In this newsletter, we have summarized the events in case law and legislation relative to company pension schemes in Germany in the first two months of 2021.
Table of Contents
- The Prevalence of Company Pensions in Germany
- Additional Earning Points for Long-Term Contributors
- Legislative Draft Amendment to the Entitlement to a Pension Rights Adjustment
- Occupational Pension Reforms in Three Steps
- Recent decision: Transfer of Undertaking Following Insolvency
The Prevalence of Company Pensions in Germany
The Federal Ministry of Labour and Social Welfare has released the results of its “Employer and Carrier Survey on The Prevalence of Company Pensions 2019”.
According to the survey, presently 88% of companies with at least 20 employees offer a company pension, compared to 64% in 2001. For companies with at least 500 employees, it is now 100%, in contrast to 92% in 2001.
The number of support fund beneficiaries during the period 2001 – 2019 increased disproportionally by more than 100% to 1.8 million entitlements. The increase for all other funding vehicles was 43%.
These significant increases in all areas demonstrate that financial provision for retirement and protection against loss of income have clearly gained importance in the occupational context.
The detailed report can be found here.
Additional Earning Points for Long-Term Contributors
§ 76g of the Fourth Book of the German Social Code came into effect on January 1, 2021, codifying the so-called “Grundrente” (basic pension).
According to this complicated regulation, pensioners who contributed to the state pension for at least 33 years are eligible for the basic pension if they contributed a maximum of 80% of the pension contributions of an average earner. If this is the case, the pension will be increased to a maximum of 80% of the average pension payment, after which, 12.5% will be deducted from the addition. In short, the increase amounts to a maximum of 12 earning points, currently about 420 EUR.
A person with pension contributions just above the 30% mark (relatively low), can almost double their pension through the basic pension. The increase will amount to about 80 EUR a month.
It is not necessary to apply for the basic pension. The increase will be flanked
- by similarly tiered deduction of other recurring income, e.g., rentals or occupational pension and
- allowances on other governmental assistance measures, e.g., housing benefit, social welfare or unemployment benefits.
More information can be found on the German Pension Fund website Deutsche Rentenversicherung.
Legislative Draft Amendment to the Entitlement to a Pension Rights Adjustment
On November 25, 2020, the Federal Ministry of Justice and Consumer Protection concluded a draft on the entitlement to a pension rights adjustment Entwurf zur Änderung des Versorgungsausgleichsrechts, including but not limited to changes to §§ 14 and 19 of the Pension Rights Adjustment Act (VersAusglG).
In future cases of an external division in terms of §§ 14, 17 VersAusglG, an aggregation of the rights for the determination of the value threshold of the external division will now be performed if the party responsible for compensation has several entitlements with the same carrier.
Furthermore, § 19 of the Act is to be amended to give the party entitled to the adjustment a choice between the statutory and a contractual adjustment, in so far as the other party is already drawing benefits from an occupational pension in the time between the end of the marriage and the legal force of the decision on the adjustment.
§ 2 of the splitting regulations of the EPF Euro-BetriebsPensionsFonds e.V. envisage an internal pension rights adjustment in terms of §§ 10 ff. of the Act. In so doing, a new entitlement to the benefit of the party entitled to the adjustment will immediately be established at the company holding the entitlement and at the expense of the party owing the adjustment.
Our clients need not concern themselves with this issue as part our services includes the processing of pension rights adjustments for our clients, of which we handle about 50 a year.
Occupational Pension Reforms in Three Steps
Occupational pensions definitely took off in the last couple of years. The Law To Strengthen Occupational Pensions in 2018 (Betriebsrentenstärkungsgesetz) provided the long awaited supplement required to give the employee’s benefits a significant push.
However, there are some reforms still pending due to inactivity on the part of the legislature. These include, e.g.,
- The adjustment of the maximum actuarial interest rate, which, according to the Actuarial Reserves Regulations, has been stagnant at an unrealistic 0.9% since 2017. The German Association of Actuaries (DAV) recommends reducing the maximum interest for life insurance to 0.25% in January 2022.
- The improvement of the Riester pension: After 20 years and many newspaper commentaries, the disadvantages of the Riester pension are clearly obvious. Corresponding demands for a capping of costs, removal of the contribution guarantee, simplification of the bonus process and an extension of the tax concessions need to be dealt with by the end of the legislative period – the Federal Ministry of Finance has, for the time being, resigned itself from further reforms.
- The long overdue amendment of § 6a of the Income Tax Act: The Tax Court in Cologne had already decided at the beginning of 2018 that the interest rate of 6% for the discounting of accrued interest of pension reserves according to § 6a of the Income Tax Act is unconstitutional and referred the matter to the Constitutional Court (the decision of the Constitutional Court is pending). The matter has meanwhile arrived on the political scene and with regard to supporting mid-size companies affected by COVID-19 through balance sheet relief. The government is caught between a rock and a hard place: According to estimates, each percentage point of the discount factor costs about 10 billion EUR in taxes.
Recent decision: Transfer of Undertaking Following Insolvency
The Applicant had been promised benefits in terms of a company pension scheme. According to the scheme regulations, the occupational pension was determined by the number of years of service and the remuneration on a set date prior to termination.
Insolvency proceedings were instituted against the employer’s assets on March 1, 2009. In April 2009, the business was transferred to the Respondent in terms of § 613a (1) of the German Civil Code.
The Applicant receives a monthly pension of about 145 EUR from his former employer who is the Respondent and a monthly pension of about 817 EUR from the Pension Security Association (PSV). When calculating the pension, the Respondent used the scheme regulations, as well as the higher salary applicable on the date of computation preceding the insured event but excluded the portion of the occupational pension that had accrued prior to insolvency. The PSV – as envisaged by the Company Pension Act – used the Applicant’s lower salary, which was applicable at the commencement of the insolvency proceedings.
The Applicant believes the employer owes him a higher pension, which, according to the scheme regulations, would have to be calculated on the basis of the higher salary minus the amount he receives from the PSV.
Decision (BAG, Urteil vom 26.1.2021, 3 AZR 139/17)
The acquirer of a business (or portion) in insolvency is, according to § 613a (1) of the German Civil Code, liable for the pension scheme entitlements of the employees transferred only pro rata temporis for the service after the institution of the insolvency proceedings.
The employer is not liable for the benefits based on service prior to institution of the insolvency proceedings, even when for this portion of the company pension, the PSV does not fully assume liability in terms of the German Company Pension Act.
The second paragraph is crucial and confirms the existing legal situation. It is therefore possible that, in such special circumstances, an employee may not receive their benefits in full as promised. There was a lot of tension while waiting for the judgment as it was feared that the recent reforms to insolvency protection through the PSV would once again be necessary. False alarm!