New requirements for German insured pension schemes
Out of five different pension funding vehicles in Germany, the insurance-based ways are most popular because they provide the opportunity to offer DC pension plans. Recently, the German Federal Labour Court (BAG) passed a consequential law regarding insurance-based solutions, according to § 2 par. 2 sentence 2 BetrAVG (German Company Pension Law), affecting all direct insurances.
The original ruling was related to disability pensions funded by a direct insurance, but it has become applicable to all direct insurances and Pensionskassen (German pension funds).
All German companies providing insured pension plans are obligated to take action!
Some general background on this ruling:
If employee leaves before normal retirement, the total amount of vested rights will be calculated using the quotation principle according to § 2 par. 1 BetrAVG (in case of early leave, benefits will be reduced depending on the vesting period and time until normal retirement).
Typically, the calculated amount does not equal the actual benefit paid by the insurance provider.
The employer can use an insurance-based solution that defines the vested rights according to the actual benefits paid by the insurance provider.
The employer is obligated to communicate the use of an insurance-based solution to employees in order to determine the value of vested rights in direct connection with the leave of the employee.
It is not sufficient to inform the employees in general about the insurance based solution during the time of their employment.
If the employer does not meet the explicit information obligation, the employee has the right to a higher benefit amount, which needs to be financed by the employer. This could also include book reserves for deferred vested employees, in the case of a financial audit. Under German law, the employer is always the last party obligated to pay guaranteed vested rights.
We can help
If your company has operations in Germany, or elsewhere around the globe, we can help. October Three provides global consulting services that offer a more personalized alternative to ‘big company’ firms. We provide you convenience and peace of mind, unburdened from policies set by a remote head office.
As the sole U.S. member of Abelica Global – a worldwide consortium of elite, independent, actuarial consulting firms – October Three provides clients with direct access to leading experts, research and technology designed to address a myriad of international consulting needs. No one can service the local market like a local independent firm.
Please contact Ray Aguilera for solutions to your global consulting needs.
Readers are reminded that nothing stated in this update should be treated as an authoritative statement of the law on any aspect, or in any specific case and action should not be taken as a result of the update. We will be pleased to answer questions on its contents.