Company Pension Strengthening Act 2.0

1. Deferred compensation through opting out: Now also at the company level – with a higher employer contribution and elected works council/staff council

According to the BRSG 2.0-E, § 20 of the German Company Pension Act (Betriebsrentengesetz, BetrAVG) is to be extended in order to include the option of deferred compensation through an option system based solely on a collective agreement between the employee representative body (= works council/staff council) and the employer – without the need for a collective bargaining agreement (Tarifvertrag, CBA). The legislator believes that this will accelerate the development and expansion of deferred compensation in companies that are not covered by CBAs. The condition for such an option system, which is based on a works agreement (Betriebsvereinbarung) or staff agreement (Dienstvereinbarung), is an increased employer contribution of at least 20% of the converted amount, which at the same time is intended to cover the employer contribution of 15% under Section 1a (1a) BetrAVG. 

Since the legal entitlement of employees to deferred compensation, introduced in 2002, did not lead to the desired spread of deferred compensation, an opting-out system based on collective agreements was already introduced with the original version of the Betriebsrentenstärkungsgesetz in 2018, which provides for the automatic participation of employees in deferred compensation. If the employee does not wish to participate in deferred compensation, he or she must actively and expressly object to deferred compensation. 

The intended new regulation will not (be able to) apply to companies without an elected works council/staff council. Here, employees will continue to have the option of opting in to activate their participation in the deferred compensation.

2. Extended social partner models: Employers not bound by collective agreements are included with the consent of the social partners

The BRSG 2.0-E extends Section 24 BetrAVG to include the opportunity for third parties to participate in the relevant social partner model (Sozialpartnermodell, SPM). The new paragraph 1 corresponds to the previous regulation, according to which non-tariff-bound employers and employees can agree on the relevant collective agreement regulation for an SPM with the consent of the social partners. 

In addition, the possibility is now also opened up to agree on the application of a non-relevant collective agreement regulation via an SPM. BRSG 2.0-E provides for two constellations with the consent of the collective agreement partners supporting the SPM: 

1. The CBA governing the employment contains a corresponding opening clause – a so-called "opening CBA"; 
2. the employment falls within the organisational scope of the trade union that supports the SPM – the explanatory memorandum to the law refers, among other things, to the SPM in the chemical industry, which can be used, for example, by the paper and ceramics industry or the water industry. 

If the employment falls within the organisational scope of the trade union, all the collective bargaining provisions of the relevant SPM apply directly. In the first constellation, however, it can be agreed that the organisational framework of the existing SPM is used, but that an independent modified arrangement is applied. In this case, it is to be welcomed that the draft of Section 21 BetrAVG now provides at the end of paragraph 1 that the social partners who are party to the opening collective agreements do not have to be involved in the implementation and management of the SPM. Furthermore, it is clarified that a lack of involvement does not lead to the pure contribution promise being ineffective. 

The new paragraph 4 of Section 24 BetrAVG, as provided for in the BRSG 2.0-E, allows the social partners to reasonably share the costs of implementing and managing the SPM with the third-party employer who is not bound by the collective agreement. The draft does not define the requirements for appropriateness in more detail; in this regard, practice will have to develop solutions that meet the needs, in particular with regard to the administrative costs for the respective SPM that can be passed on to the third party in accordance with this cost sharing rule. The intended regulation, in order to be able to take this into account when calculating contributions and benefits, has not yet been flanked in the Insurance Supervision Act in the draft bill. 

The strengthening of the security contribution buffer provided for in a new paragraph 4 of Section 35 PFAV-E in the BRSG 2.0-E is to be welcomed. The so-called security contribution buffer under Section 35 (3) PFAV, which has so far been built up exclusively from the security contributions under Section 23 (1) BetrAVG, can now also be strengthened by "yield peaks". The prerequisite is that the investment of assets for prospective beneficiaries and pension recipients is carried out together. In this context, income peaks are net income that exceeds a threshold value defined as a percentage of the investment of assets. In practice, synchronisation with the handling of the so-called fluctuation corridor in pension payments (cf. Section 38 PFAV) must be taken into account.

3. Early access to the company pension, even for partial pensions

The BRSG 2.0-E also provides for employees to be granted a legal entitlement to an early company pension, regardless of whether they are receiving a statutory full or partial pension. However, this does not include a pro-rata company pension entitlement. 

Until now, employees have only been able to claim an (early) company pension under Section 6 BetrAVG if they are receiving a statutory (retirement) full pension. Since the beginning of 2023, earned income has no longer been offset against the retirement pension when an early retirement pension is drawn under the statutory pension insurance. The regulation is therefore being adapted accordingly in view of the changes in the law on additional income in the statutory pension insurance. 

In view of the increasing shortage of skilled workers, the regulation is intended to make the pension more flexible and to provide employees with an incentive to remain in the labour market for longer.  

The new regulation does not affect the legal option of making the receipt of benefits in a company pension plan dependent on the legal termination of the employment relationship with the employer or on the retirement from working life (see our client alert on this topic).

4. Further changes in BRSG 2.0-E: Increased severance payment limits, instalment payments by pension funds, support for low earners, changes to pension funds

a) Increased severance limits for severance agreements after the termination of the employment when the severance amounts are paid into the statutory pension insurance  

In addition, the new paragraph 2a of Section 3 BetrAVG provides for the doubling of the existing compensation limits of Section 3 BetrAVG for severance agreements that employers and beneficiaries conclude after the termination of the employment, provided that the employees agree to this procedure and the severance amounts are paid into the statutory pension insurance. The new severance payment option is intended to relieve employers of the previous severance payment limits of Section 3 BetrAVG while at the same time ensuring that additional coverage is built up within the framework of the employees' statutory pension insurance; to this extent, the regulation also has a further fiscal policy interest. In view of the fact that the severance payment limit is not high in material terms, even under Section 3 (2a) BetrAVG, it remains to be seen how relevant the proposed new regulation will be in practice. 

Employers and employees will still be able to agree on severance pay during the current employment relationship without any material restrictions, to which Section 3 BetrAVG will continue to be inapplicable. 

b) Payment in instalments by pension funds:  

The revised version of Section 236 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG) in the BRSG 2.0-E enables pension funds to make instalment payments in the future, in addition to life-long payments or one-off capital payments.  

c) Support for low earners  

The draft law provides for two improvements in the subsidy under Section 100 of the German Income Tax Act (Einkommenssteuergesetz, EStG) (subsidy amount). The subsidy amount introduced in 2018 is intended to specifically promote the occupational pension provision of employees with low incomes. 

Firstly, the income limits in Section 100 (3) no. 3 EStG are to be dynamised in line with the statutory social insurance contributions ceiling (Beitragsbemessungsgrenze, BBG) (in future 3% of the annual BBG – in 2024 this would be EUR 2,718 compared to the current EUR 2,575). The previously rigid limits have meant that employees who were initially eligible for subsidies have fallen out of the subsidy scheme as a result of regular wage and salary increases. This has raised questions for employers, such as whether contributions can be discontinued again after the subsidy has been cancelled. The dynamic adjustment of income limits will give employers more planning security in this regard.  

On the other hand, the amount of the subsidy in Section 100 (2) EStG is to be increased (from currently EUR 288 to EUR 360). This would mean that in future contributions of up to EUR 1,200 (30% of EUR 1,200) would be subsidised (Section 100 (6) EStG). 

Both changes are to be welcomed, as there are gaps in the provision of pensions, particularly for employees on low incomes. The scope for a personal private pension or a company pension financed by deferred compensation is usually non-existent or insufficient. 

d) Changes to pension funds 

The modifications in Section 232 VAG take into account the abolition of the additional income limit for recipients of an early retirement pension from the statutory pension insurance. This means that the pension funds can, for example, regulate in their general terms and conditions of insurance that they will pay benefits even if there is a partial loss of earned income. This is an optional provision. However, they can – in theory – continue to link the payment of their benefits to the complete loss of earned income.  

The long-discussed and appropriate desire of pension funds for an adequate regulation to allow for temporary underfunding of the security assets – i.e. a deviation from the requirement for complete coverage at all times – has now been included in the draft bill. Section 234j VAG will be supplemented by five further paragraphs. The articles of association must allow for such a regulation and contain a reorganisation clause. The shortfall is limited to 10 per cent of the minimum amount of the security assets. Finally, the pension fund must agree a so-called security assets plan with employers or third parties before the shortfall occurs and have it approved by the supervisory authority. 

Among other things, this plan must show how the coverage is to be fully restored within a maximum of ten years. Furthermore, compliance with the solvency and minimum capital requirements must be ensured. Employers and/or third parties must undertake to provide the necessary financial resources. Regular review by the pension fund is mandatory. 

e) Further changes 

Further changes relate to the regulations on credit balances (Section 7c of the German Social Code IV (Sozialgesetzbuch IV, SGB IV). Due to the amended law on additional income in the statutory pension insurance, it should be possible in future to utilise credit balances even when drawing an early retirement pension until the standard retirement age is reached. 

In addition, Section 212 of the German Insurance Contract Act (Versicherungsvertragsgesetz, VVG) is to be extended to include all unpaid periods (previously only parental leave). This would make it possible to continue a life insurance policy financed by deferred compensation in accordance with Section 1a BetrAVG after the end of the unpaid period, such as a sabbatical, under the terms agreed before the conversion, provided that the employee requests this within three months of the end of the unpaid period. 

Furthermore, increasing digitalisation should also be taken into account in communication with the Pensions-Sicherungs-Verein (PSV). In the future, according to Section 9 (1) BetrAVG, correspondence with the PSV should also be possible via a technical procedure ("portal" or "app") with the consent of the beneficiary. And the PSV should in future be able to issue contribution notices in full using automatic facilities (Section 10 BetrAVG), provided that there is no discretion and no scope for assessment. 

Finally, BRSG 2.0-E also contains relevant changes for capital investments. Adjustments to the Ordinance on the Investment of Guarantee Assets of Pension Funds, Burial Funds and Small Insurance Companies (AnlV) include, among other things, a new, separate infrastructure quota of 5% of the guarantee assets (Section 3 (7) AnlV) and an increase in the risk capital investment quota (Section 3 (3) sentence 1 AnlV) from 35% to 40% of the guarantee assets (please refer already to our Client Alert).

5. Outlook: BRSG 2.0-E a first step in the right direction – expectations for the further legislative process

Overall, the BRSG 2.0-E – as expected in practice – does not include the big breakthrough, despite various welcome improvements. This is also because the legislator has not taken up all the relevant suggestions for change from practice, including, for example, to clarify the quantitative parameters for the equivalence of the value of occupational pension commitments in the form of defined contribution or defined contribution with minimum benefit. Since the ministries leading the legislative process have already conducted extensive consultations with and in practice on the BRSG 2.0, the further legislative process is not expected to result in any material changes to the BRSG 2.0-E. 

The draft bill was sent to the associations on 27 June 2024, who have until 25 July 2024 to comment on the draft. The draft is to be adopted by the cabinet at the end of August 2024, after which the parliamentary legislative process will begin, which will also include the necessary approval of the Bundesrat. The explained provisions of BRSG 2.0-E are to come into force on the day after it is published in the Federal Law Gazette, with the exception of the regulation on the promotion of low earners. These are to apply from 1 January 2025. 

Published: July 2024