Today, on May 20, 2014, the Directive 2014/50 of  the European Parliament and of the Council on  minimum requirements for enhancing worker  mobility between Member States by improving the  acquisition and preservation of supplementary  pension rights, shortly referred to as the MobilityDirective, enters into force. Once transposed, this  Directive will cause significant, cost-relevant changes  to the law on occupational pensions in Germany.  Employers operating pension plans in Germany are  well advised to acquaint themselves with the content  of the directive and to analyze its consequences for the  existing plans and define possibly necessary actions.

Content of the Directive

New Rules on Vesting

Under the current law, pension rights become vested  in Germany upon the end of an employment relationship if an employee leaves his employer at age 25 or  later and the pension promise has been given at least  five years before the end of the employment relationship (Sec. 1a of the German Pensions Act). For pension rights resulting from promises given before 2001,  the relevant numbers are age 35 and 10 years since  the pension promise. Art. 4 of the Directive does now  oblige the Member States to ensure that pension rights  shall vest after a period that, under no circumstances,  exceeds three years and that the minimum age for  vesting is not higher than 21.

Further, any vested pension rights resulting from a  defined benefit promise are static under German law.  Pursuant to Sec. 2 para. 5 of the German Pensions  Act, any developments after the employee’s exit, e.g.,  any dynamic or amendments of the underlying plan,  do not affect the vested pension right. The nominal  value of the pension right remains unchanged; as  a consequence the pension right’s relative value  diminishes because of inflation.

Pursuant to Art. 5 of the Directive, Member States  shall adopt measures necessary to ensure that the  vested pension rights or their values are treated in line  with the value of the rights of the active beneficiaries  or the development of pension benefits currently in  payment. The Directive prohibits the German concept  of static vested pension rights. It remains to be seen  how the German legislator will address this issue.  It might adopt a rule reflecting the already existing  principles for the adjustment of benefits in payment,  or introduce an automatic increase in line with  capital market developments.

Additional Information Duties

Under Sec. 4a of the German Pensions Act, employers  or external pension providers have to inform beneficiaries about the benefits that they are likely to receive  and about the so called transfer value (Übertragungswert) if the beneficiary has a justified interest in such  information. According to Article 6 of the Directive,  these information rights will be broadened; e.g.,  surviving beneficiaries shall have these information  rights as well.

The most important aspect of these new rules is likely  to be the requirement of “clear” information. It is to  be expected that the courts will interpret the “clear”  requirements in the same way in which they interpret  the requirement to use “clear” language in general  terms and conditions under Sec. 307 para. 1 of the  German Civil Code. This is a very strict test and any  ambiguity from a third-party perspective in the  language used is likely to lead to the “clear” requirement not being met. Consequentially, the hurdles  posed by the clarity requirement are likely to be high  and demanding.

Further Reduction of Employer’s Rights  to Pay Off Annuity Rights

The current law in Germany very strongly reduces an  employer’s right to prematurely pay off an employee’s  pension right. Under the Mobility-Directive any  paying off of vested pension rights will require the  employee’s informed consent. The practical possibility to unilaterally pay off minimum pension rights,  which is possible in Germany today, will therefore no  longer be allowed. This is likely to increase administrative burdens for employers.

Scope 

The Directive stipulates that it only applies to crossborder employee transfers. However, the German  Ministry for Labor and Social Matters has already  announced that they will transpose the Directive  also for inner German scenarios in order to avoid  an unjustified different treatment of these scenarios.  According to information available to us, this will  definitely apply to the reduction of the vesting period  from five to three years, the obligation to ensure  dynamic vested rights and the reduction of the  minimum age to 21.

The Directive further stipulates that its content shall  apply only to periods of employment falling after its  transposition. The German legislator could, however,  go beyond this minimum requirement when transposing the Directive and stipulate, e.g., that the new  rules also apply to periods of employment as of 2014.  However, this is not to be expected in our eyes. The  Directive does not apply to any pension plan that was  closed for new entries on 20 May 2014.

Practical Consequences

According to our knowledge, the Ministry of Labor  and Social Matters plans to publish a first bill of  a transposition law in fall 2014. However, it is  generally expected that the new rules will not be  effectively transposed into German law before 2017.  The German legislator must have transposed the  Directive by May 21, 2018.

Therefore, employers offering occupational pension  plans in Germany still have some time to acquaint  themselves with the consequences of the transposition  of the Directive and to prepare suitable reactions.  The economic consequences, especially the consequences  of the obligation to introduce a dynamic to vested  pension rights and the reduced criteria for vesting,  will lead to significant additional cost, especially for  those employers operating dynamic defined benefit  plans.

Maintaining occupational pensions as an attractive  component of a total compensation package and as  a strong measure to retain top talent while at the  same time ensuring cost control and proper risk  management will require creative solutions. In many  cases the amendment of DB plans into German DClike plan structures may be the solution. Those plan  structures are especially referred to in Article 5 of the  Directive fair solutions, if they provide for certain  dynamic elements (e.g., the return of investment  derived from the plan is used to adjust the value  of the vested pension rights).