The New Year ushered in several amendments to private and public sector pension Acts. Among the main amendments were an increase to the general retirement age and harmonization of the accrual percentage of employment pensions. This may have an effect on an employer's pension liabilities if the employer has promised employees a certain kind of pension benefit. Now is the time to check the contents of the pension promise especially if the employer has a supplementary pension arrangement that improves the statutory pension.
The most significant change of the new Employees' Pension Act (69/2016) is that the minimum general retirement age will rise after a transition period. The risk is that the diminished statutory pension and a supplementary pension are not sufficient to cover an employer's pension promise under the new Act. The supplementary pension supplements the statutory pension and normally entitles an employee to retire prior to the statutory retirement age. The statutory pension and the supplementary pension together form the employee's overall pension security. If the employer has promised the employee a certain amount of overall pension, the employer may be liable to compensate the employee if the overall pension coverage is not fulfilled regardless of the statutory provision or the employer's agreement, for example, with a life insurance company on the arrangements of the benefit.
The law does not contain separate regulations on employers' compensation liability. On the contrary, amendments concerning the statutory pension may entitle the employer to make amendments to its supplementary pension arrangements. The deciding factor is whether the level of the overall pension coverage is binding on the employer. If the employer has committed itself to a certain level of pension benefit,, this affects the employer's ability to change the contents of the pension arrangement and limits the employer's ability to influence its pension liabilities, for instance, by changing the terms of the pension arrangement to reflect the changes of the mandatory pension legislation.
An employer's pension promise can be based on an express agreement, on the employer's unilateral announcement, commitment or on a long-lasting established practice. Therefore, it is important to clarify what kind of pension promise the employer has made in practice to its employees who are entitled to a supplementary pension benefit. Has the supplementary pension or the level of the supplementary pension been agreed on? Do the employment contracts contain terms on the pension benefit? How has the entitlement to the supplementary pension been communicated to the employees? It is worth checking these facts as they may lead to a situation where it is not possible to influence the pension liabilities just by altering the terms of the supplementary pension, and the compensation liability arises on grounds of the binding pension promise.
Read also our arcticle from the D&I Quarterly Q1 2016.
The above Alert is also available in Finnish here.