pension run off

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Pension Run Off – Outsourcing of pension obligations from direct commitments

1. Pension run off and its differentiation from other restructuring measures

Many employers are currently engaged in on-balance-sheet restructuring of company pension commitments by means of direct commitments (BAV commitments). This is particularly the case in view of the progressing low-interest phase, which is leading to a continued inevitable increase in pension provisions for the earned pension entitlements (past service) and for the further pension entitlements (future service) that will arise in subsequent periods.

Traditional restructuring measures in this regard include

  1. the closure of the BAV commitment for new entrants. This does not affect the pension obligations already established;
  2. the implementation of severance programmes for members. These are subject to the strict requirements of the Company Pensions Act (BetrAVG) and are generally not applicable to members and pensioners who have already retired;
  3. the performance-reducing modification of the content of the BAV commitment. This is subject to the strict requirements of the case law of the Federal Labour Court (BAG) on proportionality and is only applicable to active scheme members;
  4. the change of the implementation route, in particular to the pension fund. This only results in a balance sheet correction and does not affect the employer's liability for the fulfilment of pension claims pursuant to § 1 (1) sentence 3 BetrAVG.

What the aforementioned restructuring measures have in common is that they can bring about the complete release from liability for pension obligations (as a so-called Pension Run Off) often desired by the employer either only for individual beneficiaries (severance payment programme) or not at all. For this reason, the focus has recently shifted to outsourcing pension obligations to pensioner companies to relieve them of liability.

The outsourcing takes place either by transferring the pension obligations to a legal entity established for this purpose (so-called original pensioner company) or by separating and transferring the operating business to another legal entity of the employer, so that only the pension obligations remain with the previous legal entity (derived pensioner company). If the employer wishes to achieve a final release - i.e. not bundle the pension obligations in a group company - it prefers to outsource the pension obligations to a commercial legal entity.

2. Outsourcing to an original pensioner company

In the case of the transfer under conversion law, the pensioner company enters into the BAV commitment by way of universal succession. The entry does not require the consent of the individual pension beneficiary.

However, a distinction must be made between active pension beneficiaries with a current employment relationship and pension beneficiaries who have already retired with earned pension entitlements. The pension obligations towards active pension members can only be transferred if their employment relationship is also transferred to the new legal entity by way of transfer of business in accordance with Section 613a of the German Civil Code (BGB) in conjunction with Section 324 of the German Transformation Act (UmwG). This is generally not desired in practice for original pensioner companies. Therefore, the pension entitlements of the active pensioners usually remain with the transferring company and are either compensated as part of a severance program or transferred to the pensioner company at a later point in time after the termination of the employment relationship.

It should be noted that the release from liability desired by the employer does not occur immediately upon the outsourcing of the pension obligations - after the outsourcing, the employer is jointly and severally liable with the new legal entity for the fulfilment of the outsourced pension obligations for ten years. In addition, the BAG has already decided (judgment of March 11, 2008, 3 AZR 358/06) that the employer is obliged vis-à-vis the beneficiaries to provide the pensioner company with sufficient capital. This is to ensure that the pensioner company can actually meet its pension obligations.

3. Outsourcing to a derived pensioner company

In the case of the derived pensioner company, the employer transfers the operating business to another legal entity. The transfer is regularly associated with a transfer of an undertaking within the meaning of § 613a BGB and thus with a transfer of the employment relationships of the active pension claimants to the new legal entity; this includes the BAV commitments (§ 613a Para. 1 S. 1 BGB).

The derived pensioner company is therefore - only - suitable for the employer's release from liability for pension obligations towards retired pensioners. The consent of these persons to the creation of the derived pensioner company is not required and there is no statutory obligation for the employer to provide sufficient capital to the derived pensioner company. Sufficient capitalisation of the pensioner company should nevertheless be carried out for reasons of insolvency law.

4. Summary

The use of the pension run-off to restructure pension obligations from pension commitments can be a sensible measure for the employer to optimize existing pension landscapes. Which option is suitable for the respective company depends on the concrete starting position and the needs of the company. It is essentially dependent on the composition of the group of beneficiaries ((active) scheme members, pension beneficiaries), on the legal basis of the BAV commitments and the associated possible participation of the works council, on the demand-oriented selection of the legal entity of the pensioner company and the concrete financing of the capital requirement for the implementation of the release from liability.

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