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Stand:updated on 23.03.2023 | Topic Occupational retirement provision The occupational retirement provision system

The options for occupational retirement provision (ORP) differ in terms of the types of commitment based on the provisions of the German Occupational Pensions Act (BetriebsrentengesetzBetrAVG) and the methods of implementation from which the employer can choose.

Commitment types, financing and methods of implementation

Commitment types

The BetrAVG differentiates between four kinds of commitments:

1. Entitlement to defined benefits: The employer promises a specific occupational pension, for example as a fixed annuity of money, or a percentage of the final salary.

2. Contribution-based entitlement to benefits: The employer promises to convert certain contributions to an entitlement to retirement or disability benefits or benefits for surviving dependants.

3. DB contribution based: The employer promises the payment of contributions to a Pensionsfonds, Pensionskasse or to direct insurance in order to finance ORP payments. At the start of the pension, at least the paid amounts must be available to the extent they were not used up to cover biometric risks.

4. Defined contribution schemes: The employer is merely required to pay contributions. Neither the employer nor the institution providing the retirement benefits (Pensionskasse, Pensionsfonds or direct insurance) guarantees payment of a (minimum) benefit.

Defined contribution schemes have been included in the BetrAVGby way of the German Act to Strengthen Occupational Pensions (Betriebsrentenstärkungsgesetz) effective as of 1 January 2018. A precondition for defined contribution schemes is that a collective agreement is in place. The parties to the collective agreement must participate in the implementation and management of the defined contribution scheme.

Financing

ORP benefits can be financed by the employer or (economically) by the employee through a salary sacrifice (deferred compensation). Employees can request that their employer offer deferred compensation; the employer, however, decides on the method of implementation and, if necessary, the external pension provider.

Methods of implementation

The BetrAVG defines five implementation methods from which the employer can choose:

1. Direktzusage (direct pension commitment): the employer commits to paying ORP benefits itself. The employer forms pension provisions in its balance sheet and bears the resulting risks itself. Commitments under a Direktzusage are not subject to BaFin’s supervision.

2. Unterstützungskassen (support funds): the employer makes use of the services of an institution, the support fund. This institution receives employer contributions and provides retirement benefits. There is not, however, any legal claim to benefits from the support fund. Support funds are not subject to BaFin’s supervision either.

3. Direct insurance: the employer takes out life insurance for its employees. The employee is both the insured person and the beneficiary. Life insurance undertakings are supervised by BaFin and are subject to the Solvency II Directive (2009/138/EC, OJ L 335 of 17 December 2009).

4. Pensionskassen: Pensionskassen under German law are life insurance undertakings that exclusively provide cover against loss of income. Unless otherwise stipulated by law, they are supervised by BaFin and are subject to the Directive on the activities and supervision of institutions for occupational retirement provisions (IORP Directive (EU) 2016/2341, OJ EU L 354/37).

5. Pensionsfonds: Pensionsfonds only provide ORP benefits and death grants for surviving relatives. They are not considered insurance undertakings under German law and are subject to BaFin’s supervision. As with Pensionskassen, they are subject to the IORP Directive.

The occupational retirement provision guarantee schemes

Employee claims arising from the ORP are protected by multi-level guarantee schemes. On the first level, employers are always liable under the BetrAVG for all of the benefits they have promised, even if these benefits are provided through external pension providers (this is called subsidiary liability, see section 1 (1) sentence 3 of the BetrAVG). In the event that an employer becomes insolvent, the Pensions-Sicherungs-Verein auf Gegenseitigkeit (PSVaG) assumes the relevant commitments and obligations (at the second level), for example by means of Direktzusagen, Unterstützungskassen and Pensionsfonds.

Under certain conditions, direct insurance commitments are also covered by the PSVaG, especially when the employee’s entitlement to receive benefits from the insurer is subject to revocation. However, these cases are exceptions. In the case of direct insurance, the life insurance guarantee scheme provides protection for insured persons in the event of a German life insurer’s insolvency. The German Federal Ministry of Finance (BundesfinanzministeriumBMF) has entrusted Protektor Lebensversicherungs-AG with the duties and powers of the guarantee scheme for the life insurance industry. Pensionskassen may voluntarily join the guarantee scheme, provided certain conditions are met.

Since 24 June 2020, commitments made by an employer to provide benefits via a Pensionkasse have also been protected by the PSVaG. However, there are exceptions, specifically for public sector employees, for Pensionskassen belonging to the guarantee scheme Protektor Lebensversicherungs-AG, and for Pensionskassen that are organised in the form of a common institution (gemeinsame Einrichtung) within the meaning of section 4 of the German Collective Agreements Act (Tarifvertragsgesetz).

Since no benefits are guaranteed under defined contribution schemes, neither subsidiary liability on the part of the employer nor insolvency protection by the PSVaG applies for this type of commitment.

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