CTA in insolvency of the employer

The focus is on the CTA with a double sided trust arrangement, which has become the market standard for insolvency protection of the relevant payment claims of the individual employee by way of a CTA solution at the latest since the judgements of the Federal Labour Court (Bundesarbeitsgericht, BAG) of 18 July 2013 (6 AZR 47/12) and 22 September 2020 (3 AZR 303/18, CTA rulings). In the CTA judgements, the BAG recognised the insolvency resistance of the double-sided CTA for the insolvency protection of credit balances from partial retirement employment relationships (6 AZR 47/12) and of company pension commitments (3 AZR 303/18). The double-sided CTA specifically includes the administrative trust relationship between the trustee and the employer for the administration of the trust assets as well as the security trust relationship between the trustee and the beneficiaries (CTA beneficiaries) for the fulfilment of the claims secured via the CTA.

1. Starting point: (Typical) benefit claims secured via the CTA: CTA beneficiaries and security cases besides the employer's insolvency

The vast majority of CTAs carried out on the market secure pension obligations from company pension schemes. In most cases, in view of the often extensive insolvency law protection of the commitments via the statutory insolvency protection (Sections 7 et seq. of the German Company Pensions Act (Betriebsrentengesetz, BetrAVG), the CTA is established for accounting reasons to balance the company pension obligations with the trust assets that qualify as plan assets under IFRS or HGB.

In addition, CTAs are often set up to secure credit balances from part-time work for older employees (to simultaneously fulfil the legal insolvency protection claim of the individual employee according to Section 8a (1) of the German Old age part time Act (Altersteilzeitgesetz, ATG), credit balances from long-term accounts (according to Sections 7b et. of the German Social Security Code IV (Sozialgesetzbuch IV, SGB IV) and payment claims of employees from long-term incentive plans (LTIP).

With regard to security cases, the opening of insolvency proceedings against the employer's assets is the most relevant case in practice. Other cases typically secured in the CTA include the rejection of the application for commencement of insolvency proceedings by the insolvency court (usually due to lack of assets), the conclusion of an out-of-court settlement between the employer and its creditors to avoid insolvency proceedings and the other groups of cases specified in Section 7 BetrAVG as well as the employer's default in payment of a minimum number (in practice regularly at least two) of instalments of a payment claim that has been determined by a court with final and binding effect.

2. Occurrence of security case

During the execution of the trust agreement, the trustee is obliged to continuously monitor the economic situation of the employer (including its financial situation) in order to be able to determine the security case in time. This is above all, in order not to make any more payments to the employer (e.g. retransfer of trust assets due to over-collateralisation of the CTA) after the legal occurrence of the relevant collateral case.

The preconditions of the individual security case have to be assessed according to its specific provisions in the CTA: The security cases of the employer's insolvency or the rejection of a corresponding application shall occur with the respective decision of the insolvency court. If one of these two cases of security is pending, the trustee must seek close contact with the insolvency court. At the same time, in these cases the insolvency administrator will seek active contact with the trustee at an early stage (usually shortly after his appointment as provisional insolvency administrator in the insolvency proceedings). This is particularly the case if, according to his (initial) legal assessment, he judges the CTA not to be insolvency-proof and therefore wishes to draw the trust assets to the insolvency estate.

3. Security case of insolvency: insolvency resistance of the CTA

In the event of the employer's insolvency as a security case, the insolvency administrator checks the insolvency firmness of the CTA. The BAG has determined the requirements for the insolvency resistance of the double-sided CTA in the CTA judgements:

(1) Security trust as a contract in favour of the employee as third party within the meaning of Section 328 BGB: For this purpose, the trust agreement must provide for a direct claim of the CTA beneficiaries against the trustee for the fulfilment of the secured claims in the event of insolvency (subject to the condition precedent of the security event).

(2) Design of the CTA as a two-sided trust agreement with a clear separation of the administrative trust from the security trust: The administrative and the security trust must be designed as independent legal transactions in the trust agreement. In practice, this requirement is usually ensured in the trust agreement by separating the specific contractual provisions in independent sections.

(3) Trustee as legal owner of the trust property and maintenance of this legal ownership position during the execution of the trust agreement: Decisive for the fulfilment of this requirement is an assignment of legal ownership during the execution of the trust agreement. A - mere - claim of the trustee under the law of obligations to the employer or any other use of the trust property under the law of obligations does not fulfil the requirements. The necessity of assigning the ownership of the trust assets to the trustee under property law for the duration of the execution of the trust agreement requires that the trustee becomes and remains the legal owner of the assets invested in the custody account and accordingly has a claim against the custodian bank for the surrender of the assets based on ownership (and not merely under the law of obligations).

(4) Exclusivity of purpose and prohibition of retransfer: According to the contractual provisions of the trust agreement, the trust assets are to be used exclusively for the fulfilment of the benefit claims of the CTA beneficiaries from the secured legal position. The legal power granted to the trustee in the internal relationship with the employer must at least be limited by a trust agreement under the law of obligations and a sole earmarking for the fulfilment of the secured claims must be agreed. To this end, the trustee must ensure in the trust agreement that the existing trust assets are allocated by the trustee to the individual CTA beneficiary upon the occurrence of the security event, i.e. that they may only be used to fulfil the claims of the pension beneficiaries. The prohibition of retransfer means that may only be accessed in exceptional cases for circumstances that do not run counter to the purpose of the security and the purpose limitation (e.g. in the event of over-security). The possibility of transferring trust assets back to the settlor in the event of over-securing, which is often regulated in contractual practice, must provide for a sufficiently high security buffer (i.e. usually at least 10%).The transparent separation of the trust assets and their identification by the trustee is elementary, especially when the trust assets are administered in a bank account of the trustee.

(5) Transparent identification and clear separation of the trust assets subject to the CTA from other assets of the trustee, disclosure to third parties: The trust assets to be allocated to the CTA must at least be identifiable for this purpose. They must be kept separate from the trustee's other assets at all times. Furthermore, the trust character of the trust assets must be made sufficiently recognisable for third parties, for example by an addition to the account designation documenting the trust relationship. When maintaining a trust account, the disclosure of the trust character determines in particular whether the account-holding bank is entitled to a contractual lien on the account balance as well as a right of set-off and retention for its own claims against the account holder; in the case of an account designated as a trust account, these rights are often silently waived.

(6) Clear definition of the benefit case: This is typically done in the "definition clause" of the trust agreement.

(7) No termination of the trust agreement without jeopardising the purpose of the security: A further criterion for insolvency resistance includes the exclusion of termination of the trust agreement by the settlor in the event of insolvency or the other cases of security specified in the trust agreement as well as the exclusion of termination as long as CTA beneficiaries still have claims from the security trust which are to be secured by the trust agreement and insofar continue to require the purpose exclusivity of the trust assets with the continuation of the trust agreement. The trust agreement may only provide that if equivalent security is granted to the CTA beneficiaries as a whole, this trust relationship may be terminated. In this case, the trust agreement may provide for an instruction to the trustee to transfer the trust property after the termination of the trust agreement (only) to the legal entity which, as successor of the previous trustee, will take over the protection of the claims of the CTA beneficiaries in the future.

4. Typical steps taken by the trustee after the occurrence of a security event

If the trust assets can be assumed to be insolvency-proof, the further handling of the trust agreement after the occurrence of the security event typically requires the following steps:

(1) Establishing contact and close correspondence with employer/insolvency administrator: This includes, among other things, a confirmation of the termination of the administrative trust by the insolvency administrator. In addition, the trustee must regularly check whether the documentation on the legal basis of the secured payment claims and the group of CTA beneficiaries resulting from the previous execution of the trust agreement still needs to be completed, if necessary, and whether the employer must provide the relevant information. The initial contact with the insolvency administrator also serves the purpose of establishing a common understanding about the insolvency resistance of the trust assets.

(2) Examination of the obligation to indemnify individual stakeholders from the security trust and contacting the stakeholders: This includes, as a starting point, the legal examination of the applicable legal basis for the specific payment claims (in particular, in the case of company pension commitments, any benefit-reducing modifications of the original legal basis) and the examination of the specific scope of the obligation on the basis of (obtaining) actuarial reports. In addition, the trustee has to examine the relationship of the CTA to any other existing hedging instruments (e.g. reinsurance, debt assumption).
In the case of company pension commitments as the object of the CTA, the identification of the pension claims secured by statutory insolvency protection in accordance with Sections 7ff et. BetrAVG, for which the corresponding trust assets are transferred to the PSV in accordance with Section 9 (2) BetrAVG. The excesses typically remain in the CTA, which include in particular the pension adjustment claims, if any, secured against insolvency via the trust agreement in accordance with Section 16 BetrAVG. After identification, the trustee must establish a common understanding with the PSV on the delimitation of liability and the fulfilment of the secured payment claims.

(3) Contacting the CTA beneficiaries: After the final verification, the trustee - in the case of company pension commitments regularly in coordination with the PSV - must contact the CTA beneficiaries at short notice and inform them, among other things, about the further concrete processing of their secured benefit claims.

(4) Transfer of trust assets to third parties to meet the secured claims: In the case of company pension commitments, the transfer includes the transfer of trust assets of the legally insolvency-protected pension claims in accordance with Section 7 BetrAVG (taking into account any existing security ranking) to the PSV. In the case of payment claims from partial retirement/value credit relationships, the settlement is typically carried out via the DRV Bund. In individual cases, it is advisable for the trustee to hand over the further settlement of the trust assets remaining with him after the aforementioned transfer to a third party (e.g. a trustee specialising in the settlement of trust agreements in the event of insolvency). For this purpose, the trustee shall in particular ensure a legally secure transfer of the trust assets.

(5) Implementation of a process for the fulfilment of the secured payment claims and possible settlement of the excesses: The process to be implemented immediately after the verification shall ensure a timely settlement of the secured payment claims, which the trustee shall provide to the CTA beneficiaries - even after the transfer of the relevant trust assets to third parties in accordance with paragraph (4). In this context, the trustee must also decide whether it intends to settle the secured payment claims itself or through a service provider. In the case of company pension commitments as secured claims, the trustee shall also examine and push for a possible settlement of the company pension claims of the CTA beneficiaries remaining in the CTA in individual cases.

5. Selected operational challenges in the implementation of the protection case: "protection case roadmap" of the trustee

In addition to the contractual CTA rules and the general framework parameters under insolvency law (as well as under company pension law in the case of company pension claims), the trustee regularly has to consider various operational challenges when implementing the CTA in insolvency. In individual cases, these may include (1) ensuring data security at all times (in particular with regard to the personal data/accessibility of the CTA beneficiaries, (2) the pre-financing of payment claims that can no longer be fulfilled in accordance with the contract due to the collateral case, (3) ensuring the funding of the CTA-secured payment claims, (4) only incomplete legal and/or business competence of the insolvency administrator or, in the case of self-administration, of the administrator in kind, and (5) communication with the relevant stakeholders as required. In addition, in individual cases the initial trustee may no longer be available for the further implementation of the protection case (e.g. for group-related, HR-related and/or business management reasons). In order to be prepared - in addition to the legal framework conditions - for these operational challenges in the event of a protection case, the trustee should draw up and document a protection case roadmap shortly after the conclusion of the specific trust agreement, which already anticipates the challenges and ensures needs-based solutions for the implementation of the CTA in the insolvency.

6. Preventive provision: optimising the content of the trust agreement

A good governance system of the trustee also provides for a t regular review of the trust agreement with regard to its legal and operational up-to-dateness, in order to not only take into account the consideration of changing legal framework conditions over time, for example for the security case in the CTA, but also to be able to ensure the intended administratively needs-based implementation of the trust agreement after the occurrence of the security case. The practical effectiveness of this regular review has recently been demonstrated, for example, by the CTA ruling of the BAG of 22 September 2020, in which the BAG not only recognised the insolvency resistance of the double-sided CTA for the protection of claims arising from company pension commitments, but also determined, among other things, the admissibility of a priority order for protection with the primary fulfilment of claims arising from the company pension commitment that are not protected against insolvency pursuant to Section 7 BetrAVG before the legally insolvency-protected claims of the CTA beneficiaries (see our DPEsche 02/2021: https://www2.deloitte.com/dl/de/pages/legal/articles/aktuelle-arbeitsrechtliche-rechtsprechung-bav.html). Trustees with a rule review system have to implement these rules of the graduated order of priority - if not yet implemented in the CTA - at the latest within the scope of the regular review in the calendar year 2021.

7. Conclusion: Holistic conceptualisation and implementation of the trust agreement as the basis for a practically needs-based handling of the CTA in insolvency

A legally secure and at the same time practical implementation of a CTA for the trustee - but also for the other relevant stakeholders and here above all the employer and the CTA beneficiaries - starts with the customised conceptual design and implementation of the trust agreement and the collateral case roadmap and can be ensured during the implementation of the trust agreement in particular through the regular review of the re-established system. In the event of a collateral event, the trustee must also ensure a functioning infrastructure for coordination and other communication with the other stakeholders and for the contractual fulfilment of the relevant payment claims of the CTA beneficiaries.

Published: April 2023