{"id":30517,"date":"2021-08-26T13:15:48","date_gmt":"2021-08-26T11:15:48","guid":{"rendered":"https:\/\/www.fiala.de\/?p=30517"},"modified":"2026-06-22T21:43:02","modified_gmt":"2026-06-22T19:43:02","slug":"company-pension-termination-nullity-settlement","status":"publish","type":"post","link":"https:\/\/www.fiala.de\/en\/company-pension-termination-nullity-settlement\/","title":{"rendered":"Company Pension Schemes: Termination, Nullity and Settlement of Pension Commitments"},"content":{"rendered":"

How to exit loss-making contracts with a low tax burden<\/strong><\/h2>\n

Contrary to widespread assertions, the assets accumulated in a company pension scheme (bAV, occupational pension) can, as a rule, be released early. This applies both to the occupational pension scheme of ordinary employees and to managing directors and board members \u2013 even after insolvency and deletion of the GmbH or AG from the commercial register.<\/p>\n

Entitlement to unwind deferred compensation by mutual agreement<\/strong><\/h3>\n

The Bremen Regional Labour Court (LAG, judgment of 22 June 2011, Case No. 2 Sa 76\/10<\/a>) ordered an employer to terminate the insurance policy or pension fund contract concluded in favour of its employee. The employee had fallen into financial hardship, so that the employer was bound by its duty of care and consideration under \u00a7 241 II BGB (German Civil Code)<\/a>. This was a deferred-compensation arrangement with an employer contribution. The ruling shows that, in any event, employers and employees can also cancel or terminate an occupational pension scheme by mutual agreement \u2013 with retroactive effect from inception.<\/p>\n

Unilateral settlement right of the employer<\/strong><\/h3>\n

The German Company Pensions Act (BetrAVG) provides, in \u00a7 3 para. 2 BetrAVG, the option for employers, pension guarantee associations or insolvency administrators to settle vested pension rights and current benefits where these fall below certain value thresholds (1% of the monthly reference amount under \u00a7 18 SGB IV<\/a> (German Social Code, Book IV); for lump-sum benefits, 12\/10 of that reference amount \u2013 i.e. EUR 26.25 in western Germany and EUR 22.40 in eastern Germany in 2012 for pensions, and 12\/10 of that figure for lump-sum benefits).<\/p>\n

Unilateral right of the employee to rescind the contract<\/strong><\/h3>\n

Time and again, employees discover that the promised occupational pension is worth far more on paper than the actual value accumulated. Sometimes the providers of occupational pension schemes fail to notify the employer of the pension values achieved each year, so that the employers in turn cannot inform their employees. At the latest upon leaving the company, employees find that only a fraction of the premiums paid in is still available \u2013 the missing balance having been consumed by acquisition and distribution costs. In such cases, particularly with salary conversion (deferred compensation), the employee may take the view that the occupational pension commitment is null and void (LAG Munich, judgment of 15 March 2007, Case No. 4 Sa 1152\/06<\/a>) and accordingly demand reversal.<\/p>\n

Social-security liability?<\/strong><\/h3>\n

Where the employment relationship has already ended, with a vested entitlement and a benefit paid under the BetrAVG \u2013 including by way of severance \u2013 there is regularly either remuneration subject to social-insurance contributions or a pension payment within the meaning of \u00a7 229 SGB V (German Social Code, Book V)<\/a>. The Federal Social Court (BSG, judgment of 25 April 2012, Ref. B 21 KR 26\/10 R) regards any settlement of an occupational pension commitment prior to the occurrence of the insured event as subject to social-security contributions.<\/p>\n

Where a severance payment is made during an ongoing employment relationship, it may not constitute a pension payment (carrying the ten-year social-security burden) but rather remuneration for the current year. The advantage is that it is then subject to social insurance only together with current wages up to the income threshold \u2013 and possibly not at all for higher earners. From a tax perspective, the so-called one-fifth rule may apply, \u00a7\u00a7 19, 34 EStG (German Income Tax Act)<\/a>.<\/p>\n

A severance payment would not be a \u201creal\u201d severance payment \u2013 and would therefore, within the limits of the contribution assessment ceilings, be fully subject to social-insurance contributions \u2013 if the employment relationship continues (i.e. it is not an occupational pension benefit), for example where it is paid for the loss of the employee’s previous, more senior position (BSG, judgments of 28 January 1999, Ref. B 12 KR 14\/98 R<\/a> and B 12 KR 6\/98 R<\/a>). Exempt from social security and tax-privileged under \u00a7 3 No. 9 EStG<\/a> are, initially, only severance payments made for the period after employment ends \u2013 in particular on termination of the employment relationship.<\/p>\n

It is essential to distinguish between the settlement of a commitment and a payment made on grounds of hardship, because each carries different consequences. The latter, in particular, is often even more favourable. It would, however, also be more favourable if, for example, it were simply made clear (even without hardship) that the release amount serves to finance a bridge until the start of the pension, since even then it is not a retirement provision. Or to finance a professional reorientation, as start-up support for self-employment, or as a basis for financing emigration. All of this is also possible without hardship, voluntarily on both sides, and indeed simply by way of a clear waiver by the employer.<\/p>\n

Optimisation \u2013 up to full exemption from social security<\/strong><\/h3>\n

If the occupational pension commitment is terminated retroactively, the payment is not a pension benefit (or severance payment) for the past, but a subsequent payment of remuneration for the past. The subsequent payment of the originally converted salary is no longer a pension benefit, but a one-off back payment of wages for past periods (irrespective of whether the employment relationship has ended or continues).<\/p>\n

For contribution purposes, such one-off payments are generally attributed to the individual month of payment, \u00a7 23a<\/a> III SGB IV. The pro-rata contribution assessment ceilings therefore apply, so that only the part of the payment up to the contribution assessment ceiling (BBG) is charged with social-insurance contributions. The vast majority of the amount is not subject to such contributions.<\/p>\n

A pension payment \u2013 and thus income already earned \u2013 is avoided precisely where the payment is not a settlement of the pension entitlements acquired through deferred compensation, but the deferred compensation is instead reversed from inception. This is the decisive difference.<\/p>\n

It follows that no social-insurance contribution at all is deducted if there was no employment relationship with the former employer in the year of payment, while the so-called March clause applies if there was an employment relationship in the previous year.<\/p>\n

Further reductions may arise where, for part of the relevant year up to payment, there were no periods subject to contributions \u2013 for example, due to receipt of sickness benefit.<\/p>\n

The social-security liability can be minimised or avoided, for example, by deferring payment to April or later. In that case, you are liable for contributions only if you continue to work for the same employer at the BBG level for the month in question, and only the amount exceeding the current monthly wage up to the BBG level is subject to contributions. Other optimisation approaches are also conceivable \u2013 for example, payment in a month in which variable components are also disbursed, so that the pro-rata BBG is already exceeded by then.<\/p>\n

It is also possible that the payment might be construed as a retroactive pay rise. This does not, however, lead to a different result if the structure is correct, because such a payment can likewise be treated as a one-off payment and allocated to the month of payment, for reasons of simplification:<\/p>\n

Accordingly, by disbursing the deferred-compensation capital following retroactive termination of the deferred compensation, it is genuinely possible to save all, or most, of the social-security contributions that would otherwise fall due on termination of the occupational pension scheme.<\/p>\n

No pension-rights adjustment when exercising a lump-sum option or settling an occupational pension<\/strong><\/h3>\n

The Federal Court of Justice (BGH, judgment of 18 April 2012, Ref. XII ZB 325\/11<\/a>) has ruled that a private pension insurance policy under \u00a7 2 para. 2 No. 3 VersAusglG (German Pension Equalisation Act) is not subject to pension equalisation even where the lump-sum option is exercised after the end of the marriage period, i.e. when the divorce petition is filed.<\/p>\n

This would apply correspondingly if the deferred compensation were reversed after the end of the marriage, since this would then not be a lump-sum settlement under the occupational pension scheme \u2013 which would otherwise be subject to pension-rights adjustment.<\/p>\n

The same applies by analogy to Riester pensions: the lump-sum payment of the pension (up to 30% of the capital) would fall under pension equalisation, whereas the (permissible) payment on termination would not.<\/p>\n

by Dr. Johannes Fiala<\/p>\n","protected":false},"excerpt":{"rendered":"

How to exit loss-making occupational pension contracts with minimal tax and social-security cost. Contrary to widespread assertions, assets accumulated in a company pension scheme (bAV) can, as a rule, be released early \u2013 for ordinary employees as well as for managing directors and board members, even after insolvency and deletion of the GmbH or AG from the commercial register.<\/p>\n","protected":false},"author":3,"featured_media":30515,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":"","rank_math_focus_keyword":"","rank_math_description":"","rank_math_title":""},"categories":[495],"tags":[508,504,497,504],"class_list":["post-30517","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-kanzlei","tag-betriebliche-altersversorgung-en","tag-pension","tag-altersversorgung-en"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/posts\/30517","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/comments?post=30517"}],"version-history":[{"count":1,"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/posts\/30517\/revisions"}],"predecessor-version":[{"id":30681,"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/posts\/30517\/revisions\/30681"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/media\/30515"}],"wp:attachment":[{"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/media?parent=30517"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/categories?post=30517"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.fiala.de\/en\/wp-json\/wp\/v2\/tags?post=30517"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}