Pensions & Retirement Plans in Germany

Statutory and regulatory framework

What are the main statutes and regulations relating to pensions and retirement plans?

In Germany, the old-age pension is based on three systems: the statutory old-age pension, occupational pension schemes (company pensions), and private retirement savings plans.

In respect of the statutory pension, the main statute is the Social Security Code VI (SGB VI).

For occupational pension schemes the Company Pension Act (BetrAVG) is the main relevant statute. The BetrAVG, among other things, implements European Directive 2014/50/EU. The BetrAVG does not, in general, provide the basis for the pension claim itself, but rather forms the legal basis for the rights and duties of employers and employees relating to occupational pension schemes. The pension claims and the details are usually specified in the individual plan rules implemented by the employer, which are subject to general employment and labour laws.

The BetrAVG also provides regulations for the statutory insolvency protection fund (PSVaG).

What are the primary regulatory authorities and how do they enforce the governing laws?

Employers’ obligations in relation to the state pension system (which are mostly contribution obligations) are regulated by the public institutions competent for pensions, in particular the German Statutory Pension Insurance Scheme.

Occupational pension schemes are not subject to any specific regulatory authority. However, certain financial providers involved in the implementation of occupational pension or private retirement schemes are subject to the regulatory review of the Federal Financial Supervisory Authority (BaFin), in particular insurance companies, staff pension funds and pension funds.

What is the framework for taxation of pensions?

The current framework for the taxation of private and state pensions generally provides that contribution payments during the term of employment are tax-free to a certain extent, whereas pension payments received after retirement (or another pensionable event, such as the death of the employee) are subject to taxation. Contribution payments by the employer or accruals on the balance sheets in case of unfunded pensions or retirement plans are - to a certain extent - also recognised for tax purposes.

State pension provisions

What is the state pension system?

The state pension system is a mandatory pension system that covers almost all employees (excluded employees include those in the liberal professions, management board members of German stock corporations and civil servants). The state pension system is financed through the contributions of current employees, which finance current pensioners. In case of an underfunding, additional contributions are made by the state, financed through general taxes. In general, contributions are borne by the employee and the employer, which each pay 50 per cent. The state pension provides for benefits upon reaching the statutory pension age, a (partial) reduction in earning capacity and death.

How is the state pension calculated and what factors may cause the pension to be enhanced or reduced?

The state pension is calculated on the basis of the individual contribution of an employee throughout his or her professional life as well as a demographic factor. The most relevant factors are the overall amount of the contribution payments and the months of contribution. Contributions are calculated on the basis of remuneration of the employee; however, a contribution assessment ceiling exists, which in 2019 amounted to €6,700 per month (for the old federal states) and €6,150 (for the new federal states). The exact calculation formula is provided in SGB VI, section 64.

The age limit for the state pension system is being incrementally increased to 67. (From the year of birth 1964, the standard age limit is 67 years; for the years 1947 to 1963, the age limit is being gradually increased.) Early retirement is possible under certain prerequisites and may lead to a reduction of the benefit level (in addition to the reduced benefit level due to missing contributions).

Is the state pension designed to provide a certain level of replacement income to workers who have worked continuously until retirement age?

The state pension is designed to provide a certain level of replacement income to workers who have worked continuously until retirement age. The exact pension level depends, however, on the contributions paid during the retiree’s working life.

The legislator has established a legally mandatory minimum protection level of 46 per cent up to the year 2020. It is expected that this minimum will decrease to 44 per cent by 2030 due to demographic developments. Currently, the average benefits still exceed the statutory minimum.

Is the state pension system under pressure to reduce benefits or otherwise change its current structure in any way on account of current fiscal realities?

Because the current pension benefits are funded by contributions made by current employees, the state pension system does not have considerable financial savings. In light of demographic developments, this system has come and will come under considerable pressure. As a result, the government has implemented plans to encourage the implementation of occupational and private pension plans, particularly in terms of taxation. In addition, changes to the state pension system may become necessary. In recent years, the legislator has, however, also implemented laws that lead to higher benefits for certain groups of beneficiaries.

Occupational pension schemes

What are the main types of private pensions and retirement plans that are provided to a broad base of employees?

Until 1 January 2018, the BetrAVG provided five ways to implement occupational pension plans under German law. These were:

1. Direct pension promise: a promise by the employer to directly pay occupational pension benefits to the employee out of future profits (unfunded system).
2. Direct insurance: the employer takes out life insurance on the life of the employee and promises the employee (or the employee’s survivors) payment of the benefits due under the insurance contract.
3. Staff pension fund: the employer promises payments through a staff pension fund (usually operated by a life insurance company). In this case contributions are paid to the staff pension fund, which shall pay the benefits to the employees once they become due.
4. Pension fund: the pension fund operates similarly to a staff pension fund. However, the pension fund has reduced regulatory limits as to the investment of the funding capital.
5. Support fund: a support fund also operates similarly to a staff pension fund. It does, however, nominally exclude a direct claim to pension payments for the individual employee. This is due to historical reasons; in practice, the Federal Labour Court has decided that individual employees have a direct claim against the support fund.

The ways of implementation described under (ii) to (v) are called indirect ways of implementation as they always involve a third party as an implementation or funding vehicle, while the direct pension promise is usually financed through the (future) earnings of the employer. The main differences between the four indirect ways of implementation relate to the legal form of the implementation or funding vehicle, the regulatory provisions applying to the funding vehicle and effects in respect to the balance sheet of the employer as well as the tax treatment.

In addition to the distinction according to the way of implementation, German law distinguishes between the content of a pension promise. According to the BetrAVG, a defined benefit pension plan is the default system.

The BetrAVG further provides for the possibility that an employer may make a commitment to the employee to convert certain contributions into an entitlement for an old-age, invalidity or survivor’s pension (contribution-based payment commitment). Moreover, the employer may choose to make a commitment to contribute to the financing of occupational pension plan benefits by making payments to a pension fund, staff pension fund or direct insurance, while guaranteeing that the pension benefits will at least amount to the contributions paid (contribution commitment with minimum payment).

Under German law, an employer is always ultimately liable for the pension payments due to employees under an occupational pension or retirement plan, even in the event of an indirect way of implementation (BetrAVG section 1, paragraph 1, sentence 3) - except for the newly introduced true defined-contribution schemes. Such a true defined contribution scheme can only be implemented through (or on the basis of) a collective bargaining agreement. As of today, no such collective bargaining agreements have been reported. Consequently, a true defined-contribution plan did not exist under German law until 2018. However, certain pension plans may qualify as defined contribution schemes for accounting purposes.

Having said this, it is factually possible to design an occupational pension plan that is fully funded and thus - subject to the insolvency of the funding vehicle - functions as a defined contribution plan. There is an ongoing debate as to the legal consequences if an employer provides a pure defined contribution pension or retirement plan to its employees. Such a plan would, strictly speaking, not be covered by the BetrAVG. It seems most likely that such a plan will be treated like a contribution commitment with a minimum payment, in particular due to the limitations of the new true defined benefit scheme.

A final distinction under the BetrAVG addresses the financing of pension benefits. The BetrAVG provides regulations for employee or employer-financed occupational pension plans as well as plans financed by both employer and employee.

What restrictions or prohibitions limit an employer’s ability to exclude certain employees from participation in broad-based retirement plans?

The employer is under no statutory obligation to provide any form of a purely employer-financed occupational pension plan. Consequently, the employer is free to decide whether to offer occupational pensions and to which (group of) employees.

If a pension scheme is, however, introduced on the basis of a general system, the employer must adhere to the general equal-treatment principle. This means that distinctions between different groups of employees have to be based on objective reasons. In particular, the General Act on Equal Treatment (AGG) provides for certain ‘incriminated’ criteria that may not form the basis for a distinction between groups of employees. Moreover, if the employer provides funds for a collective occupational pension scheme, the distribution of the funds is subject to the co-determination of the works council (if any).

In addition, the BetrAVG provides for a statutory entitlement of employees to convert a certain part of their future remuneration claims into an entitlement for pension benefits of equal value (remuneration conversion). The employer can select the way of implementation for this employee-financed occupational pension plan (pension fund, staff pension fund or direct insurance) and may also select the funding vehicle (insurance company). As of 1 January 2019, the employer has to pay an obligatory subsidy to a remuneration contribution of an employee in the amount of 15 per cent of the converted remuneration. This obligation applies if the remuneration conversion is implemented through a direct insurance, staff pension fund or pension fund (excluding direct pension promises and support funds) and to the extent the employer saves social security contributions through the remuneration conversion. This could also lead to a subsidy of less than 15 per cent.

In respect of remuneration conversions that are agreed prior to 1 January 2019, this obligation only applies as of 1 January 2022.

Can plans require employees to work for a specified period to participate in the plan or become vested in benefits they have accrued?

Entitlements under occupational pension plans become vested if the employment relationship ends prior to a pensionable event, but after the employee reaching the age of 21, provided that the pension commitment has been in effect for at least three years. This statutory vesting period applies to all pension promises as of 1 January 2018 and is mandatory and is also important for statutory insolvency protection that only covers vested pension entitlements. For benefit entitlements promised before 1 January 2018, other (longer) vesting periods might apply. However, special transitionary rules may apply to benefit entitlements granted before 1 January 2018.

If an employee leaves the employment prior to a pensionable event, the pension entitlement is - subject to the plan rules providing differently - calculated according to BetrAVG, section 2. The basic principle of this calculation is that the benefits are reduced based on the ratio of years of performed service of the employee (m) to the possible years of service until the age limit of the pension plan (n). As (n) is always higher than (m), the ratio will reduce the benefit level.

An occupational pension plan may provide for waiting periods that have to be fulfilled prior to receiving pension benefits. These waiting periods exclude pension benefits if the pensionable event occurs prior to the lapse of the waiting period. To avoid a circumvention of the statutory vesting provisions, the waiting period can, however, lapse after the employee has left the employment of the company with a vested pension entitlement.

Under BetrAVG, section 2a, which came into force as of 1 January 2018, the employer has to ensure that former employees with vested entitlements are not discriminated in respect to their vested entitlement compared to employees that remain in service. The exact effects depend on the respective pension scheme; however, employers may be obliged to increase vested entitlements (eg, to reflect increases in salary if the (vested) pension benefits are calculated based on the salary).

What are the considerations regarding employees working permanently and temporarily overseas? Are they eligible to join or remain in a plan regulated in your jurisdiction?

The considerations depend upon the plan rules and the individual agreement regarding working overseas. As long as a (dormant) employment relationship with the German employer remains in effect, it is often the case that benefits continue to accrue under the German occupational pension plan, replacing any overseas plans. Obviously, it needs to be assessed in each individual case what is the most beneficial solution for the parties involved, also taking tax and social security considerations into account. The employer needs to make sure that any double pension entitlements are credited.

Do employer and employees share in the financing of the benefits and are the benefits funded in a trust or other secure vehicle?

The financing solely depends on the provisions of the occupational pension plan. These are, in general, based on an individual agreement with the employee or a collective agreement (see question 8). As mentioned above, the employee is entitled to salary conversion. As of 2019, the employer may have to pay a subsidy of up to 15 per cent to the salary conversion (see question 9). In the case that the employer cannot fulfil the benefit obligations, these are protected by the statutory insolvency protection fund (PSVaG).

What rules apply to the level at which benefits are funded and what is the process for an employer to determine how much to fund a defined benefit pension plan annually?

There are no statutory requirements in respect of the level at which a plan is funded. German law allows the employer to provide direct pension promises that are not funded in any way but are only reflected on the balance sheet as accruals. Having said this, the indirect ways of implementation obviously require a certain amount of funding as required under regulatory laws. However, if the funding is not sufficient to finance the promised pension benefits, the employer is ultimately liable (see question 8), unless a true defined benefit scheme under BetrAVG section 1, paragraph 2, number 2a, has been implemented.

What are customary levels of benefits provided to employees participating in private plans?

This depends on the pension plan and differs for each company and industry. The benefit level may range from a small one-time payment upon retirement to a lifelong pension in the amount of, for example, 75 per cent of the last (gross) remuneration.

Are there statutory provisions for the increase of pensions in payment and the revaluation of deferred pensions?

Under BetrAVG section 16, the employer is obligated in its equitable discretion to review the amounts of the pension payments every three years and to increase the pension payments subject to its economic situation. The employer is deemed to have fulfilled its statutory obligations in this respect if the adjustment of the pension payments is not lower than the increase in the consumer price index for Germany, or the net wages of comparable employee groups of the company. This obligation only applies to ongoing pension payments (not one-time payments) made after a pensionable event.

BetrAVG, section 16, paragraph 3, provides for possibilities to avoid such obligation to review (eg, by providing for an annual increase of at least one per cent). This is, however, only possible for occupational pension plans implemented after 31 December 1998.

Subject to the plan rules, there is no (statutory) obligation to re-evaluate deferred pensions. However, as of 1 January 2018 section 2a has been added to the BetrAVG providing for the obligation to (potentially) revaluate vested entitlements of former employees to avoid discrimination in relation to comparable active employees.

What pre-retirement death benefits are customarily provided to employees’ beneficiaries and are there any mandatory rules with respect to death benefits?

There are no mandatory obligations in this respect. The benefits thus solely depend upon the plan rules and consequently differ. A common survivor’s benefit level for spouses is 60 per cent of the pension that would have been due to the employee if invalidity occurred at the time of death or - if the employee already receives a pension - 60 per cent of the employee’s pension.

When can employees retire and receive their full plan benefits? How does early retirement affect benefit calculations?

There are no direct statutory regulations in this respect. Consequently, the pension plan rules also have to provide the relevant age limit for old-age pensions. A common age for full plan benefits was 65, matching the age limit for the state pension system. Although the age limit of the state pension system is gradually increasing to 67, many pension plan rules still provide for an age limit of 65.

Usually, the plan rules also provide for the possibility and the prerequisites of early retirement. Irrespective of the plan rules, employees can claim an early pension under BetrAVG, section 6, if they make use of the early old-age benefits from the state pension system as full retirement benefits, provided the other prerequisites of the occupational pension plan for a pension payment are fulfilled. BetrAVG section 6 therefore synchronises the state pension system and occupational pension plans.

The effects of early retirement are subject to the rules of the occupational pension plan. In general, it is possible to pay out the benefits reached at the time of early retirement, deduct a certain percentage of the pension benefits for each month of the premature pension or to apply section 2 BetrAVG (see question 10). If no specific rules and no mechanism are provided in the plan rules or can be derived from construing the plan rules, the Federal Labour Court only allows for a deduction taking the missing years of service (contribution phase) up to the ordinary age limit into account.

Are plans permitted to allow distributions or loans of all or some of the plan benefits to members that are still employed?

Any premature distribution of pension benefits would not qualify as a pension payment and would thus be considered an ordinary loan to the employee. While this would be - to a certain degree - legally possible, in general the implementation or funding vehicle would need to request adequate securities from the employee, making this a theoretical scenario.

Is the sufficiency of retirement benefits affected greatly if employees change employer while they are accruing benefits?

Please note that - at least employer-sponsored - occupational pension plans are, in general, specific to an employer. Consequently, the employee usually has to leave the plan upon leaving employment. If an employee changes employer while accruing benefits, the employee in general may lose all entitlements that are not vested (see, however, question 20). Vested entitlements against the old employer are calculated under BetrAVG, section 2 (see question 10).

Unless the parties agree differently, the employee starts to accrue new benefits under the plan of the new employer (if any), again vesting after three years (see question 10). Consequently, the employee will accrue a new entitlement with each new employment relationship - provided an (employer-sponsored) occupational pension plan exists. These multiple entitlements are usually lower than the entitlement under one pension plan if the employee stayed with the employer until retirement.

In what circumstances may members transfer their benefits to another pension scheme?

It is legally possible for an employer to replace an existing pension scheme by transferring existing pension benefits into a new scheme. Such an ‘internal’ transfer has to pay sufficient regard to vested entitlements and may require consent of the works council (if any).

In case of the employee changing to a new employer, BetrAVG, section 4, provides for the possibility to transfer vested benefits into a scheme of new employer. Subject to an agreement between the employee and the old and new employers, either the new employer may assume the pension commitment, or the value of the vested pension entitlement of the employee (transfer value) can be transferred by the old employer to the new employer (see BetrAVG, section 4, paragraph 2). If no agreement can be reached in respect of a transfer of the vested pension entitlement, the employee has a statutory claim under BetrAVG, section 4, paragraph 3, for a transfer of the transfer value within one year of the termination of the employment relationship under certain additional prerequisites.

In case a true benefit scheme has been established, the transfer value may also be transferred to the external pension institution that administers the true defined benefit scheme

Who is responsible for the investment of plan funds and the sufficiency of investment returns?

Ultimately, except for true defined benefit schemes, the employer is liable for the payment of the pension benefits under an occupational pension plan.

When a pension plan is implemented by an indirect method, the actual investment is handled by a relevant legal entity (eg, a pension fund) or an insurance company responsible for the implementation vehicle. The insurance company is responsible for the sufficiency of investment returns in line with the agreements with the employer and the applicable regulatory prerequisites. In practice, however, the risk - at least to a certain degree - remains with the employer.

In the case of a true defined benefit scheme, the parties of the respective collective bargaining agreement (ie, in general the trade union and the employer’s association) have to take part in the implementation and administration of the scheme (compare BetrAVG, section 21, paragraph 1). In general, this requires at least some form of supervision in respect of the investment of plan funds.

Can plan benefits be enhanced for certain groups of employees in connection with a voluntary or involuntary reduction in workforce programme?

This is generally possible under an employment law perspective. In defining the group of beneficiaries, however, the employer has to consider the general equal-treatment principle. Moreover, the pension scheme has to allow for one-time contributions to increase pension entitlements, in particular in case of an externally funded scheme. Finally, co-determination rights of the works council have to be taken into account.

Are non-broad-based (eg, executive-only) plans permitted and what types of benefits do they typically provide?

In general, the employer is - subject to the general equal-treatment principle - free to decide whether and for what group of employees it wants to provide occupational pension benefits. It is common to provide for higher benefits for executive employees, as their income usually exceeds the contribution threshold in the state pension system. Consequently, they usually rely more heavily on occupational pension benefits in order to reach a comfortable level of replacement income after retirement.

How do the legal requirements for non-broad-based plans differ from the requirements that apply to broad-based plans?

There are no legal differences from an employment law perspective. The BetrAVG also applies to managing directors and members of the management board. Only managers that also hold a substantial level of shares in the employing entity are not subject to the BetrAVG’s provisions.

In practice, collective bargaining agreements and works council agreements do not apply to executive employees and the top management of a company. Therefore, occupational pension plans for such individuals are usually based on individual agreements, which means that changes, in general, require individual consent.

How do retirement benefits provided to employees in a trade union differ from those provided to non-unionised employees?

Differences in this respect can only arise if the collective bargaining agreement specifically provides for a different treatment of union members and non-unionised employees. In practice, however, employers bound by collective bargaining agreements often include non-unionised employees in the scope of the applicable collective agreements on the basis of a reference clause in the employment contract. Therefore, collective bargaining agreements are usually applied to all employees, except for above-tariff employees and executive employees.

Collective bargaining agreements often provide rules for remuneration conversion. Such a conversion is often supplemented by a payment by the employer. This payment often compensates the fact that the employer saves employer contributions to the social security system through remuneration conversions and sometimes replaces other benefits (eg, capital savings payments).

How do the legal requirements for trade-union-sponsored arrangements differ from the requirements that apply to other broad-based arrangements?

The major legal difference is that labour courts usually do not review collective bargaining agreements for fairness, as parties of equal strength conclude them. Consequently, any review is limited to investigating whether agreements comply with mandatory laws.

Finally, BetrAVG section 19, paragraph 1, allows the parties of a collective bargaining agreement to deviate from certain provisions of the BetrAVG, to the detriment of the employees, which is not possible in an individual agreement or a works council agreement. Moreover, benefits based on collective bargaining agreements may more easily be amended or reduced against the will of the beneficiaries.

On the other hand, a trade union may initiate a strike to enforce changes to a collective bargaining agreement, including benefit levels.

Enforcement

What is the process for plan regulators to examine a plan for periodic legal compliance?

In general, there is no review by plan regulators in respect of employers under German law. However, any provisions on the balance sheet in respect of pensions are subject to a general review as part of the audit process in respect of financial statements. As mentioned above, external funding vehicles are subject to the supervision of the BaFin.

What sanctions will employers face if plans are not legally compliant?

Plan rules that are not compliant with legal requirements are usually invalid. Statutory law replaces invalid rules. Therefore, depending on the nature and the scope of the non-compliance, the employer usually has to pay a higher pension or face a greater number of beneficiaries than expected and calculated for in the accruals or the funding. There are no specific administrative or criminal offences provided for in the BetrAVG; except for BetrAVG section 12, which concerns incorrect, incomplete or delayed information of the statutory insolvency protection fund.

If the occupational pension plan does not comply with legal requirements, the employer may also face detrimental effects under tax and social security laws.

How can employers correct errors in plan documentation or administration in advance of a review by governing agencies?

The legal basis of an occupational pension plan is either a collective or an individual agreement. Consequently, any changes to the agreement in general require the consent of the other contractual party. Such consent is usually tacitly assumed if the changes are to the benefit of the other party (eg, an increase of the benefit level). It may be possible to unilaterally impose a change on the other party (eg, in the event of a frustration of contract). However, this is limited to special circumstances.

What disclosures must be provided to the authorities in connection with plan administration?

Under employment law there is no specific disclosure obligation. There are specific disclosure obligations for the remuneration of members of the management board of listed stock companies as well as for the banking and insurance industry, which also cover pension entitlements. Obviously, different legal provisions apply for tax and social security purposes.

The employer is obligated to provide information to the statutory insolvency protection fund under BetrAVG, section 11.

What disclosures must be provided to plan participants?

Under section 4a of the BetrAVG, an employer has to disclose at any time to any employee the following information:

• whether and how the employee may acquire occupational pension benefits;
• the benefit amount acquired to date and the estimated benefit amounts presumably reached upon reaching the applicable age limit;
• the effects of a termination of the employment relationship on the benefits; and
• the development of the benefits after the employment relationship has ended.

In addition, the employer has to provide information in respect of the transfer value (see question 20) to active and former employees as well as certain additional information. When the benefits become due, the (former) employer and the pensioners have a claim to seeing that the composition and amount of their company pension is calculated in a logical and comprehensible way. In case of ongoing pension payments, the employer also has to provide a monthly statement showing any tax and social insurance contributions deducted.

What means are available to plan participants to enforce their rights under pension and retirement plans?

Beneficiaries may only enforce their rights under a pension plan by initiating legal action before the competent court. Labour courts are competent for claims by (former) employees. This also applies if the pension plan is implemented through a third-party provider, (see German Labour Court Act, section 2(1) No. 4 b). For corporate officers (eg, managing directors or members of a management board) the civil courts are competent. In respect of pension plans for the public service sector, the legal situation can vary, in particular, if the benefit providers are organised as public entities.

In case of a dispute with a third-party provider, the (former) employer often takes part in the dispute due to this supplementary liability under the BetrAVG, section 1(1), sentence 3.

Legal disputes between employers and the PSVaG, as statutory insolvency protection provider, regarding eligibility and amount of contributions fall under the jurisdiction of the administrative courts. Disputes regarding the state pension system or the payment of social insurance contributions fall under the jurisdiction of the social welfare courts.

Plan changes and termination

What restrictions and requirements exist with respect to an employer’s changing the terms of a plan?

The restrictions and requirements basically depend on the legal basis of the pension plan that shall be changed. If the pension plan is based on a collective agreement, changes need to be agreed with the competent employee representation. In case of an individual pension agreement the consent of the beneficiary is required in general. Consequently, the legal nature of the pension plan will determine which instruments are available for implementing changes. In any case, it should be noted that the Federal Labour Court takes the view that pension entitlements are part of the employee’s remuneration and are thus earned by the employee’s service in the past. Therefore, vested entitlements are protected under the BetrAVG and can only be changed subject to detailed legal requirements defined by the jurisprudence of the Federal Labour Court.

What restrictions and requirements exist with respect to an employer terminating a plan?

Again, this depends on the legal basis for the plan rules. Any changes to individual agreements require the consent of the employee. In very rare cases the employer can issue a notice of termination for variation of contract to change or even terminate an individual pension agreement.

In case of plans based on collective agreements, the employer can usually decide to ‘close the plan’ with effect for the future. New hires cannot join a closed plan. Employees who already participate in the plan, however, keep their entitlements and their benefits continue to accrue under the plan rules. Please note that closing a plan may require the employer to terminate the collective agreement observing the applicable notice period. In addition, an agreement with the trade union or the works council may be required in order to end an aftereffect, which could apply after the termination of the collective agreement.

Any changes to vested pension entitlements under a plan based on a collective agreement are subject to a legal test based on the principles of confidence and proportionality. While the legal test for collective bargaining agreements is not very strict, the Federal Labour Court has developed a very detailed test for works council agreements. The court distinguishes three levels of protection, with each level requiring a different justification for changes to the vested entitlements. Depending on the gravity of the changes, the required reasons range from compelling reasons (eg, an unintended benefit level exceeding 100 per cent of the last net earnings) to objective and proportional reasons. Please note that these criteria also apply to changes agreed between the works council and the employer.

What protections are in place for plan benefits in the event of employer insolvency?

The PSVaG is responsible for insolvency protection and the administration of benefits for insolvent employers. All employers fund the PSVaG, and so provide occupational pension plans for their employees through means of implementation covered by insolvency protection.

The statutory insolvency protection applies to vested pension entitlements resulting from:

• direct pension promises;
• pension funds;
• support funds; and
• direct insurance,
• for which the employee only has revocable pre-emptive rights to the insurance benefits; or
• where the employer has assigned, pledged or borrowed on the insurance irrespective of the irrevocable pre-emption right of the employee.

The insolvency protection only applies if a default event occurs in respect of the employer, not in respect of the implementation or funding vehicle. Events of default are the insolvency of the employer and comparable instances. Monthly benefits are secured at a maximum amount of €9,345 (old federal states) and €8,610 (new federal states) in 2019.

How are retirement benefits affected if the employer is acquired?

In a share deal scenario, retirement benefits for past and future service are in general not affected but remain with the acquired legal entity. In case of an asset deal, the new owner in general only acquires the pension obligations relating to active employees (past and future service), in particular if section 613a of the German Civil Code applies.

Certain exceptions may apply to occupational pension plans based on collective agreements, if these agreements no longer apply following the acquisition. The vested pension entitlements at the time of acquisition, however, need to be honoured.

Changes may, however, occur in respect of an implementation or funding vehicle if the employer under the rules of the implementation or funding vehicle may no longer participate. This may in particular be the case if the employing entity leaves a group as a consequence of the acquisition.

Upon plan termination, how can any surplus amounts be utilised?

Surpluses can only exist if contributions are paid to an external pension provider (eg, a direct insurance) or if the employer sets aside specific assets in respect of the pension benefits. In general, the plan rules define who is entitled to surpluses. These benefits are often allocated to the employee.

Fiduciary responsibilities

Which persons and entities are ‘fiduciaries’?

The concept of ‘fiduciaries’ does not apply to German occupational pension schemes unless a contractual trust agreement (CTA) structure is established. A CTA is not a way of implementation for occupational pension schemes, but rather a contractual means to finance unfunded pension obligations or to provide additional insolvency protection. A CTA structure usually involves implementation of a trustee, usually a registered association, which holds certain assets provided by the employer, for the benefit of employees with vested pension entitlements. The assets held by the trustee are then credited against the accrued pension obligations for accounting purposes. The fiduciaries in a CTA structure are usually the members of the registered association, which are often selected by the employer, sometimes together with the works council.

What duties apply to fiduciaries?

This is subject to the CTA rules.

What are the consequences of fiduciaries’ failing to discharge their duties?

In general, fiduciaries are liable under German civil law. Often their liability is reduced in the CTA agreements, as the fiduciaries are ordinary employees of the employer. The investment is often handled by an asset manager who may be liable for his or her investment decisions, subject to the contractual agreements.

Please note that any underfunding in the CTA is to be borne by the employer in relation to the individual beneficiary, irrespective of the possibility to claim damage for a third party.

Legal developments and trends

Have there been legal challenges when certain types of plans are converted to different types of plan?

As direct pension plans providing for defined benefits are still rather common, employers often try to change their pension plans to plans involving an indirect pension provider in order to avoid detrimental effects resulting from the currently low interest rates that negatively affect accruals on the balance sheet.

Have there been legal challenges to other aspects of plan design and administration?

A number of issues have influenced the rather detailed jurisprudence of the Federal Labour Court. In particular, discrimination issues (eg, age, gender) or the increase of benefits following the crisis in the financial industry since 2008 have led to a number of new judgments. In general, the jurisprudence of the European Court of Justice has an increasing impact on German pension law. Moreover, the implementation of the legislative changes that came into force as of 1 January 2018 is still on the agenda of many employers.

How will funding shortfalls, changing worker demographics and future legislation be likely to affect private pensions in the future?

Owing to low interest rates, employers and external providers are coming under increasing pressure as their reserved funds are no longer sufficient to cover longer life expectancies or the benefit levels promised to their employees. The increasing contribution payments, or the obligation to fill gaps in the payments by external service providers, put a financial strain on employers.

Due to the recent changes to the BetrAVG, the legislature has not brought forward any proposals for new laws.

Update and trends

Are there any current developments or trends that should be noted?

In recent years a number of decisions of the Federal Labour Court have dealt with clauses limiting the benefits of spouses due to age discrepancies between employee and spouse. Employers should align their plan rules with these requirements. In addition, it remains to be seen, when the first collective bargaining agreement regarding a true defined contribution scheme will enter into force.