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New Directive on Supplementary Pension Rights in Force 20 May 2014: Do German Employers Need to Take Action?

On 15 April 2014, the European Parliament issued a Directive improving the protection of supplementary pension rights (i.e. rights under occupational pension schemes – so-called ‘second-pillar’ pension schemes linked to an employment relationship) for mobile workers. The new rules help to remove current obstacles to free movement, such as the requirement for very long periods of employment to acquire these rights or the risk of the rights being lost when leaving a pension scheme. The Directive will come into force on 20 May 2014, with Germany required to implement into national law by 21 May 2018, and shall improve the protection of mobile workers’ supplementary pension rights in three ways:

–           Acquisition

Pension rights should be vested (guaranteed) after three years of employment at the latest. When a minimum age for vesting is stipulated, it must not be higher than 21 years.

–           Preservation

The rights of workers who leave an employer-run pension scheme before retirement (“deferred beneficiaries”) must be preserved and treated fairly compared to the rights of those workers who remain in the scheme, for example as regards indexation.

–           Information

The workers have the right to know how potential mobility would affect their pension rights, and those who have left the scheme (deferred beneficiaries) must be informed about the value of their rights.

The Directive is only applicable to mobile workers. However, the German Federal Ministry of Labour Affairs already announced that the German Private Pension Act will be adjusted to reflect the Directive by 2018 in order to avoid any native discrimination.  Hence, the statutory vesting period will be reduced from five to three years, the vesting age from 25 to 21. In addition, each pension guarantee which is linked to an indexation (e.g. salary index) shall keep the indexation even if the employee leaves the company. Actually, such pension guarantee must not be adjusted to the indexation once the employee leaves the company and the pension system As a consequence, the financial and administrative costs of such pension scheme for the employer will increase considerably.

The Directive is not applicable to pension schemes which already has been closed to new members.  As the Directive will become effective on 20 May 2014, German employers have the option to close their respective schemes by 19 May 2014 at the latest. However, against this very tight time frame it is more advisable to convert the actual scheme to a defined contribution pension system by 2018 instead of closing the system in the short term.