Statutory insolvency protection reloaded – The new version of Secs. 7 et. of the German Company Pension Scheme Act

The new statutory insolvency protection for company pension schemes via pension funds

With the new version of the German Company Pensions Act (BetrAVG) published in the Federal Law Gazette on 23 June 2020, the legislator has extended the statutory insolvency protection system to company pension commitments via pension funds. Excluded from the extended statutory insolvency protection are pension funds which are members of the Protektor protection fund or which are operated as a joint institution under the social partner model.

1. Background of the new legal regulation - Pressure to act due to the "Guenther Bauer ./. PSV"-judgement of the ECJ

The impetus for the new legal regulation was provided by the ruling of the European Court of Justice (ECJ) of 19 December 2019, C-168/18 ("Guenther Bauer ./. PSV"). In this ruling, the ECJ had decided that company pension commitments made via pension fund (pension fund commitments) are also subject to the special insolvency protection under Art. 8 of the EU Directive on the protection of employees against the insolvency of their employer (Directive 2008/94/EC).

Employees benefiting from the pension fund commitment can also claim this special insolvency protection against the individual member state if the existing domestic legal provisions do not provide for a sufficient level of protection (see our Client Alert). Against the background of the state liability risk, the German legislator took this regulatory pressure for action as an opportunity to introduce the provisions set out in Sec. 7 et seq. of the German Company Pension Act (Betriebsrentengesetz, BetrAVG) to extend statutory insolvency protection to pension fund commitments. The legislator introduced the statutory amendments to the ongoing legislative process for the "Seventh Act to Amend the Fourth Book of the German Social Security Code and other laws". The law was passed by the German Parliament on 7 May 2020 and passed through the Federal Council on 5 June 2020. As regards the extension of the statutory insolvency protection to pension fund commitments it will apply as of 1 July 2020.


2. The new legal rule: Legal insolvency protection for pension fund commitments

The new legal provisions provide statutory insolvency protection for pension benefits from pension fund commitments with the initial security case consisting in that insolvency proceedings are opened against the assets of the employer issuing the pension fund commitment and at the same time the pension fund does not provide the pension benefits in full to the extent promised in the pension fund commitment (Sec. 7 para. 1 s. 2 no. 3 BetrAVG). The statutory insolvency protection for pension fund commitments also covers the further security cases specified in Sec. 7 para. 1 s. 4 BetrAVG, which provide, among other things, for the rejection of the application to open insolvency proceedings for lack of assets (Sec. 7 para. 1 s. 4 no. 1 BetrAVG) and the out-of-court settlement of the employer with its creditors and the PSV to avert insolvency proceedings (Sec. 7 para. 1 s. 4 no. 2 BetrAVG).

PSV's obligation to pay benefits will only come into effect if a security event within the meaning of Sec. 7 para. 2 s. 1 BetrAVG has occurred and the pension fund fails to provide all or part of the benefits specified in the pension fund commitment. The PSV's obligation to pay benefits is thus limited to the difference between the pension fund commitment and the lower benefit of the pension fund. The statutory insolvency protection therefore does not cover, for example, claims which are built up after the pension beneficiary leaves the employer's company through the pension beneficiary's own contributions or which are still forfeitable at the time of insolvency.

The amount of the statutory insolvency protection is stratified depending on when the security event occurs: The insolvency protection is "fully" effective for the first time in security cases that occur after 31 December 2021. In this case, the pension beneficiary receives the difference between the pension benefits promised in the pension fund commitment and the benefits actually granted by the pension fund - and therefore, in economic terms, the pension benefits promised in the pension fund commitment are always paid in full. Questions regarding the allocation of surpluses in the event of a possible transfer of claims and assets to the PSV are not dealt with here. In the case of security cases prior to 1 January 2022, there is a claim against the PSV (only) if the pension fund reduces the benefit provided for in the employer's pension fund commitment by more than half or if the income of the pension beneficiary falls below the at-risk-of-poverty threshold determined by Eurostat for Germany due to a reduction (Sec. 30 para. 3 s. 1 BetrAVG). With these criteria, the legislator follows the guidelines on the required minimum level of insolvency protection laid down by the European Court of Justice in the "Guenther Bauer ./. PSV" ruling.

The PSV finances the statutory insolvency protection for pension fund commitments through the contributions specified in Sec. 10 para. 1, para. 3 no. 4 BetrAVG. The obligation to pay contributions begins in 2021; the contribution in that year amounts to 3 per mille of the contribution assessment basis determined in detail in Sec. 10, para. 3, no. 4 BetrAVG (Sec. 30 para. 2 s. 2 BetrAVG). For the years 2022 to 2025, the PSV will levy an additional contribution of 1.5 per mille of the contribution assessment basis (Sec. 30 para. 2 s. 4 BetrAVG).


3. The statutory exceptions: Protector, social partner model, VBL and ZVK

The statutory insolvency protection extends in particular to company pension funds. It does not cover pension funds that are members of the Protektor security fund. Protektor is intended to and can, according to the will of the legislator, in this case guarantee the economic protection of the pension beneficiary in the event of the employer's insolvency as required by the ECJ. The legislator clarifies that the individual pension fund - and also the protection fund - cannot use the new legal regulation as a reason to terminate membership of the protection fund and subsequently switch from the protection fund to the PSV.

Pension funds that are operated as a joint institution of the parties to a collective agreement in the social partner model are also not covered by the statutory insolvency protection. Here, the legislator assumes that the social partners take sufficient precautions in the case of pension commitments under collective agreements.

In addition, commitments under a social partner model introduced with the Company Pension Strengthening Act are still not subject to statutory insolvency protection.


4. Further legal modification: The insurance solution as a standard for pension fund commitments and for occupational pension commitments in the implementation channel of direct insurance

The legislator has also made a modification that is important in practice in the regulations on the amount of vested pension rights in the case of pension fund commitments as well as in the case of commitments made through the direct insurance method (direct insurance commitment).

Sec. 2 sec. 2, sec. 3 s. 2 BetrAVG now stipulate that the amount of the vested pension rights corresponds to the amount of the accumulated capital. Up to now, the employer had to assert this so-called insurance-based solution in the temporal context of the termination of the employment relationship in order to avoid the otherwise imminent liability of an additional obligation to pay - in the amount of the difference between the benefit promised in the pension fund or direct insurance commitment and valued according to the pro rata temporis method and the benefit actually granted by the external pension provider in each case - in relation to the vested entitlements earned. At the same time, the legislator, with the insertion of Sec. 3 para. 2 s. 3 BetrAVG, makes it clear that the employer is also liable for the fulfilment of the company pension benefits promised by it if the pension beneficiary with a direct insurance commitment or a pension fund commitment retires prematurely and the conditions for the insurance-based solution are met; the obligation to pay contributions continues to exist in the amount of the partial claim calculated according to the insurance-based solution.


5.Consequences for practice: Future PSV contribution obligation for pension fund commitments and continued liability from the procurement claim according to Sec. 1, para. 1, s. 3 BetrAVG

For employers with pension fund commitments through pension funds, the new regulations on statutory insolvency protection for pension fund commitments primarily include an additional contribution obligation to the PSV. In addition, they must continue to be liable for reductions in pension fund benefits compared with the benefits promised in the pension fund commitment on the basis of the company pension law entitlement under Sec. 1 para. 1 s. 3 BetrAVG, whereby the liability of pension beneficiaries who left the company before the benefit event with vested entitlements is limited to the partial entitlement determined in accordance with the insurance solution. Employers must take this into account in the further planning and implementation of their introduced and applied company pension schemes.

Did you find this useful?