacity or in the event of death before retirement, please refer to the information in Section VII of the calculation sheet.” Section VII of the calculation sheet contained, among other things, the following text:

“With regard to the entitlement to a disability pension and the lump-sum death benefit, the contractual solution applies. According to this, you or your surviving dependents will receive a one-time payment of the surpluses accumulated in the risk insurance until your retirement when an early retirement event occurs, but at the latest when the retirement pension begins. […] The surplus credit as of 31.12.2007 amounts to: 348.60 EUR. In order to maintain the previous insurance cover after your departure, you have the option of taking over the risk insurance within three months after departure without a health check and continuing it by paying your own premiums. However, the risk insurance must have been taken over before three months have elapsed since you left the company (cut-off period).”

The plaintiff was initially granted a pension for full reduction in earning capacity from the statutory pension insurance for the period from August 1, 2011 until December 31, 2012. The pension was extended until December 31, 2015 by decision dated September 25, 2012. After unsuccessful out-of-court claims in December 2012, the plaintiff filed an action for payment of a company occupational disability pension for the period from January 1, 2013, to December 31, 2015, in the amount of EUR 1,000,000. 337.00 EUR per month.

At the core of the BAG’s decision are the provisions of Sec. 2 para. 2 sentences 1 and 2 BetrAVG: If an employee with a pension commitment issued as a direct insurance policy leaves the employment relationship prematurely with a legally vested pension entitlement (UVA), the claims against him/her, i.e. the claims from the otherwise ratable quotation procedure for calculating the vested pension entitlements (employment contract solution), are replaced by the insurance benefit to be provided by the insurer in accordance with the insurance contract (insurance-type solution).

In the case of a direct insurance policy, the insurer’s actuarial reserve accumulated up to the employee’s early retirement and the benefit to which the employee is entitled under the insurance contract will often not be sufficient to satisfy the claim calculated on a pro rata basis. The provision of § 2 para. 2 sentence 2 of the German Company Pensions Act (BetrAVG) is intended to help the employer meet the so-called social requirements under Section 2 (2). 2 sentence 2 no. 1 to no. 3 of the German Occupational Pensions Act (BetrAVG) to limit the amount of the claim of the departed employee to the claim existing under the insurance contract by choosing the insurance-type solution and to avoid supplementary liability. In accordance with the meaning and purpose of the provision, the option was also intended in particular to facilitate the conclusion of direct insurance policies for employees who have already been with the company for a longer period of time.

The BAG states as a guiding principle that the employer’s request pursuant to Sec. 2 para. 2 sentence 3 BetrAVG must be declared to the employee and the insurer no later than three months after termination of the employment relationship. In terms of its legal nature, this declaration by the employer is a unilateral declaration of intent requiring receipt, to which the provisions of Sections 104 et seq. BGB are applicable. The declaration therefore only becomes effective upon receipt by the recipient (§§ 130 ff. BGB).

The BAG ruled that the insurance solution can be effectively declared by the employer even before the termination of the employment relationship, but only if and insofar – at the time of receipt of the declaration by the employee and the insurer – there is a connection of a factual and temporal nature with the impending termination of the employment relationship. It must be readily possible for the employee to access the insurance information (insurer and policy number) at the time the declaration is received. And also the insurer must be informed by the expiry of the period of § 2 para. 2 sentence 3 of the German Occupational Pensions Act (BetrAVG) that the employee has left the employment relationship with a legally vested pension entitlement and the employer has chosen the insurance-based solution.

Furthermore, the BAG stated in this context that the interpretation of a pension plan which, with the pension case “occupational disability”, is linked to the social security law applicable at the time of its creation, regularly shows that this requirement is fulfilled in the sense of the social security law applicable today in the case of complete reduction in earning capacity of the pension beneficiary.

Conclusion: The decision of the BAg includes a considerable liability risk for employers who would like to choose the insurance-based solution for a pension commitment issued as direct insurance and thus continue to use the privilege of the de facto exemption from liability included with the insurance-based solution.

Employers should evaluate the liability risk on an accounting basis depending on their specific commitment design. Since the differential claim can be very high depending on the length of employment, the effects can be serious in individual cases. Furthermore, care must be taken to adapt any templates in contracts and, in particular, termination agreements in order to remove the hurdles to effective implementation of the insurance-based solution, at least in the case of future withdrawals of pension beneficiaries.

Since deregistrations due to resignations by employers during the year often occur only once per calendar year, insurers do not get a chance to intervene helpfully in individual cases. Fundamental guidance on the design of the deregistration process should therefore be reconsidered.

2. claiming of the surrender value of a life insurance policy as direct insurance for the company pension scheme by an employee who has left the company (BGH ruling dated June 8, 2016, IV ZR 346/15)

In its decision of June 8, 2016, the German Federal Court of Justice (BGH) ruled that the external pension provider of a pension commitment issued as direct insurance can refuse to pay out the surrender value of the life insurance if the payment of the surrender value violates the prohibition of settlement under occupational pension law from Section 3 of the German Occupational Pensions Act (BetrAVG).

In the case underlying the decision, the employee terminated the insurance contract due to personal financial hardship and – with the consent of the employer who had issued the pension commitment – demanded payment of the surrender value from the insurer. After confirmation of the termination by the insurance company, the employer revoked the termination. The insurer confirmed the revocation of the termination and considered this revocation as an offer to continue the direct insurance. The employer subsequently terminated the direct insurance policy in turn and, at the same time, his employment relationship with the employer.

The BGH ruled that the termination of an insurance contract cannot be unilaterally rescinded. If the termination of the insurance contract is cancelled by mutual agreement before the expiry of the notice period, the insurance relationship shall continue unchanged. The irrevocable subscription right of the employee entitled to a pension does not prevent the termination of a contract by mutual agreement. In particular, the agreement to continue the insurance relationship during the current notice period does not require the employee’s consent. As long as the insurance relationship exists, the policyholder (i.e. the employer) and not the employee entitled to benefits remains authorized to decide on termination or continuation of the contract. Even if an irrevocable subscription right has been agreed, the policyholder may dispose of the claims arising from the insurance contract in different ways within the scope of his freedom of choice. The continuation of the insurance relationship does not interfere with a protected legal position of the employee. His right is aimed at ensuring that he can no longer be deprived of his rights under the insurance contract in favor of another party. This asset allocation is not affected by the agreement to continue the insurance contract, as the subscription right remains unchanged.

It is true that the provision of Sec. 2 para. 2 sentence 5 of the German Occupational Pensions Act (BetrAVG) does not preclude the claiming of the surrender value of a life insurance policy by the employee who has left the company if the insurer received the notice of termination from the policyholder and employer while the employment relationship was still in force. However, the termination of the insurance contract is invalid if it is based on a severance agreement between the employee and the employer which – as in the present case due to the connection of the severance payment of the pension commitment with the resignation from the employment relationship – is invalid under Section 3 (3) of the German Civil Code. 1 BetrAVG is ineffective. The restrictions on disposal set out in Section 2 of the German Occupational Pensions Act (BetrAVG) are intended to preserve, as far as legally possible, the existing entitlement for the purpose of the pension. According to the intention of the legislator, § 2 para. 2 sentence 5 BetrAVG in addition to section 2 para. 2 sentence 4 of the German Occupational Pensions Act (BetrAVG), it is precisely the employee who has left the company who is prohibited from making dispositions that could jeopardize the purpose of the pension. It should be prevented that the employee liquidates the entitlement and uses it for other purposes.

Conclusion: In the case of occupational pension provision by way of direct insurance, the insurer is not obliged to pay out the surrender value if the claiming of the benefit is based on a settlement agreement in violation of the prohibition.

3. employer’s obligation to pay also for own contributions in the case of a so-called comprehensive commitment (BAG ruling dated March 15, 2016 – 3 AZR 827/14)

In its decision of March 15, 2016, the BAG recognized that the provision of Section 1 para. 2 No. 4 BetrAVG also applies to so-called comprehensive commitments issued before the standard came into force on July 1, 2002. In the case of defined contribution pension commitments from the period before the entry into force of Sec. 1 para. 2 No. 4 BetrAVG, however, more stringent requirements are to be placed on the assumption that the employer’s pension promise also includes the benefits from the employee’s own contributions. Accordingly, it is not only necessary for the employee to make contributions from his or her remuneration to finance company pension benefits to a pension fund, among others, but the employer’s pension promise must also include the benefits from the employee’s own contributions. It is not sufficient that the employee’s participation is not voluntary and that the benefit calculation is made uniformly from the contributions made by the employer and the employee.

Conclusion: If there is a comprehensive commitment, the employer is responsible for the fulfillment of the pension commitment by the external pension provider (in this case a pension fund) in accordance with the procurement claim under Section 1 (1) of the German Civil Code. 1 p. 3 BetrAVG. Our focus article on labor law in this issue (LINK) deals with the consequences resulting from this ruling for practice).

4. exclusion of an employee with an individual pension commitment from a pension commitment on the basis of a works agreement: favorability principle and principle of equal treatment under works constitution law (BAG, judgment dated July 19, 2016, 3 AZR 134/15)

In its ruling of July 19, 2016, the Federal Labor Court (Bundesarbeitsgericht – BAG) decided that the employer may exclude employees to whom it has made an individual contractual promise of a company pension from a collective pension scheme based on a company agreement if the parties to the agreement can assume, within the scope of their discretionary powers, that these employees will typically receive at least approximately equivalent benefits in the event of a pension claim. In this ruling, the BAG further develops its case law on the principle of favorability under works constitution law and on the principle of equal treatment under works constitution law.

In the facts underlying the decision, the defendant employer had granted the employee an individual commitment to the company pension scheme (EZ 1987) in the pension fund implementation path after his employment relationship commenced in 1987, which was financed 2/3 by contributions from the employer and 1/3 by contributions from the employee. The Employer determined in the EZ 1987 that the Employee was excluded from other pension arrangements of the company pension plan with the Employer upon issuance of this individual pension commitment; the Employee declared his consent to this exclusion. In 1988, the employer agreed with the works council on a new company pension scheme in a company agreement (BV 1988, implementation method: direct commitment), which did not contain any restrictions with regard to its personal scope of application. The BV 1988 was superseded in 2007 by a follow-up company agreement (BV 2007), which stipulated that employees who had received an individual contractual commitment did not fall within the scope of the BV 2007. Upon the occurrence of the insured event, the employee requested pension benefits in accordance with the BV 2007, which the employer rejected with reference to the employee’s waiver of other pension regulations declared in the EZ 1987 and to the exclusion of the employee from the personal scope of application of the BV 2007 determined in the BV 2007.

The LAG Hessen, as the court of second instance, upheld the action on the grounds that the waiver declared in the EZ 1987 was invalid due to a violation of the principle of favorability under works constitution law and that the exclusion of the employee from pension benefits determined in the BV 2007 could not have any legal effect for the employee due to a violation of the principle of proportionality.

The BAG found the exclusion and also the waiver originally declared by the employee in the EZ 1987 to be invalid; because at the time when the works agreement and the individual contractual agreement were competing with each other for the first time, the individual contractual commitment was not more favorable than the VG 2007. In accordance with the principle of favorability under works constitution law, the employee’s waiver of a legal position arising from a works agreement requires the consent of the works council (Section 77 (4) sentence 2 Be- trVG). The consent of the works council must refer to the individual concrete waiver. Accordingly, a waiver of claims by the employee in an individual agreement without the individual consent of the works council – as was the case in this specific instance – is generally invalid. Exceptionally, in the opinion of the BAG, such an advance waiver by the employee shall only be effective if the relevant individual contractual commitment is approximately equivalent to the pension commitment.

The BAG also applies the same standard of review to the assessment, also made in the judgment, as to whether the exclusion of the employee from the personal scope of application of the BV 2007 includes a violation of the principle of equal treatment under works constitution law (Sec. 75 BetrVG) with regard to the employees who are beneficiaries under the BV 2007. According to the assessment of the BAG, these two groups of persons can be treated unequally if the parties to the agreement – taking into account the scope for assessment to which they are entitled and their prerogative of assessment – could assume that the employees with individual commitments would typically receive at least approximately equivalent benefits in the event of a pension claim. The BAG clarifies that these general requirements for unequal treatment also apply irrespective of the fact that the plaintiff employee was covered by the predecessor regulation of the BV 2007 under collective law, the BV 1988. The parties to the agreement could exercise their prerogative of assessment again in a subsequent company agreement. Legitimate expectations of the employee, which were acquired until the works agreement was amended, were protected by the principles of protection of legitimate expectations and proportionality with regard to the replacement of a pension commitment by a successor works agreement in accordance with the three-step theory of the BAG; in the event of the invalidity of the replacement by the successor works agreement (here the BV 2007), the previous pension regulation (here the BV 1988) continued to apply. Since the employee had not claimed any benefits under the BV 1988 in the present legal dispute, the BAG did not have to decide on the (in)effectiveness of the replacement of the BV 1988 by the BV 2007. It ultimately referred the legal dispute back to the Higher Labor Court of Hesse for further clarification of the facts on the question of whether the individual commitment provided for a sufficiently equivalent pension as the BV 2007.

Conclusion: The ruling clearly shows the possible interplay between the principle of favorability under works constitution law and the principle of equal treatment under works constitution law in the case of the “double-sided” exclusion of an employee benefiting from an individual commitment from an occupational pension commitment on the basis of a works agreement. According to this ruling, if an employer intends to exclude employees with an individual commitment from the scope of a company agreement on an occupational pension commitment, it should carry out the relevant actuarial calculations during negotiations with the works council and comprehensively document the calculations (including its assumptions).

The ruling also shows that when individual employees who were still included in the group of beneficiary employees in the predecessor company agreement are excluded from a successor company agreement on occupational pension benefits for the first time, the parties to the company agreement must examine the effectiveness of the exclusion in the successor company agreement according to the principle of proportionality under company pension law in accordance with the BAG’s three-step theory.

5. reduction of company pension due to early claim: no discrimination due to disability (BAG judgment dated October 13, 2016, 3 AZR 439/15)

In its decision of October 13, 2016, the BAG recognized that the employer can effectively reduce occupational pension benefits when they are claimed early – even in the case of an early claim by a severely disabled pension beneficiary employee.

In the facts underlying the decision, the employee, who was recognized as severely disabled, had been receiving a statutory old-age pension for severely disabled persons and a company pension since reaching the age of 60. The occupational pension commitment provided for the granting of retirement benefits upon reaching the age of 65; in the event of early retirement, the pension benefits were to be reduced in installments. The employer granted the employee a reduced company pension. In his action, the employee sought the granting of unreduced company pension benefits on the grounds that the reduction would affect him due to his severe disability pursuant to Sec. 7 para. 1 sentence 1, 1 AGG.

The BAG recognized the reduction in pension benefits as effective. The reduction of pension benefits provided for in a pension scheme in the event of early claiming of the company pension before reaching the usual “fixed age limit” does not include unlawful discrimination on the grounds of disability within the meaning of the AGG. A direct disadvantage according to § 3 para. 1 AGG is not applicable because the reductions are not linked to disability. Other workers could also retire earlier. Likewise, there was no indirect discrimination pursuant to Sec. 3 (3) of the German Stock Corporation Act. 2 AGG from. If the conditions for early retirement are also met by employees who are not severely disabled, they would also have to accept deductions. Insofar as severely disabled persons alone can claim the statutory and thus the company pension earlier, they would not be disadvantaged compared to other employees. This is because there could be no other employees drawing a company pension at the same time.

6 (No) Discrimination against Part-Time Employees in the Occupational Pension Plan: Pro Rata Temporis Principle from Section 4 Para. 1 sentence 2 TzBfG (BAG judgment dated April 19, 2016, 3 AZR 526/14)

In its decision of April 19, 2016, the BAG recognized that the pension benefit paid in installments to a part-time employee – compared to a full-time employee – does not constitute a violation of the prohibition of discrimination against part-time employees pursuant to Sec. 4 (4) AktG. 1 p. 2 TzBfG contains.

In the facts underlying the decision, the plaintiff employee had worked full-time since 1978 and reduced his employment level to part-time in 1995. The pension plan regulating the pension commitment determined the amount of the pension from the sum of certain increments determined for each completed year of service, whereby a maximum of 25 increments were to be taken into account. In determining the increase amount, the monthly salary was based proportionately on the average degree of employment, i.e. the ratio of the individual regular working time to the collectively agreed working time during the entire period of creditable service. The defendant employer determined a degree of employment of 85% on this basis of calculation. The employee claimed that the degree of employment should only be measured on the basis of the first 25 years of service and therefore amounted to 97.04% due to the higher proportion of full-time work. In his action, the employee objected to the combination of the limitation of the increments to 25 with a degree of employment based not on 25 years but on the entire duration of the employment relationship.

The BAG rejected the complaint. The plaintiff could not demand that the (higher) degree of employment be taken as a basis only in the first 25 years of his employment relationship. The calculation of the pension taking into account a degree of employment to be determined on the total creditable service period with a simultaneous maximum limitation of the increments to 25 creditable years of service is in accordance with the principle set out in section 4 para. 1 sentence 2 TzBfG standardized pro rata temporis principle. According to this provision, a part-time employee shall be granted remuneration or another divisible benefit in kind at least to the extent of the proportion of his or her working hours to the working hours of a comparable full-time employee. This also applies to the company pension scheme. The decisive factor for comparability is the aspects – such as length of service – on which the employer bases the provision of benefits under the company pension plan.

In this respect, the pro rata temporis principle does not require the degree of employment to be determined only in relation to the first 25 years of creditable service. The pension shall be granted on the basis of those eligible earnings which correspond (pro rata) to those of an employee employed full-time for the entire duration of the employment relationship. The limitation to 25 increments does not lead to unequal treatment on account of part-time employment, since it also applies to a full-time employee with the same length of service. Nor does it constitute impermissible age discrimination within the meaning of the AGG or a violation of the principle of equal treatment under works constitution law is not given.

Conclusion: The BAG confirms its previous case law according to which part-time employees cannot demand the same pension benefits as full-time employees, but must only receive benefits at least proportionately in accordance with the ratio of their working hours to the working hours of a comparable full-time employee. However, only part-time and full-time employees with the same length of service are comparable. In practice, this grouping is not always easy.

7 (None) Retroactive applicability of the simplified adjustment test pursuant to Sec. 16 para. 3 No. 2 BetrAVG n.F. for previous adjustment-relevant benefit periods for pension benefits via a pension fund or direct insurance (ArbG Hamburg judgment of June 2, 2016, 7 Ca 602/15; LAG Düsseldorf, judgment of. 14.09.2016, 12 Sa 448/16)

For many companies that offer pension commitments via the pension fund implementation channel, it has become a case of application of the obligation to accept liability that the employer’s liability risk also includes any increases in pension benefits to be granted from indirect pension commitments following an adjustment check in accordance with Section 16 of the German Occupational Pensions Act (BetrAVG). When examining the need for adjustment, the interests of the beneficiary and the economic situation of the employer must also be taken into account in the case of external implementation paths in accordance with Section 16 (1). 1, 2nd Hs. BetrAVG to be taken into account. The economic situation of the external pension provider is irrelevant. A facilitated adjustment test could only be effectively performed if the statutory maximum regulatory interest rate was observed for the adjustment. If it has been exceeded, the adjustment test must be carried out in accordance with the case law of the BAG pursuant to Section 16 para. 1 BetrAVG to be carried out.

With the Act on the Implementation of the EU Mobility Directive, which entered into force on December 21, 2015, the legislator introduced, among other things, an amendment to Section 16 para. 3 No. 2 BetrAVG on the simplified adjustment test: under the amendment, the adjustment obligation for pension commitments made after May 16, 1996 via a pension fund or direct insurance is already to be waived if all profit shares are used to increase benefits. The prior limitation of the actuarial interest rate to be used for calculating the actuarial reserve for the guaranteed benefit to the actuarial interest rate specified in Section 65 para. 1 No. 1 lit. a) VAG in conjunction with. § 2 para. 1 DeckRV, the new version of Section 16 (1) of the German Insurance Supervision Act (DeckRV) stipulates that the statutory maximum interest rate is to be applied. 3 No. 2 BetrAVG no longer has to be observed.

It is still not clear whether the simplified adjustment test also applies retroactively to adjustment test dates prior to December 21, 2015. Shortly after the Act came into force, the Gelsenkirchen Labor Court (ruling dated January 12, 2016, 5 Ca 1061/15) and the Hesse Labor Court (ruling dated February 24, 2016, 6 Sa 1163/12) rejected the retroactive effect of the facilitating adjustment test. The Düsseldorf Higher Labor Court (LAG) endorsed this view in its ruling of September 13, 2016. It justifies the rejection of retroactivity with the legal character of the provision of § 16 para. 3 No. 2 BetrAVG as an exception to the employer’s general duty to review and adjust pursuant to Sec. 16 (2) BetrAVG. 1 BetrAVG, which had to be observed at the time of the respective audit in the respective applicable version and which – for reasons of legal certainty – could only have a retroactive effect if the legislator had unambiguously determined such a retroactive effect in the text of the law. The legislator had not determined retroactivity in the text of the law.

In contrast, the Mönchengladbach Labor Court in its ruling of February 18, 2016 (3 Ca 2160/15, preceding the ruling of the Düsseldorf Higher Labor Court) and the Hamburg Labor Court in its ruling of June 2, 2016 affirmed retroactivity. They base their view on the wording of the new provision, which does not provide for any time limit, and on the explanatory memorandum to the law, according to which the adjustment review obligation does not apply “without exception to all existing and future commitments” that are implemented via a Pensionskasse or direct insurance. The addition in the draft bill that the adjustment review obligation should be eliminated “in the future” was deleted after the critical opinion of the Arbeitsgemeinschaft für betriebliche Altersversorgung (aba) during the legislative process. There were no legal objections to a retroactive effect, as this was a permissible non-genuine retroactive effect, because the obligation to review the adjustment under Section 16 of the German Occupational Pensions Act (BetrAVG) was not based on previous calendar years in which the pension was drawn, but on the pension amount at the start of the pension. According to the principle of catch-up adjustment, the increase in inflation over the entire period from the start of the pension is always the basis for the adjustment test. If, however, the legislator regulates the entire pension withdrawal as a uniform process, the pension withdrawal in the period up to the entry into force of the Act cannot be regarded as a completed factual situation.

Conclusion: It remains to be decided by the supreme court as of which adjustment test cycle the simplified adjustment test pursuant to Section 16 para. 3 No. 2 BetrAVG applies. Until this decision is made, employers should at any rate assume in their risk assessment that retroactivity is considered impermissible insofar as there was a trust on the part of the users of the law that was worthy of protection – this could be assumed, for example, until the publication of the substantively modified government draft of July 1, 2015, so that at any rate until then the statutory maximum interest rate for adjustment review cycles under supervisory law would remain applicable.

News from the legislator

bAV News Ticker

Current schedule for the Company Pension Strengthening Act

After the hearing period for the joint draft bill of the BMAS and BMF expired on November 24, 2016, the following timetable for the legislative process for the Company Pension Strengthening Act is now emerging:

21.12.2016 Cabinet decision

February 2017 1st round Federal Council

10.03.2017 1st reading Bundestag

March/April 2017 Parliamentary deliberation in committees and 2nd/3rd sessions. Reading

June 2017 Approval by Bundesrat, completion of the legislative process

01.01.2018 Entry into force of the law

We discussed the main content of the joint draft bill in the introductory article in this issue.

Federal Cabinet decides on social security calculation parameters for 2017

On October 12, 2016, the Cabinet approved the Ordinance on Social Insurance Calculation Figures for 2017.

According to the BMAS, the ordinance on the social insurance calculation parameters 2017 will adjust the relevant calculation parameters of the social insurance according to the income development in the past year on a rotational basis. The values are set on the basis of clear, unchanged legal provisions by means of a decree. The income trend in 2015 on which the 2017 social security calculation figures are based was 2.65% in the federal territory (2.46% in the old federal states and 3.91% in the new federal states). The determination of the respective income development is based on the change in gross wages and salaries per employee excluding persons in work opportunities with compensation for additional expenses (“one-euro jobs”).

The most important figures for 2017 at a glance:

WestEast
MonthYearMonthYear
Contribution assessment ceiling: general. Pension insurance6.350 €76.200 €5.700 €68.400 €
Contribution assessment ceiling: knappschaftl. Pension insurance7.850 €94.200 €7.000 €84.000 €
Contribution assessment ceiling: Unemployment insurance6.350 €76.200 €5.700 €68.400 €
Compulsory insurance limit: health and long-term care insurance4.800 €57.600 €4.800 €57.600 €
Contribution assessment ceiling: Health and long-term care insurance4.350 €52.200 €4.350 €52.200 €
Reference amount in social insurance2.975 €35.700 €2.660 €31.920 €
Preliminary average compensation/year in the pension insurance scheme37.103 €

 

The reference figure, which is significant for many values in social insurance (including for determining the minimum contribution assessment bases for voluntary members in statutory health insurance and for calculating contributions for self-employed persons subject to compulsory insurance in statutory pension insurance), increases to EUR 2,975/month (2016: EUR 2,905/month). The reference amount (east) increases to EUR 2,660/month (2016: EUR 2,520/month).

The contribution assessment ceiling in the general pension insurance scheme will rise to EUR 6,350/month (2016: EUR 6,200/month) and the contribution assessment ceiling (East) to EUR 5,700/month (2016: EUR 5,400/month).

European regulatory projects – IORP-II Directive adopted

The version of the compromise text of the Directive of 30 June 2016 brings together the provisions of the EU institutions, which take into account the specific features of national occupational pension schemes and combine rules on the supervision of institutions for occupational retirement provision.

This is a European legal framework that still requires implementation by national legislators. The official legislative process for revising the IORP Directive (Institutions for Occupational Retirement Provision, 2003/41/EC), which has been in place since 2003 and was implemented in Germany by means of regulations in the Insurance Supervision Act (VAG), was already initiated in 2014. The scope of application of the IORP-II Directive is Pensionskassen and Pensionsfonds, and optionally (and in Germany probably still not) direct insurance.

The objective is to ensure more equal distribution of risk and benefits between generations and to expand cross-border portfolio transfer from one IORP institution to another (non-individual portability). In addition to the mediation function of the European supervisory authority EIOPA, the main regulatory content is the improvement of governance (business organization) and the improvement of transparency (information obligations towards pension beneficiaries). Since a renewed revision of the adopted IORP-II Directive is not planned until six years after its entry into force, there is at any rate a certain degree of legal certainty. This is particularly true with regard to the virtually unchanged quantitative regulations on capital requirements. Directive 2009/138/EC (Solvency II), which applies to traditional life insurance companies, does not apply.

Since the draft directives were not without political and professional controversy, the effects on occupational pension schemes remain to be seen until they are transformed into German law. We will inform you here about the further development.

Further legislative procedures – draft flexi-pension law

The draft law of the CDU/CSU and SPD parliamentary groups concerns the flexibilization of the transition from working life to retirement in order to strengthen prevention and rehabilitation in working life (BT- Drucksache 18/9787 dated 27.09.2016)

The fact that an increasing number of older people in Germany are able and willing to work longer is cited as both a problem and a goal. The framework conditions for their employment are continuously being further improved, which has already shown clear success. More than 50% of the 60-64 age group is now employed. At the same time, there are still many people who cannot manage to continue working until the standard retirement age even if they wanted to. For them, there are disadvantages in the pension transition, which are to be solved by a series of changes in the Third and Sixth Book of the Social Code (SGB III and SGB VI).

The bill contains the following other significant provisions:

(1.) The possibility of supplementing part-time work with a partial pension before reaching the standard retirement age is improved. Partial pension and additional earnings can be combined flexibly and individually. Additional earnings are taken into account in the pension on an annual basis.

(2.) Those who draw an early full pension due to old age and continue to work will increase their pension entitlement in the future. From now on, full pensioners are also subject to compulsory insurance in the statutory pension insurance scheme until they reach the standard retirement age.

(3.) The possibility is created to waive the then existing exemption from insurance. In this way, employees can acquire additional earning points in the statutory pension insurance scheme.

(4.) Insured persons can pay additional contributions into the pension insurance scheme earlier and more flexibly than before in order to compensate for pension deductions that would be associated with a planned early claim to an old-age pension.

(5.) Insured persons are specifically informed about their options for managing the transition from working life to retirement.

(6.) New regulations apply in the area of prevention and rehabilitation for participation.

(7.) The attractiveness of employing older workers is strengthened by support measures for employers.

On HGB Accounting of Pension Obligations and DC/DB Classification under IFRSs

A published and meanwhile approved draft of the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer, IDW) on amendments to its statement IDW RS HFA 30 under commercial law is available.

The adjustments mainly relate to:

  • the amendment to the law on discounting obligations using an average interest rate for the last ten (previously seven) years
  • as well as regulations on the assumption of debt, indemnification obligation and acquisition of obligations against payment.

Furthermore, the IDW has published a draft of a module to the statement IDW RS HFA 50, which deals with the classification of pension plans under IFRS as defined benefit plans or defined contribution plans. Due to the low interest rate environment, the first changes in the previous classification decision from defined contribution to defined benefit are being observed in practice.

Events

At this year’s roadshow “Vorgesorgt: betriebliche Altersversorgung trotz Niedrigzins” (Providing for the future: company pension despite low interest rates ), we welcomed almost 200 participants at six locations to discuss current developments, challenges and options for action in the field of occupational pension provision in the low-interest environment. The roadshow provided answers to questions about the accounting and tax consequences and possible liability risks of outsourcing care.

Moderated by Susanne Jungblut and Stefan Bäumler, experts from various fields gave a comprehensive overview of current developments and also formulated individual recommendations for action. Lars Hinrichs, Christine Hansen (both KPMG Law) and Detlef Mann (KPMG AG/Tax) explained the labor law and tax aspects of occupational pension schemes from case law and legislation. Marlene Mirtschink and Tobias Schmitz (both KPMG AG/Deal Advisory Pensions) shared their experiences in accompanying a vendor selection or public tenders. Andreas Johannleweling and Franziska Kröning (both KPMG AG/Pension Assessment Group) spoke about the accounting consequences of a restructuring with external financing.

There was plenty to talk about: Above all, considerations of restructuring with external financing and liability risks from the procurement claim were discussed constructively.

Next year, we are planning another roadshow on occupational pension schemes after the summer vacations and look forward to your numerous participation. We will announce topics and dates in the next issue of Pensions Update in spring 2017.

We would also like to draw your attention to some topic-related events with employees of KPMG AG Wirtschaftsprüfungsgesellschaft and KPMG Rechtsanwaltsgesellschaft mbH as speakers. For an up-to-date overview of seminars and events, please click here(News – KPMG Law).

We would like to draw your attention in particular to our webinar on the Company Pension Strengthening Act, which we are planning for the penultimate week in March 2017. You will receive more information and invitations in due course.

At the turn of the year, we will also keep you up to date with a Client Alert on the current status of the Company Pension Strengthening Act.

Sales and remuneration in insurance – How Versurers can use the can use the experience of banks

KPMG Law

Breakfast Meeting Dates and Locations:

19. January 2017 in Cologne
January 25, 2017 in Hanover
February 02, 2017 in Stuttgart
08. February 2017 in Munich

Participation is free of charge.

Whether for insurance companies or banks, regulation – especially at the European level – is becoming more and more extensive and also affects the core business of companies: product design, remuneration and sales. Increasingly, legislators are pursuing matching or very similar regulatory concepts. Using the example of the new IDD sales directive and the requirements for remuneration systems, we will show which regulations currently apply or will apply in the foreseeable future to banks and would like to discuss with you how you can use the experience of the banking world in implementing the new requirements.

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