More favourable occupational pensions without the Occupational Pensions Act (BetrAVG)

– How employers can free themselves from the constraining corset of the BetrAVG –

Employers who want to set up company pensions look at the Company Pensions Act (Betriebsrentengesetz), or more precisely the Occupational Pensions Act (Betriebliches Altersversorgungsgesetz – BetrAVG). However, structuring a company pension in accordance with the BetrAVG usually suits neither the employer’s nor the employee’s needs. Changes in the law, also as a result of EU law and case law, also make the BetrAVG unpredictable.

Real freedom to organise your pension according to your own wishes is gained by throwing the BetrAVG overboard as an unnecessary burden and restriction.

It takes surprisingly little – but it does a lot.

Company pension beyond BetrAVG

The unnecessary corset of the occupational pension law has already been stripped off those who do not promise the pension themselves as employers. For the first sentence of the said law reads

“Where an employee is promised retirement, disability or survivor benefits by the employer on the occasion of his employment (occupational pension scheme), the provisions of this Act shall apply.”

So as soon as it is not the employer who makes the commitment, the whole law simply does not apply to it, not even a single provision of it. Done correctly, this results in the greatest freedom for an optimal and flexible design of occupational pensions.

For this purpose, it is advisable to use a group company or, for example, a corporate foundation, also as an independent subfoundation of a group foundation. This can simply be a sister company, but it must not itself be the employer of the employees concerned.

This opens up more flexible arrangements – for example, if the company pension is conditional on the employee remaining until retirement or occupational disability (BU). Flexible social compensation to avoid hardship may also be included.

Federal Labour Court Judgment of 20 May 2014 – 3 AZR 1094/12

For example, the Federal Labour Court (Bundesarbeitsgericht – BAG) has already ruled in its decision of 20 May 2014 that a company pension commitment made by a group parent company to an employee of a subsidiary who was not an employee of the parent company either when the commitment was made or at a later date is not a company pension within the meaning of Section 1 (1) of the German Occupational Pensions Act (BetrAVG). The express consequence of this is that there is also no insolvency protection, i.e. the Pension Protection Association does not step in if the (parent) company making the commitment becomes insolvent, as the BAG expressly states. A positive side effect is, of course, that no contributions have to be paid to the Pension Protection Association.

Gem. BAG, it depends on the formal employment relationship. Pursuant to Section 17 (1) Sentence 2 of the German Occupational Pensions Act (BetrAVG), this applies accordingly to persons who are not employees if they have been promised retirement, invalidity or survivors’ benefits on the occasion of their work for a company. However, the fulfilment of the obligations under the employment contract with the Subsidiary constitutes an obligation in accordance with the German Civil Code (HGB). BAG ruling does not constitute such an activity for the group parent company, even if it benefited the latter economically.

Longer vesting periods strengthen employee loyalty

A vested pension entitlement under the German Occupational Pensions Act (BetrAVG) is retained on a pro rata basis when the employee leaves the company. The rapid vesting (according to the will of the EU now within three years) has only a minor binding effect on the employee despite a lot of effort. A higher risk of insolvency of the company pension instead of protection by the Pension Protection Association could also strengthen the cohesion between employees and employer in the sense of an economic division of fate, especially in a crisis.

Elimination of liability risks for the employer

Within the framework of the BetrAVG, the employer can be subject to an obligation to pay compensation, i.e. an additional financial expense that is difficult to keep track of, for example if insurers or pension funds, as partners of the employer, unilaterally reduce their benefits legally – for example because of the low market interest rate and longer life expectancy, also under pressure from the supervisory authority.

Some employers believe that they can escape their liability by simply transferring “their” company pension scheme contract to the employee when he leaves the company – however, this can only be done in individual cases.

On the other hand, it is safer to have the company pension commitment issued by a separate group company or foundation without employees, similar to a direct commitment. This can be arranged in such a way that the latter, in turn, is not subject to state supervision as an insurance company either.

In the case of this type of organisation “off the balance sheet” of the employer, the latter reimburses the implementing group company/foundation for current expenses in accordance with the agreement. This eliminates not only any further liability, but any further balance sheet exposure at all. There is also no obligation to contribute to the Pension Security Association (PSVaG) – and such security is not necessary anyway for a foundation that is not operationally active. Adjustment obligations under the German Company Pensions Act (BetrAVG) thus also cease to apply. Likewise, all limits on unilateral settlements. Since the foundation making the commitment is not an employer, it is not subject to any equal treatment obligations vis-à-vis the third-party employees.

Company pension under social/tax law even without BetrAVG

The social courts also count such provision outside the BetrAVG as an occupational pension – the term is not, for example, already defined conclusively or uniformly by the BetrAVG for other areas of law, such as when contributions to statutory health insurance (GKV) are concerned.

• 229 para. 1 sentence 1 no. 5 of the German Social Code, Book V (SGB V) refers to pensions from occupational pension schemes (occupational pensions) as pension benefits. This includes old-age, invalidity or survivors’ benefits, insofar as they accrue directly or indirectly as a result of a previous employment relationship.

In the case law of the BSG, the term occupational pension scheme (bAV) in the contribution law of the SHI has always been understood independently of the term occupational pension scheme in the BetrAVG. If the pension is not already recorded as a pension under the BetrAVG, it is nevertheless to be regarded as a pension under the occupational pension scheme in the sense of the law on contributions, insofar as there is a close connection between the acquisition of this pension and the previous employment.

This is stated in the leading sentence of the judgment of the Federal Social Court (BSG) of 25 May 2011 – B 12 P 1/09 R -:

“Retirement pensions” paid by a foundation to former employees of the founder’s group of companies are subject to contributions to health and long-term care insurance as income comparable to pensions (pension benefits) if there is a connection between the acquisition of these benefits and the former employment and they are intended to replace lost earned income”

As an exception, the BSG adds “Only in the case that a benefit is no longer directly attributable to gainful employment and does not serve to replace income or remuneration, but is intended to secure the subsistence of needy members or their survivors and therefore has the character of private social assistance-like benefits, has the Senate denied the characteristic of income comparable to a pension”.

Accordingly, there is no obligation to pay contributions to the GKV if the foundation does not provide “wage replacement” but – in particular, depending on the individual case – “mitigates hardship”, because there is then no reference to wage replacement benefits.

Accordingly, the classification as a wage substitute then also applies for tax purposes with regard to wage tax.

Company pension foundation for employee capital participation and for home ownership promotion

Employee share ownership can also be used to provide for retirement, or, for example, to encourage home ownership; including through “employer” loans, which can even be (re)financed from the capital accumulated at the company pension foundation. However, the foundation can also grant loans directly to the employer, thereby strengthening the latter’s financial power or, for example, financing a company crèche. Or award scholarships to employees for children, for example. In this way, the employee’s loyalty can then also be increased.

Further advantages with Group foundation and Group company

This is by no means a so-called support fund (which is also possible as a foundation) – with narrow tax regulations and within the framework of the BetrAVG. Employers often do not keep track of the actual costs of their solution – until they are asked to pay for it years or decades later. However, this is also due to the fact that the real future expenses for company pensions of the employees are not reflected in the tax balance sheet. In the event of bankruptcy, the insolvency administrator will then look for reasons for personal liability of the managers, for example because of the risk management that is regularly lacking in this respect in small and medium-sized enterprises (SMEs).

This is easier with a corporate foundation, because it is not an employer and simply makes a commitment itself, for which the employer then pays a lump sum, or also partly provides the foundation with capital in advance or successively. The employer is not liable for this reason alone, because he himself has not made any commitment. Even though it is ideally expected that the employer will voluntarily provide financial support to the pledging group foundation if necessary – he is by no means forced to do so.

On the other hand, the employer is certainly liable if he opts for the external solution of the provident fund, which does not itself offer any legal entitlement. In the event of insolvency, the PSVaG also collects the assets there for the provision of the managing director at the same time – and distributes them to the employees by virtue of the statutory transfer of claims. And if the provident fund has fallen for a Ponzi scheme as an investment, the employer is allowed to make double contributions – even if it causes him financial hardship.

Even without insurance business up to full tax deductibility

For the state financial services supervisory authority, the group company and the group foundation are not operators of an insurance business if one may assume that the employer purely voluntarily supports the group foundation if the latter needs additional money – so one cannot rule this out completely in advance. This means that there will be no maximum actuarial interest rate of 0.25 percent in the future, which will make low-cost pension commitments possible, as well as no high Solvency II capital requirements.

By means of longer vesting periods and, compared with the BetrAVG, lower benefits at vesting, a significantly higher pension commitment can be financed in a targeted manner at significantly lower cost precisely for employees who are loyal to the company or have particularly close ties to it than is possible under the BetrAVG. And this with the elimination of virtually all risks for the employer.

From a tax point of view, the group foundation is not to be treated according to the rules of company pension law from BetrAVG, but according to the general rules for pension commitments, such as when some commercial enterprise has to pay a pension to the aggrieved customer, or it is a pension like on the advertising pillar in front of the Pfefferminzia insurance company “6,000 EUR monthly pension for one-time 15 EUR annual lottery ticket, chance 1 in 1,000,000”. This means that there are no harmful differences in discount rates between the commercial and tax balance sheets, which would then only affect the group foundation anyway.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of

www.hrperformance-online.de (published in HR Performance 3/2021 (Special: Compensation & Benefits) pages 14-15 under the heading: Company Pension Plan -Exempt from the Company Pension Act).

Link: www.hrperformance-online.de or www.hrperformance-online.de/zeitschrift

and

www.nd-aktuell.de (published Aug. 18, 2021, under the headline: The compulsory corset of the BetrAVG)

Link: www.nd-aktuell.de/artikel/1155620.das-zwangskorsett-des-betravg.html

and

www.der-bau-unternehmer.de (published in Der BauUnternehmer September 2021, page 6 under the headline: Those who do not promise a company pension can circumvent company pension law).

Link: DBU_09_2021_DT.pdf (der-bau-unternehmer.de)

and

www.elektropraktiker.de (published in ElektroPraktiker 10/21, pages 748 – 750)

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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