Company pension in Germany in view of the Corona crisis
The corona crisis is also affecting the capital market dependant area of company pensions in Germany. Pension assets are being affected by substantial book losses and many employers are threatened by financial difficulties. The already tense situation of many pension providers such as pension insurance funds (Pensionskassen) could deteriorate over time. Here are some questions and answers which clients are asking about.
1. What measures are available to companies to reduce their pension liabilities?
German company pension law provides employers which face a “financially strained situation” with a number of options to reduce future or already incurred liabilities under their pension schemes. The focus is usually on collective measures such as replacing works council agreements (Betriebsvereinbarungen), which can in principle be implemented without the consent of the individual employees. Restrictions of pension entitlements in individual contracts, such as settlements against one-off payments or waiver agreements, may be possible depending on the circumstances. At a collective agreement level, the following measures are viable:
- Closing the pension scheme for new entrants, i.e. an "admission stop" for future new hires, is relatively easy to implement. If the pension scheme is based on a works council agreement, this usually requires a substitution agreement with the competent works council or a unilateral termination of the works agreement with explicit effect for new entrants. In the case of pension plans unilaterally issued by the employer towards the staff (general staff commitments - Gesamtzusagen), a general announcement of the closure is usually sufficient.
- Subject to certain conditions, case law even allows for an intervention in pension rights and entitlements of employees who already participate in a pension scheme on the basis of collective regulations. Firstly, this requires that the underlying pension scheme is open for a collective law replacement. In principle, this is assumed not only in the case of works council agreements and collective bargaining agreements (CBAs), but usually also in the case of general staff commitments and even standard form individual commitments (e.g. in form employment contracts).
If pension provisions are based on works council agreements, interventions require an agreement with the competent works council. However, the effect of such substitution works council agreements is watered down by the fact that under current case law they do not affect pension claims of former employees (with vested pension expectancies) or retirees.
Interventions in CBA-based pension schemes require a new CBA.
In the case of general staff commitments and standard form individual commitments, interventions are even considered possible by means of a unilateral announcement by the employer.
In any case, such collective interventions in pension commitments are subject to a proportionality review.
(i) Interventions in future pension increases possible under the pension commitment which have not yet been "earned" by the employee (so-called "future service") such as the "freezing" of the pension expectancy by excluding further increases, must be justified by “objective and proportional reasons”. Such reasons are given in particular if the intervention takes place as a comprehensible reaction to a longer-term deterioration in the earnings situation, on the basis of which the previous funding framework can no longer be maintained in the foreseeable future. A concrete risk of insolvency is not necessary. However, evidence is necessary that the intervention is part of an overall concept aimed at improving the company’s economic situation. Interventions must be limited to the necessary extent. Since it is difficult to assess the development of the earnings situation as a result of the crisis, it may be necessary to limit the duration of interventions, e.g. to freeze pension commitments only temporarily.
(ii) Interventions in the calculation parameters for the benefit amount, such as a change of the provisions on the pensionable income, usually also affect the value of the pension already earned (so-called “earned dynamic”). Such interventions must be justified by “good reasons”, which in principle can also be of an economic nature. This requires a detailed and expertly prepared forecast, according to which the intervention is likely to be necessary in order to maintain the company's asset substance.
(iii) The withdrawal of parts of the entitlement which the employee has already earned through his work performance ("past service") is generally inadmissible and, if any, only possible for compelling reasons. The justification requirements are unclear in detail but are considered so high that they are unlikely to be met even in the event of an imminent insolvency or closure of the business.
All of these measures only change the contractual arrangements between the company and the employee/beneficiary. If, as is often the case, external pension providers such as pension insurance funds (Pensionskassen) or insurance companies (as regards direct insurances - Direktversicherungen) are involved, the adjustments require a separate implementation to have effect on the contractual funding relationship with the provider. The requirements depend on the framework conditions applicable at the provider. In case of premium exemptions or reductions, a notification to the pension provider is often sufficient; however, in some cases the provider's consent can be required.
2. What steps can be taken to make the company pension system as "crisis-proof" as possible?
The situation on the capital markets, which was becoming tense even before the crisis began, has already prompted many employers to adjust their pension systems. The options are manifold and range from a change in investment strategies or a change of pension provider to a complete restructuring of the benefit plan and/or the form of implementation.
- The overall design of the pension system has a considerable influence on the financing costs and possible risks of subsequent financing. It is true that a complete exclusion of subsequent financing risks currently cannot be achieved due to the employer's statutory benefit guarantee under German company pensions law. Though a pure defined contribution plan model has been introduced at the beginning of 2018 (so-called “social partner model”), the requirements currently cannot be met since no corresponding CBA is available yet. Under the forms of pension commitment available to date, the employer is liable for default in relation to the beneficiaries if the benefits paid by the pension provider fall short of the promised benefits, in particular due to financing difficulties of the provider. However, these liability risks can at least be significantly influenced by the design of the pension plan, as well as the choice of the pension provider or the implementation form.
- Even in view of the Corona crisis, no rush decisions should be made in this context. Changes to the pension system are often complex to implement and require detailed planning and preparation, considering in particular the effects on taxation and accounting.
3. Are there ways to access pension assets to ensure liquidity?
According to some media reports, some companies have started to access their pension funding capital in order to secure their liquidity. As a rule, however, it is not legally feasible to withdraw plan assets from the group's own Contractual Trust Arrangements (CTAs), pension insurance funds, pension funds (Pensionsfonds) or support funds (Unterstützungskassen), or at best only within narrow limits, as these assets are normally reserved for the fulfilment of pension obligations.
- In the case of CTAs, the contributed plan assets (which usually include the investment income) are withdrawn from the company’s direct access. Only the CTA trustee has the power of disposal and the framework accounting conditions for CTAs require that the trust agreement is drawn up in a way that the trustee may only refund plan assets to the company in certain exceptional cases, for example in case of overfunding. A reimbursement (solely) due to the financial difficulties of the company would be contrary to the balance sheet recognition of the CTA structure and is therefore usually not provided for in the trust agreement. Should the trustee nevertheless make a payment, e.g. in order to save the company from insolvency, this could lead not only to the loss of the CTA's balance sheet recognition but also to claims for damages of beneficiaries against the company and/or trustee.
- It is likely to be even more difficult to disburse funds to (group-owned) pension providers such as pension funds or pension insurance funds, where reimbursement of plan assets generally requires the elimination of pension obligations. Regulatory restrictions might apply with respect to such payout. If a withdrawal is successful, the company should bear in mind that it will ultimately be liable for the fulfilment of its pension obligations towards the employees if the pension provider fails to pay benefits.
- Depending on the situation, access to funds that are not part of the plan assets (e.g. liquidity reserves) and/or funds for which reimbursement is expressly provided (e.g. surplus contributions) may be possible.
4. What role does the Mutual Pension Insurance Association play?
The PSV (pension insolvency protection fund - Pensions-Sicherungs-Verein auf Gegenseitigkeit) as the carrier of the statutory insolvency protection for company pension benefits has the task of fulfilling pension claims of employees which the employer cannot meet due to insolvency. The PSV is not a "crisis aid fund" for distressed companies and usually not willing to assume pension obligations in excess of its legal obligations. It is protected by law against any claims due to the improper (re)structuring of pension plans. If the company is to be restructured in insolvency proceedings by means of a mutually agreed insolvency plan, the consent of the PSV as the company's creditor of recourse is required. Experience shows that the PSV only gives its consent if it can be convinced that the insolvency plan will reduce its financial burden. Rescuing the company or jobs is fundamentally irrelevant for the PSV.