The topics covered in our current newsletter are: “Post-election reading of the Federal Elections”, “Increase in statutory pensions as of 01.07.2022”, “Adjustment of the social security contribution rates”, “Setting the PSV contribution rate for 2021”, “Short-time (Kurzarbeit) work in times of Corona”, “Case law: reduced earning capacity pension”.
Table of Contents
- Post-election reading of the Federal Elections: pension plans in the coalition agreement
- Increase in statutory pensions as of 01.07.2022
- Adjustment of the social security contribution rates and their impact on occupational pensions
- Setting the PSV contribution rate for 2021 at 0.6
- Case law: reduced earning capacity pension
Post-election reading of the Federal elections: pension plans in the coalition agreement
In our September special edition issue on the Federal Elections, we informed you about the plans for retirement benefits contained in the election programs of the individual parties. In the meantime, the coalition agreement of the SPD, Green and FDP coalition government has been presented. Agreed for the coming legislative period (until 2025), it includes the following:
– The minimum pension level of the statutory pension of 48% is to be permanently secured (explicit goals of the SPD and the Greens in their election programs), and the contribution rate is not to rise above 20% during the legislative period. There are to be no pension cuts and no increase in the statutory retirement age.
– In order to stabilize the pension level and the pension contribution rate in the long term, it has been agreed to introduce partial funding of the statutory pension insurance. This is to be done via a publicly administered fund, which is to be endowed with 10 billion euros in a first step in 2022 (the election programs of all three parties contained similar provisions here).
– In the coalition agreement, the parties continue to commit to strengthening occupational pensions. This is to be done, among other things, by allowing investment opportunities with higher returns. There is indeed an urgent need for reform in this area, as the regulations from the areas of tax, labor, social security and insurance supervisory law, which have grown up over the years and are sometimes very detailed, do not make it easy to exploit appropriate return opportunities.
Increase in statutory pensions as of 01.07.2022
And again on the subject of statutory pensions: at the beginning of November it was announced that statutory pensions could rise by 5.2% in western Germany and by 5.9% in eastern Germany as of 01.07.2022. At least, this is the official information from the pension insurance estimation circle. The background to this significant increase – in western Germany higher than at any time in almost 40 years – was the pandemic-related economic slump in 2020, which had led to a zero adjustment in the west and a marginal adjustment of 0.72% in the east. The economic upturn in 2021 has now led to an increase in contribution income again.
However, there was a great deal of serious criticism against a pension increase on this scale. This is because the high pension increase is due not only to economic developments, but also to the suspension of the so-called catch-up factor in the pension adjustment formula during the last legislative period. In principle, the development of pensions depends on the development of (average) income. If this rises, the pension also rises. However, a decrease in pensions is ruled out by law. The so-called catch-up factor introduced in 2008 is intended to compensate for pension cuts that are actually necessary by slightly lower pension increases at a later date. However, the grand coalition suspended this catch-up factor in 2018. If this catch-up factor, which is intended to ensure a balance between contributors and pensioners, were still in force, pension increases in the summer of 2022 would be only half as high.
However, it has now been agreed in the coalition agreement between the SPD, the Greens and the FDP that the catch-up factor will be reactivated in good time before the pension adjustments in 2022. It therefore remains to be seen how high the actual pension increase will be on July 1, 2022.
Adjustment of the social security calculation parameters and their impact on occupational pensions
At the end of October, a decree was issued to adjust the social security calculation parameters for 2022. So far, everything remains the same. What is unusual, however, is that there will be a reduction in the income threshold for pension insurance (West). Since the relevant calculation parameters for 2022 depend on the development of income in 2020, it is hardly surprising that there will be a time-delayed reduction due to Corona. The reduction amounts to 50 euros per month, from 7,100 euros/month to 7,050 euros/month.
However, the contribution assessment ceiling for pension insurance also determines the amount of remuneration that can be converted into company pension benefits free of tax and social security contributions. Efforts to prevent the reduction in the income threshold from affecting company pensions were in vain. As a result, employees who take full advantage of the legal framework for subsidizing deferred compensation (up to 8% of the income threshold is tax-free, up to 4% is exempt from social security contributions) will now either reduce their deferred compensation for 2022 and lower their contributions, or will have to pay tax or social security contributions on the excess amount. This means additional administrative expense, especially in the pension drawdown phase – because of a maximum of 4 euros per month that are now no longer subject to tax-free conversion (if the 8% limit is exhausted), or just under 2 euros in social insurance (if the 4% limit is exhausted).
Setting the PSV contribution rate for 2021 at 0.6
Despite Corona, insolvency activity in the German economy has apparently been encouraging so far. At any rate, at the beginning of November the Pension Security Association was able to set a contribution rate of 0.6 for 2021. This was below the long-term average of 2.6. Although it should not be forgotten that this low contribution rate is also linked to a number of relieving factors that are unlikely to be present again in this form in 2022, as the PSV itself explains, it is nevertheless pleasing to see how resilient the German economy is proving to be despite the adverse circumstances.
Short-time work in Corona times
Due to the ongoing Corona pandemic, the special regulations on short-time working allowances have been extended once again. These pandemic-related special arrangements were originally due to expire on December 31, 2021, but have now been extended by three months to the end of March 2022 in light of current developments.
The regulations on short-time allowances are likely to have played a key role in enabling German companies to cope with the pandemic-related sales and order shortfalls relatively smoothly to date. According to the Ministry of Labor, six million employees subject to social security contributions received short-time working benefits during the first lockdown in April 2020. This corresponds to about 20%. Over the course of the year, this figure fell to around 2 million by the end of 2020, since when it has risen again slightly.
Case law: reduced earning capacity pension
In a recent decision, the German Federal Labor Court (Bundesarbeitsgericht – BAG) dealt with the prerequisites for receiving a disability pension in the context of a company pension plan (BAG v. July 13, 2021, 3 AZR 445/20). Pension regulations regularly refer – as is the case here – as a prerequisite to the “occurrence of a presumably permanent total incapacity to work within the meaning of social insurance law”. However, the statutory pension insurance usually grants a reduced earning capacity pension initially for a limited period of 3 years, provided that it is not completely improbable that the full reduction in earning capacity can be remedied.
According to the decision of the BAG, however, it cannot be concluded from the initial limitation in the decision of the statutory pension insurance that there would thus be no “presumably permanent” incapacity to work. Based on a dynamic reference to social insurance law, the only criterion for the existence of a full reduction in earning capacity is that the insured person must be “unable to work for an unforeseeable period of time”. According to common usage, “not for the foreseeable future” and “expected to be permanent” are to be equated. And since, according to the long-standing case law of the BAG, pension regulations constitute general terms and conditions and are accordingly to be interpreted according to the understanding of legally uninformed, reasonable and honest contracting parties, it is therefore solely this use of language that matters, and not the question of whether the statutory pension was granted for a limited or unlimited period.