Two major changes in IVV 3.0 compared to IVV 2.0 include the inclusion of all compensation components in the regulatory definition of compensation, and the reversal of the previous principle “Everything that is not variable compensation is fixed” to the new guiding principle “Everything that is not fixed is variable” (cf. on the other material innovations of IVV 3.0, see our Client Alert from 08/2017: https://kpmg-law.de/content/uploads/2017/08/Client-Alert-IVV-3.0_final.pdf). The two innovations affect the regulatory embedding of AV benefits in the compensation systems and the institutions’ compensation governance.
Content: AV services in the context of the IVV
The IVV does not contain a definition of AV benefits. It defines in § 2 para. 4 IVV only defines the remuneration component of the “supplementary pension” as the part of the variable remuneration that the institution promises to the employee as a pension at its own discretion. The definition goes back to the EBA’s pronouncements in para. 133 et seq. of its Guidelines on Sound Compensation Policy of December 21, 2015.
From a regulatory perspective, pension benefits can include any conceivable form of retirement benefits provided by the institution to the individual employee under labor law: In practice, the most common type of pension commitments are those under the German Occupational Pensions Act(Betriebsrentengesetz – BetrAVG). These commitments can be found in all forms possible under Section 1 of the German Occupational Pensions Act (BetrAVG) (above all as defined benefit plans and defined contribution plans), in all implementation channels provided for under Section 1b of the German Occupational Pensions Act (BetrAVG), whether internal (direct commitment) or external (direct insurance, pension fund, support fund, pension fund), and irrespective of whether they are financed by employers or employees. Other AV benefits include earmarked subsidies paid by the Institute to the employee to build up a private pension(net AV benefits) and the direct payment of contributions to an external pension provider that do not meet the requirements of a BAV in accordance with the BetrAVG(AV contribution commitments).
AV benefits as regulatory remuneration within the meaning of the IVV
The AV benefits or the entitlements earned by the employee during the employment relationship in the individual reference period include, in accordance with section 2 para. 1 No. 1 and 2 IVV generally a remuneration in the sense of § 2 para. 1 IVV if they are granted by the Institute or by a third party in relation to the employee’s professional activity for the Institute. The persons appointed in accordance with § 2 para. 1 p. 2 IVV 2.0, which was still possible, and which does not create incentives to take financial risks, has been abandoned by the legislator in IVV 3.0.
Supervisory compensation also includes BAV benefits that are paid out of the employee’s own contributions in accordance with Section 1 (1). 2 No. 4 of the German Occupational Pensions Act (BetrAVG) if the employee has made the personal contributions from taxed remuneration from his or her work for the institution. In this case, the institution must take into account either the underlying net remuneration or the employee’s entitlement to these BAV benefits as remuneration.
AV services as fixed remuneration
AV services include a fixed remuneration pursuant to § 2 para. 6 IVV if they (1) are not subject to any discretion on the part of the institution in terms of their granting and amount, (2) do not offer the employee any incentives to assume risk, (3) the conditions for their granting and amount have been defined in advance and (4) are transparent to the employee, (5) their granting and amount are permanent, (6) cannot be unilaterally reduced or cancelled by the institution, and (7) are not designed to be performance-related or otherwise dependent on the occurrence of previously agreed conditions.
The decisive factor for the classification as fixed remuneration is that the institution (also) grants the AV benefit to the employee as remuneration for his/her work performance.
The capacity as fixed remuneration pursuant to Sec. 2 (2) of the Articles of Association Section 6 IVV does not preclude the institution from granting the AV benefit only as a lump sum (for example, as a lump sum payment to the external pension provider in the case of a BOLZ). The criterion of permanence requires only that the institution provide the benefit to the employee in accordance with its conditions for the duration of the employment relationship without any time limit.
The capacity as fixed remuneration pursuant to Sec. 2 (2) of the Articles of Association 6 IVV also does not preclude the BAV commitment from linking individual benefits to further conditions precedent or conditions subsequent (such as the granting of surviving dependents’ benefits to marriage or the establishment of a registered civil partnership during the term of the employment relationship). The criterion of freedom from conditions refers only to conditions relating to the employment relationship and its implementation; conditions relating exclusively to the private sphere of the employee’s life are harmless.
AV benefits as variable compensation
AV benefits, are exceptionally to be regarded as variable compensation in accordance with § 2 para. 3 IVV if they are granted on the basis of performance. This is the case for BAV benefits that are financed from the employee’s performance-related bonus entitlements by way of deferred compensation.
Quantitative evaluation of AV services
AV services are to be assessed quantitatively – among other things, for calculating the ratio between fixed compensation and variable compensation and, in the case of significant institutions, for determining the compensation threshold for the quantitative identification of risk takers.
Net AV benefits and benefits from AV contribution commitments can be calculated with the specific amount of the earmarked payment to the employee or the Institute’s contributions to the external pension provider.
The quantitative valuation of BAV benefits can be based on actuarial principles according to the BaFin’s pronouncement in the interpretative guide. For this purpose, the Institute may refer to the actuarial calculations for the annual financial statements of the respective reference period.
Early retirement pay, transitional pay and BAV as severance pay under sec. 5 para. 6 IVV?
AV benefits are regularly the subject of termination agreements for the mutually agreed termination of employment. In this regard, with regard to the new provision of § 5 para. 6 IVV on the regulatory treatment of termination benefits, the question regularly arises as to whether the AV benefits regulated for the termination of the employment relationship constitute a termination benefit for regulatory purposes in accordance with section 2 para. 5 include and therefore meet the requirements of § 5 para. 6 IVV are subject to.
There are no special features if the termination agreement alone – declaratorily – describes the further contractual processing of the AV services.
If the termination agreement gives rise to an entitlement on the part of the employee to AV benefits or other benefits granted by the institution in the period following termination of the employment relationship, a distinction must be made: Benefits granted by the institution to the employee to bridge the period between the termination of the employment relationship and the receipt of statutory (retirement) pension benefits or BAV benefits – often referred to in practice as transitional or early retirement benefits – regularly include a severance payment in accordance with §§ 2 para. 5, 5 par. 6 IVV. They are subject to § 5 para. 6 p. 6 no. 1 lit. a) IVV do not meet the requirements for variable compensation if they are regulated in a social plan.
No severance pay pursuant to sec. 2 para. 5, 5 par. 6 IVV exists if the termination agreement stipulates that the legally not yet vested entitlements from the BAV commitment are contractually declared to be vested. The BAV entitlements then continue to represent remuneration for the work performed by the employee in the entitlement period. For the same reason, the settlement of BAV entitlements that is effective under company pension law – i.e. does not violate Section 3 of the German Occupational Pensions Act (BetrAVG) – does not include a settlement payment. A supplement to the vested rights in the termination agreement also does not include severance pay pursuant to Sec. 2 (2). 5 IVV, if the increase is directed to the work performed by the employee during the qualifying period. In contrast, agreements on the compensation of reductions in the statutory pension due to the premature termination of the employment relationship regularly contain a severance payment pursuant to Sec. 2 para. 5 IVV.
AV benefits are given a much more restrictive regulatory dress under IVV 3.0. Institutions must therefore carefully examine the status quo of existing AV benefits with a view to compatibility with IVV 3.0. At the same time, the new regulatory framework allows scope for design in line with individual requirements.
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