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In-house Counsel – Barred From Private Pension Systems?

German employees are usually subject to the state pension insurance (“gesetzliche Rentenversicherung – GRV“). In contrast, professionals such as lawyers, physicians, tax consultants, vets or pharmacists may join special pension funds for their professional peer group (known as “Versorgungswerke“). As these special private pension funds are, generally, better funded than the state pension insurance, professionals often opt to participate in the relevant “Versorgungswerk“.  When that happens, the employee must apply for suspension of compulsory membership of the state pension insurance. The competent authority approves the suspension if the applicant exercises his or her profession in a similar way to a self-employed professional person.  In the past, it was common practice that the employed professional applied for suspension at the beginning of their professional career and the suspension continued to apply irrespective of any change of employer or job activity.

Change of Practice

However, due to various decisions by the State Federal Court of Social Affairs (“Bundessozialgericht – BSG“) dated October 31, 2012, the state authority has changed its practice on suspensions.  The authority recently published revised guidelines on the issue.  The guidelines are important for both employed professionals and their employers.  Employers will be required to repay all contributions to the state pension insurance, including the employee´s portion, backdated for up to four years if the professional was not suspended effectively.

Reference Date: October 31, 2012

The revised guidelines can be briefly summarized as follows: If a professional successfully applied for suspension with respect to employment prior to 31 October 2012, the state authority will not review the suspension as long as the professional is still employed by the same employer, irrespective of whether the professional´s activity has changed in the meantime. So, for example, if an employee started his or her professional career with a company in 1997 as Junior Legal Counsel and was allowed to participate in the respective Versorgungswerk and subsequently advanced to Chief Compliance Officer, the original suspension will remain effective and the state authority will not require proof that the CCO role qualifies. However, if the professional changed employer after the original suspension was granted but prior to the reference date of 31 October 2012, he or she will have to re-apply for suspension, irrespective of whether the professional is doing the same job for the new employer.   

How to deal with the Change in Practice?

Professionals and employers should now consider if they need to apply for suspension with retrospective effect for clarification on their respective pension obligations.  It is possible to wait for the next external audit before taking action, but there are good arguments in favour of prompt action.  The State Federal Court of Social Affairs will decide on the opinion advanced by various Federal courts that, e.g. a legal in-house counsel could never be suspended from the state pension insurance as the in-house counsel job is different from the activities of a lawyer in a law practice.  If the State Federal court upholds this opinion it is likely that the state pension authority will further revise its practice which may mean that in the future it is more difficult to apply for dispensation than it is currently.

Conclusion

Having said that, it is already becoming difficult to apply for suspension as it seems that the state pension authority’s preference is to keep professionals in the state pension fund.  Hence, any application should be prepared with care.