Occupational Pensions: New law introduces insolvency protection for pension benefits granted via pension insurance funds (“Pensionskasse”)

According to a new law (“Siebtes Gesetz zur Änderung des Vierten Buches Sozialgesetzbuch und anderer Gesetze“, BGBl. 2020 I S. 1248 [1271]) pension benefits granted through a so-called pension insurance fund (“Pensionskasse”) will in future be protected against the insolvency of the employer.

German occupational pension law stipulates that pension commitments can be granted not only directly but also by involving pension carriers such as so-called called pension insurance funds (“Pensionskasse”). The employer is then obliged to pay premiums to the relevant carrier which then normally assumes both the administration and the asset management of a company’s pension plan and later pays the pension benefits to the employees. Such schemes are commonly treated as defined contribution plans in the context of accounting according to international accounting standards (US-GAAP; IFRS/IAS).

Until now, pension benefits based on such pension schemes were not protected against the insolvency of the employer. The reason for this was that certain kinds of pension insurance funds (so-called “regulierte Pensionskassen”) are subject to extensive legal regulation to ensure their ability to fulfil their benefit promises and, additionally, that they are monitored by the insurance supervisory authority. The legislator therefore saw no need for additional insolvency protection. In recent years, however, and more and more frequently, such insurance funds have got into financial difficulties due to persistently low interest rates and they have had to reduce the benefits promised. In such cases, the employer must make up the difference; but if the employer itself becomes insolvent, under the previous legal position the pensioners did not receive compensation for the reduction in benefits . This has now been changed by the new law.

From now on pension benefits based on such pension schemes are protected against insolvency by the German Insolvency Insurance Association (“Pensionssicherungsverein – PSV”). This means that in the event of company insolvency the beneficiary will receive the full amount of the company pension that has been promised.

However, this new protection does not apply to every type of pension insurance fund. It does not i.a. apply to such pension insurance funds that are members of the protection scheme of German life insurers (“Protektor Lebensversicherungs-AG”). Also, it does not apply to so-called joint institutions (“Gemeinsame Einrichtung”, Section 4 Collective Agreements Act) and to certain public supplementary pension funds (“Öffentlich-rechtliche Zusatzversorgungskassen”). Furthermore, insolvency protection is lower in the event of an insolvency before 1 January 2022. Then the German Insolvency Insurance Association only pays if there is a reduction of more than half of the promised benefits or if the income of the person concerned falls below a certain poverty line as a result of the reduction.

The new law offers additional protection to affected employees. For employers, however, this entails additional costs. If an employer grants pension commitments to its employees on the basis of such pension insurance fund schemes, it will have to pay contributions to the PSV in future.