The new draft bill of the Federal Ministry of Labor and Social Affairs on the Ordinance on Relevant Calculation Parameters for Social Insurance (“Social Insurance Calculation Parameters Ordinance 2022”) has been published and finally brings certainty to the occupational pension world: It can always be more complex. The regulation serves the annual determination of the relevant calculation parameters of the social insurance in accordance with the statutory regulations, in particular for the insurance, contribution and benefit law of the statutory health and pension insurance. For the first time, the contribution assessment ceiling of the Western pension insurance (“BBG”) decreases as a consequence of the negative wage and salary development (in particular due to the pandemic). Unfortunately, the consequences for occupational pensions, which refer to the BBG in various places, were apparently not considered. No area exemption has been created – to date – for occupational pensions. While companies are already sufficiently busy to review and implement requirements and designs for the mandatory employer subsidy for social security contributions saved through deferred compensation in time for January 1, 2022, there are now further changes. We explain the consequences to be considered in our Client Alert.
1. determination of the BBG
“The previous year’s figures for social security are extrapolated using the rate of change in gross wages and salaries per employee excluding persons in job opportunities with compensation for additional expenses in 2020. The relevant rate of change in 2020 is – 0.34 percent in the old Länder.” reads the introduction to the draft bill. The BBG RV (West) does not increase as in the last decades, but decreases for the first time since 1959: from currently 85,200 euros in 2021 to 84,600 euros per year in 2022, i.e. by 50 EUR per month.
The draft bill states that there are no alternative solutions. There is no discretion in determining the calculation parameters of social insurance, since the federal government is bound by the legal requirements of the ordinance authorization (§ 159 SGB VI). It goes on to say that there would be no additional compliance burden for citizens and the economy, without going into the realities of the occupational pension system.
2. links between the occupational pension scheme and the BBG and Effects of the change
What are the main implications for occupational pension schemes?
(a) The statutory entitlement to deferred compensation under § 1a para. 1 BetrAVG is not directed at a fixed amount, but the relative amount of 4% of the BBG. Employees’ maximum conversion entitlement will therefore fall from EUR 3,408 in 2021 to EUR 3,384 in 2022. The difference is 24 euros per year or 2 euros per month.
In some cases, the pension systems provide for a contribution option above this limit, but in others – as in the case of collectively agreed arrangements in particular – there is a strict cap on this 4% of the BBG (collective agreement priority, Section 20 (1) BetrAVG). Here it must be checked whether a reduction of the contribution must be made in the individual case (relevant especially if the maximum amount has been used so far) and which adjustment measures must be taken.
If there is scope under the pension plan regulations to exceed the minimum entitlement under section 1a para. 1 BetrAVG flexibly above 4% of the BBG, there is no problem per se and the deferred compensation can in principle be continued unchanged with the employee contribution.
(b) However, deferred compensation is also exempt from social security contributions – and this is capped – only up to a maximum contribution amount of 4% of the gross salary. As of 2022, only conversions up to EUR 3,384 will be exempt from social security contributions; above this amount (i.e., the difference from the old BBG of more than EUR 24), social security contributions will be due in each case. This means that the excess contribution will be subject to double contribution in the pension drawdown phase without any adjustment to the contribution.
(c) For the statutory insolvency protection via the PSV, the downgrade of the BBG in 2022 means that any conversion contribution above the 4% BBG will only be protected by the PSV with a time delay of two years (Section 7 (5) sentence 3 BetrAVG).
(d) In special cases, tax requirements and design options such as a change in the pension commitment must be examined (in particular, Section 4d EStG in the case of a reduction in support fund pension payments)
3. what does the reduction of the BBG to 2022 mean for the mandatory employer contribution?
The reduced social security savings also affect the mandatory employer subsidy for new and old deferred compensation contracts. § 1a para. 1a BetrAVG stipulates that the employer must additionally pass on 15 percent of the converted remuneration as an employer allowance tothe pension fund, pension fund or direct insurance “insofar as it saves social security contributions as a result of the remuneration conversion.” This means that the only exceptions to the obligation to pass on contributions are deferred compensation under the direct commitment and support fund schemes.
While practitioners in the countdown to the expiry of the statutory transitional period for old contracts on 01.01.2022 are still eliciting the answers to the manifold questions that this simple regulation raises (see our Client Alert of spring 2021 on this subject), it must now additionally be borne in mind that subsidy entitlements and the amount of the subsidy are to be calculated on the basis of the reduced BBG 2022.
Depending on the implementation and design of the mandatory subsidy, however, different constellations may arise. If a reduction solution is agreed in individual cases, the total amount of the contribution may remain the same. This may also be the case with the principle of additive subsidization, when there is no peak accounting, but in the case of any social security savings, a flat rate of 15% of the contribution is always subsidized.
4. further consequences – information obligations of the employer and costs?
What needs to be considered in further implementation and communication? Is the employee entitled to pension benefits to be informed about the changes and consequences of the reduction in the BBG? Irrespective of a possible duty to inform on the part of the employer (cf. BAG dated 18.02.2020 – 3 AZR, 206/18), we recommend informing the employees whose deferred compensation is affected by the BBG reduction in any case. For utilities, too, the small-scale adjustments to contributions, as with the subsidy, are labor-intensive and capacity-binding, with corresponding financial costs and consequences.
5. direct commitments – salary-based defined benefit plans even more expensive?
In many companies, direct commitments still exist from the past in the form of salary-dependent defined benefit plans, in which higher benefits are earned for salary components above the BBG than for salary components up to the BBG. Inherent in the plan formula is that the development of the pension entitlement of the pension beneficiary depends on how the salary and the BBG develop: If the BBG increases without the salary being increased, the salary portion above the BBG is reduced for salaries above the BBG. The entitlement decreases. However, if the BBG falls while the salary remains constant, the entitlement increases.
In times of rising BBG, employees have so far regularly focused on whether their individual salary increase offsets the BBG development and thus their pension entitlements are not eroded by a rising BBG.
The situation of a reduced BBG is now completely new. This is because, for plans with a split pension formula as outlined above, this leads to higher pension entitlements above a certain salary level. For the employers concerned, the falling BBG means in many cases an increase in the cost of the occupational pension and an increase in pension provisions.
We note that the reduction of the BBG without an exemption and protection of existing occupational pension schemes will result in additional auditing and implementation costs. Companies are required to take the current statutory changes in 2022 – downgrade of the BBG and the mandatory employer contribution – as an opportunity to examine their pension commitments, which have often evolved in a complex manner over time, agreements with the pension provider and also deferred compensation in detail to determine the need for action.
We will be happy to provide you with individual, vendor-neutral advice and suggestions on how to find a suitable solution for your company that is sustainable, legally compliant and acceptable in terms of personnel policy.
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