It was hard work and in the end a close call.  Up to the very end, it was unclear whether the “Company Pension Strengthening Act” (Betriebsrentenstärkungsgesetz) (“the Act”) would fail or succeed. On January 1 2018, most parts of the Act will come into force. The Act will bring the biggest reform of the company pension landscape in Germany since the enactment of the Company Pension Act (Betriebsrentengesetz) in the mid-70s and since the Pension Fund Law (“Altersvermögensgesetz”) of 2001. The objective of the reform is to strengthen company pensions and to promote further dissemination, especially within small and medium sized companies with respect to employees with low income. Below is a brief overview of the most important aspects of the reform.

Genuine Defined Contribution Plan

The key element of the reform is the recognition of a genuine defined contribution plan (reine Beitragszusage) as company pension promise under the Company Pension Act. As of 2018, the employer will have the opportunity to pay a certain amount of money to a third-party financer as company pension without the need to provide a guarantee for a definitive or determinable retirement benefit in favor of the employee. This concept of “pay and forget” means that by paying the fixed contribution as company pension, the employer entirely fulfills its obligations under the pension promise. Consequently, there is also no subsidiary liability on behalf of the employer for the retirement benefits of the employee and the employee will have any legal claims only against the third-party financers. Another particularity is that entitlements under the genuine defined contribution plan immediately vest. Genuine defined contribution plans can be financed through pension funds, direct insurances, and German Pensionskassen. This concept is a real novum for company pension and retirement benefits in Germany all together: neither the employer nor the funds will guarantee the amount of the actual pension. The German legislator hopes to achieve higher dividends. Guarantees are costly and the freed capital could be used to increase the pension amounts paid to the retirees in the end.

Key Role of Tariff Parties

The design of the genuine defined contribution plan is reserved for the tariff parties only (Sozialpartnermodell). Individual employers who are not bound by collective bargaining agreements will only be able to set up such plans by referencing the respective collective bargaining agreement in the individual employment contracts or by means of a respective agreement with the work councils. It is expected that in practice the tariff parties will also set up most of the third-party financers and will participate in the implementation and control of the genuine defined contribution plan. It is also up to the tariff parties to agree to reasonable rules and regulations, balancing the interests of the employer and the pensioners and to agree, in the collective bargaining agreements, on safety nets to ensure the genuine defined contribution.

Opting-Out Rules Concerning Deferred Compensation

The Act provides for the opportunity of the tariff partners to introduce “opting-out” rules regarding deferred compensation (Entgeltumwandlung) within collective bargaining agreements. Under these rules, employers would be obliged to conduct deferred compensation for all employees. Therefore, a certain part of the employee’s salary would automatically convert into pension entitlements unless the employee “opts out” by expressively declaring to object to the conversion of parts of the salary into pension entitlements. Employers who are not bound by collective bargaining agreements would only have the opportunity to implement opting-out rules concerning deferred compensation by making reference to such collective bargaining agreement in the individual employment contracts or by means of agreement with the work councils. The legislator is of the opinion that this approach will lower the acceptance threshold of employees and therefore increase the dissemination of deferred compensation. In addition, it is also expected that many employees will not make use of the option to “opt out” which would further increase the dissemination.

Other Amendments Concerning Tax Advantages

The amount of tax-exempt contributions (steuerfreie Höchstbeträge) of employers to pension funds, direct insurances, and German Pensionskassen will be increased from currently 4% to 8% of the social security contribution ceiling in the statutory pension insurance (for 2017 currently monthly income of EUR 6,350 gross (West Germany – EUR 6,500 gross expected for 2018) and EUR 5.700 gross (East Germany – EUR 5,800 gross expected for 2018)). In addition, the maximum amount of tax-exempt contributions of currently EUR 1,800 will be repealed.

Furthermore, employers who pay contributions to a company pension (minimum of EUR 240 and up to EUR 480 per year) for low-income earners (income of EUR 2,200 gross per year or lower) will be entitled to keep 30% of the income tax usually be paid on this amount by the employee. This will result in savings of minimum EUR 72 and up to EUR 144 per year on behalf of employers.

Bryan Cave LLP has a team of knowledgeable lawyers and other professionals prepared to make employers ready for those changes on company pension law. If you or your organization would like more information on this or any other employment issue, please contact an attorney in the Labor and Employment practice group.