Occupational pensions

One in four pension funds (Pensionskassen) is now under enhanced supervision by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin), as the German news channel NTV reported on 21 April 2021. The continuing interest rate slump is hitting many pension funds hard. Pension funds need to react to market realities and weigh up options for action. Depending on their organisational structures and articles of association, the options for pension funds include adjusting insurance terms, changing retirement factors, adjusting contributions, levying restructuring charges or additional payments, and reducing benefits.

Insurance rates adjusted at PKDW

At the turn of the year 2020/2021, the Pension Fund for the German Economy (Pensionskasse für die Deutsche Wirtschaft – PKDW), for example, adjusted its insurance rates, including for existing policies, i.e. also with effect on existing insurance tariffs and insurance policies. BaFin approved these measures in early December 2020. PKDW then informed members in December about the changes adopted, and changed the rates in the insurance portfolio starting from the beginning of 2021.

This has a significant impact on pensioners and employers: Existing insurance policies with a previous guaranteed interest rate of between 0.90% and 3.00% have seen this rate uniformly reduced to a guaranteed rate of 0.40%. New policies will only receive a guaranteed rate of 0.25%; from 1 January 2022, in accordance with the publication in the Federal Law Gazette of 27 April 2021 (BGBl. I, 2021 page 842), this will be the maximum guaranteed interest rate for direct insurance policies, too. At the same time, the mortality tables were updated at PKDW. While this does not affect the pension rights accrued up to 31 December 2020, which are still determined on the basis of existing rates, the pension entitlements concerned are those which will be earned on the basis of the contributions still to be paid from 1 January 2021 onwards.

Consequences for pension recipients

For pension recipients the impact may be significant because the reduction of the guaranteed interest rate from between 0.90% and 3.00% to a uniform 0.40% involves a significant reduction in potential pension benefits. Sample calculations show that this reduces the pension fund’s level of benefits for contributions paid from 1 January 2021 by 40% to 60%. Pension schemes through the PKDW often have blended funding, i.e. contributions are paid partly by the employer and partly by the employee. The decisive factor in the case of employee contributions is whether it is paid directly out of their salary, from a comprehensive commitment (“Umfassungszusage”) pursuant to section 1(2) no. 4 of the German Occupational Pensions Act (BetrAVG) or as a private pension. Often, older pension commitments through the PKDW are private contributions from employees which are not covered by the employer’s pension promise and hence by the employer’s obligation to pay (see next paragraph).

Impact on companies

The impact on employers is also significant insofar as they (as in most cases) have to account for the reduced level of benefits, regardless of the reasons why the external pension scheme provider does not pay or whether the employer itself is at fault. The employer’s obligation to assume responsibility without fault follows from section 1(1) sentence 3 BetrAVG:

“The employer shall be deemed to be responsible for the performance of the benefits it has promised even if the provision is not carried out directly through it.”

In other words, even if the employer implements the occupational pension scheme through an external pension scheme such as a pension fund, it must also take responsibility for the pension promise originally made. If, on the basis of the previous insurance rates of a pension fund, the employer has promised the pension recipient a pension scheme with a guaranteed rate of between 0.90% and 3.00%, it must fulfil that promise even if the pension fund itself no longer earns and pays that interest.

If the employer wishes to avoid its own obligation to pay under section 1(1) sentence 3 BetrAVG with the corresponding balance sheet effects and to close the gap in coverage by means of additional contributions to the PKDW (if at all possible in individual cases), sample calculations show that employers would have to pay additional contributions of around 60% to 120% of the previous contributions. The contributions required can thus be more than doubled in individual cases. The specific additional contributions depend on various factors, such as the residual maturity, updated mortality tables and others.

Adjustment of pension commitments

While pension funds can adjust their insurance rates after approval by BaFin, the employer cannot easily adjust its own pension commitment. The Federal Labour Court has already decided in a similar case when, at the turn of 2016/2017, BVV Versicherungsverein des Bankverein a. G. adjusted some insurance rates and reduced the pension factors in a particular rate by approximately 24%. The level of benefits was able to be maintained by means of ongoing additional contributions of about 31% of the previous contribution.

By decision of 12 May 2020 (3 AZR 157/19), the Federal Labour Court ruled that while the employee entitled to the pension was not entitled to additional contributions from the employer, the employer was liable under section 1(1) sentence 3 BetrAVG for the reduced benefits of the pension fund. In the specific case, the Federal Labour Court assumed that a comprehensive commitment under section 1(2) no. 4 BetrAVG existed, meaning that the employer’s liability obligation also covered the pension fund benefits financed by the employee. The rules in the pension commitment often do not provide protection for businesses. For example, according to the Federal Labour Court’s assessment, even a dynamic reference to the rules of the pension fund does not mean that the employer’s pension promise is “automatically” reduced in accordance with the reduced pension factors of the pension fund. It is merely a “reservation of a change” on the part of the employer, which it can use only in consideration of the principles of the protection of legitimate expectations and proportionality. As a result, companies need their own justifiable reasons in accordance with the three-stage audit scheme developed by the Federal Labour Court.

Employers should consider their options for action

Employers should consider:

• how far their own obligation to pay under section 1(1) sentence 3 BetrAVG extends, specifically: is “only” the employer-funded part of the pension scheme covered or is the employer also liable for the part of the scheme financed by the employee? That depends on the pension commitment.
  
  
• whether and by what measures their own pension promises could be adjusted; the decisive factor for this is the legal basis on which the pension promise was made (company agreement, individual commitment, collective agreement, overall commitment, etc.).
  
  
• whether there are sufficient justifiable reasons for interfering with the pension commitments and/or whether such intervention is possible with the consent of the works council or the pension beneficiaries who are often affected too.

However, even if the employer’s own pension promises are not adjusted, the employers concerned should determine the extent of their own obligation and determine whether they want to accept the obligation with all “side effects”, fulfil the original pension promise themselves or wish to fill the gaps in coverage by means of additional contributions.