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Hiring in Germany: Company Pensions FAQ
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Company Pensions
Company Pensions
Q. Is there any obligation for Employers in Germany to provide company pensions and - if so - how can this obligation best be fulfilled?
1. Employer-financed company pensions
There is no legal obligation for Employers to provide any employer-financed company pension.
Under German law, the employer can freely decide whether he wants to offer an employer-financed company pension to his employees and if so, which form this employer-financed company pension shall take. However, please note that once an employer-financed company pension scheme has been established, it can only be terminated or amended under certain conditions (as far as employees already participating in the scheme are concerned; new entries can be excluded relatively easily). Also, in case of a transfer of undertaking, the buyer is generally obliged to continue a company pension scheme established by the seller.
2. Employee-financed company pensions
The Employer is obliged to allow its employees to convert a certain part of their salary into a company pension.
a. Statutory claim to salary conversion
According to German statutory law (§ 1a German Company Pension Act - Betriebsrentengesetz - BetrAVG), employees are entitled to convert an amount of up to 4% of the current contribution ceiling in the state pension insurance ("Contribution Ceiling") into a pension entitlement (salary conversion).
In 2008, 4% of the Contribution Ceiling are € 212 / month respectively € 2,544 / year (in case the employee works in former West Germany; slightly lower amounts apply to former East Germany).
The details regarding the salary conversion - e.g. which parts of the salary are to be converted and what kind of pension is promised in return for the salary conversion - are to be agreed between the employee and employer (in case collective bargaining agreements regulating these aspects apply, these of course have to be respected). However, if the employer offers to conduct the salary conversion via a pension fund or a pension fund society, the employee has to accept one of these implementation ways; otherwise, he can demand that the salary conversion is conducted via a direct insurance (for details regarding these implementation ways, please see below).
b. Practical ways to handle salary conversion
There are basically two different ways to accommodate the employees' entitlement to conduct salary conversion:
- The employer can choose an implementation way and a provider which have to be used by all employees for their salary conversion.
German law knows five different ways to implement a pension scheme: one "direct" way, the book reserve scheme (the employer directly promises a pension to the employee, without using an external pension provider and establishes book reserves for the future pension obligations [Direktzusage]) and four "indirect" ways which all include external pension provider. These "indirect" ways mainly differ with regard to the tax treatment of contributions and paid-out pensions, investment restrictions and administrative issues; they are support fund (Unterstützungskasse), pension fund (Pensionsfonds), pension fund society (Pensionskasse) and direct insurance (Direktversicherung). For salary conversion, usually one of the "indirect" implementation ways is chosen, often a direct insurance or a pension fund society. These are basically life insurances concluded by the employer on the life of the employee; the provider therefore will be an insurance company.If a large number of employees are expected to conduct salary conversion and if the employer wants to encourage salary conversion, offering one implementation way and one provider - with which the employer normally concludes a group insurance agreement - usually is the preferred approach as it facilitates the administration for the employer (that only needs to communicate with one provider); also, it renders salary conversion more attractive for the employees as the group insurance agreement offers more favourable conditions than an individual insurance agreement would do (of course, the employer can also offer several implementation ways and providers but this would make the administration more complicated).
- The employer can also ask the employees to choose an implementation way and a provider themselves. This approach is usually chosen by employers that do not want to encourage salary conversion. It can lead to a number of different implementation ways and providers having to be handled by the payroll department.
There is no obligation to regulate the employees' right to conduct salary conversion in the employment agreement, by way of a general guideline or by a works council agreement (as the entitlement is a statutory one anyway). However, especially in case the employer offers one implementation way and one provider for all employees, some kind of regulation is usually made in order to inform the employees and in order to avoid future disputes.
c. Financial risks for the employer
As salary conversion is financed solely by the participating employees, it per se does not lead to any financial exposure of the employer.
However, the following aspects should be taken into account:
- Under German law, the employer always is subsidiarily liable for the promised pension; i.e. in case the external provider is unable to make the promised pension payments, the employer has to meet the respective liability. However, as most external providers are linked to insurance companies and as these are subject to state supervision, this risk is a rather theoretical one.
- Depending on the chosen implementation way, contributions to the State Pension Securing Association (Pensionssicherungsverein auf Gegenseitigkeit - PSVaG) might be payable once the employees' pension entitlements become statutorily vested. However, if the salary conversion is conducted via a pension fund society, no contributions to the PSVaG are payable; the same is usually true for salary conversions conducted via a direct insurance.
- Recent case-law by the regional Labour Court Munich makes the employer liable, under certain circumstances, for any difference between the amount of salary converted and the surrender value paid by the external pension provider. However, this case-law is currently under review by the Federal Labour Court; also, the underlying insurance law has changed for all insurance agreements as of 1 January 2007, so we would assume that this liability does not materialise for insurance agreement concluded after this date.
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We are aware that this first overview is rather general. Should you require any further or more detailed information, we would of course be happy to assist you. Also, please do not hesitate to contact us in case you have any further questions.
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Ann-Christine Hamisch
About our FAQ author:
Ann-Christine Hamisch has worked at Lovells in Munich since 2003. She advises international and German companies on all issues relating to company pensions.
Ann-Christine Hamisch has already devoted her attention to this field as part of her thesis – notably with regard to the issue of modifying company pension schemes.
Recently she has advised notably on issues pertaining to the introduction and modification of pension rules as well as protection against insolvency for liabilities under schemes for old-age part-time work. In addition to contract drafting and the practical implementation of contractual trust agreements, a further important aspect of her work is general company pension law.
Contact:
Ann-Christine Hamisch (ann-christine(dot)hamisch(at)lovells(dot)com)
Lovells LLP (Munich)
Karl-Scharnagl-Ring 5
80539 München
Germany
Phone +49 (89) 290 12-0
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