Update: Pension funds – New opportunities for partial turnarounds since 1 January 2022

In a press release on 21 January 2022, Germany’s Federal Financial Supervisory Authority (BaFin) announced that the pension fund for tax professionals, Deutsche Steuerberater-Versicherung – Pensionskasse des steuerberatenden Berufs VVaG, had lost its licence to operate an insurance business. This comes around one year after two other pension funds, Kölner Pensionskasse VVaG and Pensionskasse der Caritas VVaG, lost their licences.

Situation in pension funds and supervisory measures by BaFin

Low interest rates are putting pension funds (Pensionskassen) under huge pressure, as we previously reported. Today, some pension funds are often no longer able to meet high guarantee commitments made in the past. A considerable number of pension funds are therefore subject to enhanced supervision, according to the BaFin communiqué. BaFin’s supervision toolkit has a broad range of tools, from

• ordering more frequent reporting by occupational pension funds
• requesting a turnaround and funding plan
• ordering benefits to be reduced in existing pension plans
• or even ordering the closure of certain insurance schemes
  
  to
  
  
• revoking the fund’s licence to operate an insurance business. That means the pension fund can continue to handle its existing insurance policies, but cannot conclude any more new business. Of course, this may greatly reduce pension funds’ room for manoeuvre in a potential turnaround scenario.

Risk and possible courses of action for pension funds 

The pension fund for tax consulting professionals had its licence to operate an insurance business revoked because it could no longer fulfil the minimum capital requirements. BaFin did not consider the turnaround and financing plan presented to be sufficient.

If a pension fund runs into financial difficulties, it is not only BaFin that has tools available; the funds themselves can proactively anticipate any supervisory measures that BaFin might take. A pension fund can generally counteract negative financial trends with the following measures:

• Amending insurance terms in accordance with the statutes (section 197 German Insurance Companies Supervision Act (VAG))
• Reducing benefits in accordance with the statutes (section 179 German Insurance Companies Supervision Act)
• Adapting the (general and special) T&C or adjusting premiums (sections 163 and 164 German Insurance Policy Act (VVG))
• Levying extra charges or additional contributions
• Transferring portfolios

As of 1 January 2022 there is also the option of partial turnaround of a pension fund. The legislator has acknowledged the precarious situation of many pension funds due to the current low interest rates. It has created the option in the form of section 234(7) German Insurance Companies Supervision Act to turn around a pension fund supported by several companies, even if the turnaround plan is only supported by some of the member companies.

Partial turnaround of the fund

Specifically, section 234(7) German Insurance Companies Supervision Act allows insurers to adjust statutory rules even for existing insurance policies in order to create the basis for a partial turnaround of the pension fund. This type of partial turnaround is to be facilitated if:

i. the actuarial reserve has to be increased because the basis for calculation needs to be adjusted due to an unpredictable, not merely temporary change in circumstances 

and

ii. insurance claims from the implementation of occupational pensions which an employer is still responsible for under section 1(1) s. 3 German Occupational Pensions Act (BetrAVG), (a) account for a share of at least 75% of the actuarial reserve to be increased and (b) at least two thirds of that share is attributable to insurance claims for which employers or third parties have agreed to provide the pension fund with the necessary funding so it can fully fund the increase in the actuarial reserve, at least for those insurance claims.

In other words, a partial turnaround can be facilitated if unpredictable and not merely temporary events require an increase in the actuarial reserve and at least two thirds of the entire actuarial reserve is attributable to the companies supporting the turnaround.

In the event of impending financial difficulties, pension fund executives should review early on the various options for turnaround, and now especially partial turnaround, to avoid disadvantages for the pension fund itself as well as the associated member companies.

Risk and possible courses of action for employers

Revoking a pension funds licence to operate an insurance business means for employers that they can no longer register their employees with the relevant pension fund. Employers then have to revise their existing pension schemes and in future run the occupational pension via a different pension fund operator. If certain pension fund operators are specified in a collective agreement or company agreement, then these rules ought to be adapted together with the relevant negotiation partners.

Employers should find out about the current situation of the pension fund they use and participate within their statutory rights in order to be informed in good time and not be surprised by a pension fund’s financial difficulties. If benefits are to be reduced, employers are generally required to make up the shortfall for their beneficiary employees under section 1(1) s. 3 German Occupational Pensions Act. That means employers have to make up for any benefit cuts by pension funds out of their own pocket, even if employers have always correctly transferred the premiums.

Due to the burdensome duty to make up the shortfall (actuarial analyses, creating a reserve, potentially adjusting indices and possible legal disputes with pension beneficiaries) and the resulting impact on employers’ assets, turning around a pension fund can be preferable for employers too.

Alternatively, employers can of course also consider reorganising their pension schemes to avoid or reduce financial drawbacks. Reason enough for businesses to take a closer look at their existing occupational pension schemes.