Companies often implement company pension (betriebliche Altersversorgung, "bAV") indirectly via a direct insurance company as an external pension provider. The relative familiarity of this mode of implementation does not necessarily reduce the susceptibility to legal errors within the scope of the German Company Pensions Act (Betriebsrentengesetz, "BetrAVG") in practice. From the company's perspective, the following aspects should be taken into account (under labour law) before and during the implementation of a company pension scheme via direct insurance.
1. Pension commitment under labour law
The starting point for introducing a company pension scheme and setting the stage for minimising the legal risks is always the pension commitment under labour law (direct insurance commitment, Direktversicherungszusage).
- The direct insurance commitment can be issued under collective law (in particular in or on the basis of works council agreements or collective agreements) and under individual law with or without reference to a collective agreement (in particular as an individual commitment, contractual standardised regulation or overall commitment).
- The life insurance contract (see below) implements the pension commitment under labour law.
2. The magic triangle of the company pension scheme
A direct insurance policy is implemented in triangular form (company, employee and insurance company).
- The company and the employee form the starting point for the direct insurance commitment (see above).
- As the policyholder, the company concludes a life insurance contract with an insurance company for implementation purposes.
- The employee or their surviving dependants are wholly or partially entitled to draw a pension directly from the life insurance contract.
- The crucial factor from the company's perspective is that the direct insurance commitment and the life insurance contract are congruent, in order to ensure that the company is not held liable for any discrepancies decades later by company pensioners on grounds of statutory subsidiary liability.
3. Relevance of the pension entitlement under the direct insurance
Companies must carefully regulate how they structure the pension entitlement under the direct insurance to the benefit of the employee or their surviving dependants. Typically, the employee is granted an unrestricted irrevocable pension entitlement or, in the case of exclusive financing by the employer, an unrestricted irrevocable pension entitlement subject to the statutory non-forfeitability.
- In the case of direct insurance commitments financed by deferred compensation, the company must grant the employee an irrevocable pension entitlement - at least under labour law; Section 1b (5) sentence 2 of the BetrAVG.
- From the company's perspective, the (ir)revocability of the pension entitlement has a direct effect on the obligation to pay contributions to the German Pension Assurance Association (Pensions-Sicherungs-Verein, "PSVaG"). This is also the case if the company has assigned or pledged the claims from the life insurance contract (Section 10 (1) in conjunction with Section 7 (1) sentence 2 and (2) sentence 1 No. 2 in conjunction with Section 1b (2) sentence 3 BetrAVG).
4. Premature termination of the employment relationship - what should you do?
Incidentally, an irrevocable pension entitlement is also favourable for companies in cases where employees with vested pension rights due to company pension schemes implemented by means of direct insurance leave the employment relationship prematurely.
- With an insurance-based solution, the benefits to which employees are entitled are limited to the insurance benefits from the life insurance contract if, among other things, the employee's pension entitlement is irrevocable three months after termination of the employment relationship (Section 2 (2) sentence 2 No. 1 - 3 BetrAVG). In this context, the (future) utilisation of surplus amounts also requires regulation when introducing the company pension scheme.
- However, the insurance-based solution does not eliminate the statutory subsidiary liability in the company's favour, which may become relevant decades later in the course of a company liquidation.
5. Outlook
The above article outlines just some of the central issues of a company pension scheme implemented by means of direct insurance. In addition, from the company's perspective, during both the entitlement and benefit phases the accompanying tax and social security regulations have to be observed. Under tax law alone, there are four different types of company pension schemes implemented by means of direct insurance (Section 40 German Income Tax Act (Einkommensteuergesetz, "EStG") old version; Section 3 No. 63 EStG; 100 EStG and Section 10a EStG).
As an interdisciplinary full-service law firm, we advise companies comprehensively on all legal issues relating to company pension schemes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
