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Company Pension Schemes under COVID-19 – Recent questions and developments

Company Pension Scheme in active employment and for pensioneers

CoVid is also present for company pension schemes: In relation to active employees with questions on its execution during short-time work and in other cases where the employee is unable to work and generally does not receive any remuneration. In relation to securing liquidity with questions about measures to preserve liquidity, and in relation to benefit recipients to ensure performance.

1 Introduction: COVID-19, employment and company pension scheme

CoVid-19 is also present for employers in their company pension schemes (betriebliche Altersversorgung, bAV): With regard to active employees, among other things with questions on the execution of the bAV during short-time worki and in other cases in which the employee - e.g. because of officially ordered quarantine or because of home care of his own children due to officially ordered kindergarden/school closures - cannot perform work and therefore generally does not receive any remuneration. This also applies with regard to securing liquidity, with questions about any measures that may be taken to preserve liquidity or even reduce expenses, and with regard to beneficiaries, to ensure their ability to perform the services due.


2. Company pension scheme in active employment: short-time work and short-time work subsidies (KUG subsidy), loss of earnings and compensation claims under the German Infection Protection Act (IfSG)

Short-time work, home care of one's own children due to officially ordered kindergarden/school closures and the officially ordered quarantine have in common that the employee cannot perform his work at the place of work and/or the working time agreed in the employment contract.

The effects of these cases on the further implementation of the company pension scheme are assessed at the outset according to the terms and conditions of the indiviudal company pension commitment. Decisive is further whether the company pension commitment is employer- or employee-financed.

With so-called short-time work zero (Kurzarbeit Null), the employee does not have to perform any work during the short-time work period - and does not receive any remuneration (any more) at the outset.

In the case of an employee-financed company pension plan commitment financed by means of deferred compensation, the employee is generally not (no longer) able to convert remuneration during the short-time work period; in particular, he cannot use the short-time working subsidy (Kurzarbeitergeld, KUG) granted by the Federal Employment Agency for this purpose. Correspondingly, the statutory employer's allowance pursuant to Section 1a (1a) of the German Company Pensions Act (Betriebsrentengesetz, BetrAVG) is no longer applicable. If the company pension scheme commitment is made via an external implementation path (direct insurance, pension fund), the contract with the external pension provider is made non-contributory for the short time work period. If the contributions are exempted, there is usually no cover for occupational disability. Here it depends on the structure of the respective (supplementary) tariff. Employees can avoid the legal consequence of "contribution exemption" if they continue the insurance contract during the contribution-free period with their own contributions (§Sec. 1a, (4) BetrAVG). The same legal principles generally apply if the employer grants a subsidy to the KUG. From a tax law perspective, the KUG subsidy does include income taxable wages. From a labor law perspective, however, it does not contain any remuneration within the meaning of § 1a BetrAVG, but is paid by the employer on a regular basis to compensate for the loss of earnings suffered as a result of short-time work.

In the case of an employer-financed company pension plan commitment, a distinction must be made: Short-time work does not affect final salary-based pension commitments, provided that short-time work does not fall within the reference period for the company pension plan-related final salary. In the case of defined contribution company pension commitments, the company pension commitment can stipulate in individual cases that the employer only has to pay contributions to the external pension provider (insurance company, pension fund, relief fund) or to form benefit modules for periods subject to remuneration. Under such arrangement, the employer is not required to pay contributions during short-time work and - correspondingly - no benefit modules are formed for the employee to increase the pension entitlement.

If the company pension commitment does not contain such a direct link between the payment of contributions and the obligation to pay remuneration, the employer generally has to pay the contributions to the external pension provider even for periods of short-time work zero. In this case, the possibility of temporarily discontinuing contribution payments in order to reduce expenses is assessed according to the legal basis of the company pension commitment: In the case of an individual company pension commitment, the employer can achieve the discontinuation by means of an individual agreement with the employee. If the company pension commitment is based on a works agreement, a supplementary agreement with the works council is required which - due to the encroachment on the pension entitlements otherwise earned by the employee during the short-time working period - must satisfy the requirements of proportionality as set out by the German Federal Labor Court (BAG) in accordance with the so-called three-stage theory (3-Stufen-Theorie). In practice, the requirements of the third level, which are generally relevant here, should be fulfilled, at least in the event of a sustained deterioration in the earnings and liquidity situation during the short-time working period. If an expense-reducing suspension of contribution payments is not possible, the employer may in individual cases consider agreeing a deferral of insurance contributions with the external pension provider. The employer is liable for the underfunding of the company pension plan commitment that is then recorded on the basis of the company pension law procurement claim (Section 1 (1) s. 3 BetrAVG) - and will usually rectify this after the deferral period agreed with the external pension provider has expired.

If the employer implements only partial short-time work and the employee still performs some of the work - with a corresponding remuneration entitlements - the company pension commitment can generally be continued. In the case of employee-financed company pension commitments, the amount of the remuneration to be converted and the corresponding statutory employer's contribution under Section 1a (1a) BetrAVG may be reduced in individual cases, depending on the form of the agreed remuneration conversion - e.g. if the contribution is calculated as a percentage of the remuneration paid.
In cases of officially ordered quarantine and home care of the employee's own children due to officially ordered kindergarden/school closures, there is no change in the implementation of the company pension scheme if the employee performs his work during the relevant periods by remote work or home office. If this is not possible and the employee does not perform work during these periods, the same legal principles apply as for zero short-time work. In the case of an employee-financed company pension commitment, the employee cannot use his or her claim for compensation against the competent federal state (Section 56 para. 1 of the German Act on Protection against Infection (Infektionsschutzgesetz, IfSG) or Section 56 para. 1a IfSG) for deferred compensation. In the case of employer-financed company pension commitments which link contribution payments to periods subject to remuneration and therefore do not provide for contribution payments for periods not subject to remuneration, the employee can take into account the loss of pension expectancies resulting from the suspended contribution payments as part of the loss of earnings which can be compensated for under the IfSg.


3. Company pension scheme and liquidity: CTA, Lump-sum provident fund, Reinsurance

From a liquidity point of view, the suspension of the transfer of assets, which the employer carries out if the company pension scheme is run smoothly in order to (out-)finance individual company pension commitments to external legal entities, is also a possibility. The suspension mainly concerns contributions from reinsurance contracts that the employer has concluded to (dis)finance direct commitments. It is possible under labor law in any case if the employer has not promised the employee to finance the employer's pension commitments. If the employer has promised to finance the employee's contributions in the company pension plan commitment, the suspension of contributions requires an agreement with the employee. A comparable liquidity-saving suspension of further asset contributions during the CoVid-relevant period can also be considered if a CTA is used, provided that the trust agreement or the company pension commitment does not directly stipulate an employee's entitlement to out-financing via the CTA, as well as in the case of an company pension commitment implemented by the provident fund via a company or Group provident fund with lump-sum funding.

On the other hand, the repatriation of assets from the above-mentioned legal entities is generally not an option. In the case of a CTA, the repatriation of assets generally eliminates the plan asset eligibility of the assets transferred to the CTA and thus the netting capability of the plan assets; a retransfer is only considered in exceptional cases of an overfunding of the CTA if the conditions specified for this in the trust agreement are met. In the case of reinsurance, measures taken by the employer to establish liquidity are regularly offset by pledging the subscription right to the employee and his or her surviving dependents entitled to benefits.


4. Company pension benefits for pensioners: (No) adjustment in accordance with Section 16 BetrAVG, securing the ability of the employer or the external pension provider to meet the pension payments due

Employers will also consider the economic impact of the CoVid pandemic on their company in follow-up adjustment reviews in accordance with Section 16 of BetrAVG and - especially in the event of a resilient, sustained deterioration in economic planning data - will only make a partial adjustment to pension benefits or refrain from making an adjustment.

The pension funds providing guarantees must comply with the regulatory requirements regarding the mix of investment types and the diversification with regard to the debtors in the investment. In these times, the stringent review and resulting adjustment of the asset allocation is of particular importance. This is generally conducive to stabilisation in the capital investment.

The external pension providers (life insurance companies and pension funds) grant the beneficiaries a legal claim to their benefits. If contributions are not paid by the employer or at a reduced level, the obligation of the external pension provider is reduced accordingly. In this case, fast and transparent communication between employer and external pension provider is important. This is not least because, especially for institutions for company pension schemes (EbAV), the obligations to inform pensioners about their pensions also include the disclosure of contributions paid into the pension scheme in the past twelve months or over a longer period. This ultimately also affects the information to be provided to employees. Rapid and transparent information for beneficiaries is essential for understanding and trust in the actions of employers and pension providers.


5 Conclusion: Needs-based handling of the CoVid pandemic in the execution of company penion schemes

Depending on the economic and liquidity consequences of CoVid-19 on their company, employers will implement the existing company pension commitments using the aforementioned management tools. Especially in the case of employer-financed defined contribution plans, agreements with the relevant stakeholders (employees, works council, external pension providers) on the temporary suspension or deferral of contributions can help to secure liquidity in short term. 

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