actuarial interest rate pensions


Reduction of the maximum actuarial interest rate for insurance-type company pension schemes

Change requirements and design options in practice

In the Fifth Ordinance Amending Regulations under the Insurance Supervision Act of 22 April 2021, the legislator determined that the maximum actuarial interest rate for insurance-type commitments in company pension schemes will be lowered to 0.25 percent effective 1 January 2022. This reduction results in material implications; not only with regard to the question of how the minimum benefit required by the legislator in the defined contribution plan for minimum benefit can be presented at all. The substantive design of company pension commitments designed as defined contribution plans (beitragsorientierte Leistungszusagen, BOLZ), which the employee (co-)finances through deferred compensation and the amount of which is subject, among other things, to the requirement of equal value under Company pension law, is also affected. This Client Alert discusses the options for structuring the amount of pension benefits resulting from the reduction in the maximum interest rate.

1. Legal starting position in the German Company Pension Act: No specification of the benefit amount

According to the legal definition in Section 1 (2) no. 1 of the German Company Pensions Act (Betriebsrentengesetz, BetrAVG), the employer undertakes in respect of a BOLZ to convert certain contributions into pension entitlements as retirement, disability or surviving dependents' benefits. The legal definition does not directly specify the amount of the benefit. It does not even require the payment of amounts, rather only their conversion into an expectancy of benefits is necessary. However, when the BOLZ is mapped under the insurance-based implementation paths, these amounts are regularly paid to the pension provider. The pension benefits result from the actuarial conversion of the contributions or their savings portions. If necessary, these benefits are increased by those from allocated surpluses.

The employer's obligation pursuant to Sec. 1 (2) no. 1 BetrAVG therefore includes a dual obligation as a commitment to a pension entitlement, the amount of which is based on the committed contribution. The BetrAVG does not contain any requirements regarding a minimum level of the pension benefit resulting from the contributions in respect of BOLZ.

2. Initial situation under supervisory law: Insurance law principle of prudence

The regulatory provisions also do not contain any rules on a minimum pension amount for the insurance-based implementation channels. An indirect requirement results from the guiding principle of Sec. 138 (1) sentence 1 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG) on the calculation of premiums, which includes a concretization of the insurance law principle of prudence. According to this guiding principle, premiums in life insurance must be calculated on the basis of appropriate actuarial assumptions and must be high enough to enable the life insurance company to meet all its obligations and, in particular, to form sufficient actuarial reserves for the individual contracts. This guiding principle is flanked by the requirements of Sec. 2 (1) of the German Ordinance on Actuarial Reserves (Deckungsrückstellungsverordnung, DeckRV) on the maximum interest rate for calculating the actuarial reserve. This is intended to take sufficient account of the obligations entered into by life insurers. This maximum actuarial interest rate and the so-called guaranteed interest rate used in the calculation of premiums/benefits regularly - but not necessarily - coincide in Germany. As will be shown in detail in Section 4, these guiding principles play a fundamental role in the readjustment of the framework parameters for the content of the BOLZ.

3. The BAG's previous case law on the level of BOLZ benefits: Guiding principle of planning security

The German Federal Labor Court (Bundesarbeitsgericht, BAG) has so far only set out guiding principles on the minimum level in its ruling of 30 August 2016 (3 AZR 361/15), which was based on an employer-funded BOLZ in the implementation path of the direct commitment. It requires for the criterion of immediacy that a direct connection between the financing contribution and the amount of the benefit is maintained. The employer must structure the benefit plan in such a way that it must be immediately clear at the latest at the time of conversion of the contributions into the pension entitlement what the - minimum - amount of the pension benefit will be. This is accompanied by formal requirements of transparency and a use-relatedness for the contributions: Once the benefit plan has been set up, it must be possible for the employee to plan his or her pension in a reliable manner. In addition, the investment risk for the contributions must be distributed between the employer and the employee in a way that is in line with their interests. In the opinion of the BAG, these requirements are (only) met if the amount of the benefit resulting from the contributions is fixed. An increase in the guaranteed benefits by benefits from surpluses that cannot be determined in advance does not prevent this.

4. The guiding principle of equal value - and its reception by the BAG

In the case of a BOLZ that the employee has (co-)financed on the basis of deferred compensation, the guiding principle of equal value under company pension law must also be observed. The BetrAVG does not contain a statutory definition of equal value, but uses this (only) as part of the statutory definition of deferred compensation in Sec. 1 (2) no. 3 BetrAVG, according to which deferred compensation exists in the case of a conversion of future compensation claims into an entitlement to the relevant pension benefits of equal value. From the perspective of company pension law, the guiding principle of equal value follows the remuneration character of the remuneration that the employee contributes for the deferred compensation: It is intended to protect the employee from an economic devaluation - which is not (any longer) in line with the interests - with regard to the use of the contributed remuneration to build up pension entitlements - and is at the same time an outflow of the general remuneration character of pension benefits from company pension commitments.

In its so-called Zillmerung judgement (dated 15 September 2009, 3 AZR 17/09), the BAG adopted a real economic approach and established three key legal principles for determining the content of equal value, which are decisive for the content of the company pension commitment - taking into account a weighing of the legitimate interests of the employer and the employee.

  1. The equality of value is to be determined on the basis of an objective economic approach. For the specific assessment, the future remuneration entitlements on the one hand and the pension entitlement to be achieved through the deferred compensation on the other must be compared with each other and their value must correspond when viewed objectively from an economic perspective.
  2. The comparison must take into account the legal framework for the individual pension commitment. This includes that, in the case of company pension commitments in an insurance-based implementation path, the actuarial benefits must be determined from the contributions paid in accordance with actuarial principles. Recognized actuarial principles must therefore be taken into account when determining the content of the concept of equal value. This is in line with the employer's interest in a reliable advance determination of the (fulfillment) risks associated with the BOLZ; which follow in particular from the claim to procurement pursuant to Sec. 1 (1) Sentence 3 BetrAVG.

  3. The assessment of the equality of value shall be made at the respective time of the deferred compensation agreement.

Against this background, in the Zillmerung judgement, the BAG considered a (interest-based) zillmerization of pension benefits from a company pension commitment with deferred compensation to be compatible with the guiding principle of equal value. Corresponding statutory regulations on zillmerization and the amount of surrender values can be found in the DeckRV and Sec. 169 of the German Insurance Contract Act (Versicherungsvertragsgesetz, VVG). In practice, the second legal principle in particular has been used for more far-reaching options in determining the (still) permissible amount of pension benefits under company pension law and, to date, has considered a minimum amount for pension benefits from company pension commitments with deferred compensation of 80% of the converted contributions to be (still) legally valid if the employee is granted a right of choice with a risk-averse alternative option and this ultimately ensures pension benefits in the amount of the converted contributions (see also our Client Alert 03/2019). In practice, there are currently tendencies to flexibly develop this further in view of the long and presumably continuing period of low interest rates. This would correspond to the "objective economic view" listed under (1).

5. How the reduction of the maximum interest rate fits into the legal framework: Restrictions and Design Options

In its report "Garantien der bAV im Niedrigzinsumfeld" (Guarantees of company pension schemes in a low-interest environment) of February 26, 2021, the German Association of Actuaries (Deutsche Aktuarvereinigung, DAV) states transparently that even with an approach of 0% distribution costs - as encountered, for example, with regulated pension funds - and reduced administrative costs, a term of almost 40 years is required in order to be able to achieve just 100% of the sum of paid-in contributions with a guaranteed interest rate of 0.25%. At standard administrative cost rates, the required term even extends to more than 100 years. The reduced actuarial interest rate or guaranteed interest rate of 0.25% for the calculation of tariffs is the result of the interest rate situation - i.e. reflects economic realities - and the principle of prudence. In its above-mentioned report, the DAV rightly points out that the actuary and the pension provider must, of course, also comply with regulatory requirements when designing the tariff:

"In the case of insurance-based implementation via a pension fund, direct insurance or a pension fund, the scope for discretion is considerably restricted by regulatory requirements as well as actuarial principles in order to ensure that the obligations can be met at all times from the perspective of the pension provider. Pursuant to Section 138 (1) of the German Insurance Supervision Act (VAG), the accounting assumptions must contain sufficient collateral to ensure that the associated rates can be approved by the supervisory authorities (regulated business) or are unobjectionable (non-regulated business). Furthermore, in addition to statutory requirements, restrictions arise from the case law of the Federal Labor Court with regard to the amount and distribution of acquisition costs."

From the point of view of company pension law, this means that when calculating the pension benefits from the insurance-based company pension commitment with or without deferred compensation - taking into account the deductible zillmerization costs - external pension providers must apply an adequate guaranteed interest rate that reflects the economy and satisfies the regulatory requirements, and the associated benefits from the specific company pension commitment can also generally be lower than the converted contributions. The specific amount of the guaranteed benefit to be promised in the company pension commitment is assessed - in extrapolation of the criteria already relevant under the current legal situation - on the basis of the conversion of contributions into pension entitlements in accordance with actuarial principles. In its findings report, the DAV arrives at the view,

"that, from an actuarial point of view, a conversion of contribution into benefit of equal value is given in any case if

  1. the contribution/benefit ratio was determined in accordance with the recognized rules of actuarial mathematics, in particular in compliance with the actuarial equivalence principle,
  2. appropriate accounting bases were used, and
  3. in the case of insurance-based implementation, any profit shares attributable to the beneficiaries are used to increase the benefit entitlements or current pensions in accordance with the principles of causation.

It may be assumed that rates that have been approved by regulators or to which insurance regulators have not raised concerns comply with the equal value requirement.“

According to the aforementioned criteria, there are weighty reasons for considering pension benefits under the amended maximum interest rate to be permissible under company pension law in the case of exclusive deferred compensation without the employee's option to choose an amount of less than 100% of the paid premiums, e.g. 80%. For the legal derivation of this number please refer to our Client Alert 03/2019.

6. Outlook

Insurance companies are currently implementing the statutory changes to the maximum interest rate in their benefit plans. Legal certainty regarding the scope for design, in particular with regard to the amount of BOLZ benefits, promised on the basis of deferred compensation (co-)financed by the employee, will (only) be created by case law. Until then, employers and insurance companies - depending on their risk profile - will (be able to) make use of the options for structuring the content within the scope of the law described above.

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