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Occupational pension schemes

Types of scheme What are the most common types of pension scheme provided by employers for their employees in your jurisdiction?

Different types of pension schemes exist, including:

  • direct insurance;
  • a pension fund;
  • a staff pension fund; or
  • a benevolent fund.

An employer may directly and personally grant a pension or involve an external pension provider.

While all of above pension schemes are used, most employers prefer to offer direct insurance through an external pension provider. 

Statutory framework Is there a statutory framework governing the establishment and operation of occupational pension plans?

The basic statutory framework for occupational pension plans is the Act for the Improvement of Company Pension Plans, which provides for employee protection rights that secure employee benefits from a pension commitment. In order to achieve this aim, the act restricts various arrangements between employers and employees that would affect the pension commitment.

What are the general rules and requirements regarding the vesting of benefits?

The vesting of benefits depends on a pension plan’s contractual regulations and the Act for the Improvement of Company Pension Plans’ mandatory statutory rules. Contractually, it is possible to agree on an immediate vesting (non-forfeiture) of a pension commitment. According to the act, pension commitments vest by mandatory rule (Section 1(b), Sub-section 1 of the act) if the pension commitment exists for at least five years and the employee is at least 25 years old. From 2018, pension commitments will be vested if they exist for at least three years and the employee is at least 21 years old. An important consequence of the vesting of pension claims according to the statutory law is that such claims are protected against the employer’s insolvency by the Mutual Pension Security Association. 

What are the general rules and requirements regarding the funding of plan liabilities?

The funding of plan liabilities depends on the type of pension scheme that has been established. If an employer grants a direct pension commitment, it is usually funded by making provisions for liabilities. Such direct pension commitments are often secured by liability insurance. Pension schemes that are managed by external pension providers are usually funded by the employer’s ongoing contributions to the pension provider. In any case, the employer remains liable, at least in the second degree, for employee pension claims that have been vested. 

What are the tax consequences for employers and participants of occupational pension schemes?

Employer contributions and provisions usually constitute operating expenditure and are therefore deducted up to certain thresholds from taxable income. Employees usually have to pay income tax on their pension when the pension payments are not made earlier. 

Is there any requirement to hold plan assets in trust or similar vehicles?

The legal body responsible for company pension schemes differs depending on the respective vehicle chosen. A pension pool is a legally independent life assurance company which can be managed as a German stock corporation, a European company (societas Europaea) or a mutual insurance association. The same applies for direct insurance vehicles, which are typically based on a life assurance policy. Pension funds, as pension institutions with legal capacity, can likewise be managed only in the form of a German stock corporation, a societas Europaea or a mutual insurance association. A benevolent fund is generally managed in the form of a registered association. In the case of a direct commitment, the employer formulates provisions in its balance sheet.

Are there any special fiduciary rules (including any prohibited transactions) in relation to the investment of pension plan assets?

Depending on the vehicle used, special regulatory provisions apply in relation to capital investment. Direct insurance, pension funds and the pension pool are all subject to government insurance supervision by the Federal Financial Supervisory Authority. In relation to capital investment, the Insurance Supervision Act’s investment rules apply. In this respect, pension funds are less fettered than pension pools. Benevolent funds, on the other hand, are not bound by investment regulations under any special law and are, as a basic principle, free in their choice of investment. However, the nature of investment, even in the case of benevolent funds, cannot lead to a situation where the fund, through the activities associated with the asset management, pursues a purpose which is not stipulated under its articles of association. In the case of a direct commitment, an employer formulates provisions in its balance sheet.

Is there any government oversight of plan administration and/or insurance coverage for plan benefits in the event of an employer’s insolvency?

If a company is insolvent, the Mutual Pension Protection Association assumes the payment of pensions where the pension vehicle in question provides protection against insolvency. Benevolent and pension funds must provide protection against insolvency. Benefits granted through a staff pension fund or under a direct insurance policy are not, as a basic principle, obliged to provide such protection. However, they are subject to supervision by the Federal Financial Supervisory Authority, which constantly monitors the business operations of insurers in order to prevent cases of mismanagement or quickly recognise such activity. In cases of mismanagement, the supervisory authority will intervene in order to restore an orderly situation as quickly as possible. The funds for benefits provided by the Mutual Pension Protection Association are raised through contributions from companies that have chosen protected retirement benefit policies.

Are employees’ pension rights protected in the event of a business transfer?

If a business is sold or transferred to a new proprietor by other means, the existing employment relationships, together with all rights and obligations, pass to the acquiring party, pursuant to Section 613a(1)(1) of the Civil Code. Irrespective of the vehicle chosen for the company's pension scheme, employees are thereby fully protected. In all cases, employees are treated as if there has been no change of employer. Together with the employment relationships which are transferred, the acquiring party must also assume the existing company’s pension scheme. Neither a compensatory payment nor a waiver may be agreed with an employee. The same applies for any agreement under which the company pension scheme remains with and is continued by the transferor. The acquiring party must maintain the pension commitment together with all rights and obligations. This means that the period of service with the previous and new employers are treated as a single period for the purpose of determining:

  • the amount of benefits earned;
  • the relevant qualifying period; and
  • the vesting of rights by law.

If the former employer has given the employee a direct pension commitment, the new employer must provide the benefits under this commitment in the full amount. If a company pension scheme at the business making the transfer was implemented through a benevolent fund, the pension does not pass to the acquiring party. However, it may be agreed that the new employer takes over as the sole business responsible or joins as a responsible body. Any direct insurance policy concluded by the former employer must be transferred to the new employer through assignment of insured party status. The new employer continues the insurance policy as the insured party and pays the agreed insurance premiums in future. The same applies in the case of a commitment to a staff pension fund.

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