Pension Protection in the Draw-Down Phase:
Approaches to Maintaining Pension Longevity
- The German Perspective
IPEBLA Conference 2013
Rome, Italy
Dr. Nicolas Roessler
May 2013
Partner
+ 49 69 7941 2231
nroessler@mayerbrown.com
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Agenda
1.
Can participants receive benefits at times other than retirement? Are
there any penalties for doing so?
2.
What are permissible forms of payment from plans? Specifically, are
annuity payments standard/common/permitted from DC plans? From
DB plans?
3.
Do plans have investment options (participant-directed or otherwise)
that are structured to provide a change in investment as the participant
nears retirement and/or retirement age?
4.
Are participants permitted to transfer/”rollover” retirement savings? If
so, are those opportunities limited to any specific type of plan/savings
account/annuity?
5.
What type of obligations do employers/plan sponsors have with respect
to participants who are no longer active employees? What about
participants with unclaimed benefits?
2
Can participants receive pension/benefits at times
other than retirement?
• Yes, under Sec. 6 of the German Pensions Act (BetrAVG)
• Participants are entitled to benefits as of the day at which
they draw an old-age pension in the German statutory
pension scheme
– Earliest possible age varies depending on type of old-age
pension (e.g. age 60 for handicapped participants, age 62 for
participants with 35 contribution years, born after 01 Jan 1952)
• Creates parallelism between occupational old-age
pensions benefits and statutory old-age pension benefits
3
Are there any penalties if participants receive benefits
at times other than retirement?
• No automatism
– Depends on plan rules
• Plan rules must be transparent and in line with the doctrine of just and
equitable treatment
• In the absence of specific language in the plan rules: gap must be filled by
means of interpretation (works only for pre-1975 plans)
• Practical Implementation
– Regularly actuarial reductions of 0.5% of benefits per month of
earlier drawing
– In so-called „brick systems“, in which one „pension brick“ is
earned per year, no further bricks are earned
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What are permissible forms of payment from plans?
• Generally every form of payment is permissible
– annuity payments
– lump sum payments
– installments
– benefits in kind (electricity, housing, gas, coal, etc.)
• To qualify as a „pension“ in the meaning of the BetrAVG,
the benefit must be granted with the purpose to ensure
the beneficiary‘s (or his/her dependants‘) standard of
living after retirement
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What are permissible forms of payment from plans?
• Are annuity payments standard/common/permitted from
DC/DB plans?
– Always minimum benefit guarantee in Germany (“pure” plans not
statutorily recognized)
– Payment form mainly depends on financing method
(Durchführungsweg). Very generally speaking, the typical payment
forms are:
Financing Method
Typical payment form
direct commitment
lump sum and annuity
direct insurance
lump sum
Pensionskasse
annuity
German pension fund
annuity
support fund
annuity
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Do plans have investment options (participant-directed or otherwise)
that are structured to provide a change in investment as the participant
nears retirement and/or retirement age?
• Many major plans have adapted liability driven investment or lifecycle
investment set-ups in the last five years
– lifecycle mainly for so-called contribution-oriented DB plans (employer pays
defined contribution, but is liable for a certain benefit, which is calculated
actuarially at the time at which the pension promise is made)
– liability driven investment strategies mainly for more traditional DB plans
• Rarely any participant-directed investment
– employer bears risk of minimum benefit
– insurance companies need to meet minimum interest requirements and
generate profit
– Some company or industry specific funding vehicles (Contractaul Trust
Arrangements, German pension funds, etc.) have „investment comittees“,
with seats for employee/union representatives
– Some new plans offer „investment toys“
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Are participants permitted to transfer retirement savings?
• Transfer from occupational plan to occupational plan:
– Governed by Sec. 4 BetrAVG
• transfer allowed based on voluntary agreement between old employer
and new employer and employee:
– transfer of liability and underlying pension promise from old
employer to new employer, or
– transfer of so-called transfer value (Übertragungswert) from old to
new employer, provided that new employer gives pension promise
of „equal value“ (wertgleich)
• What is the „transfer value“?
• Calculated differently, depending on financing method:
• present value (Barwert) of vested entitlements in case of
direct promise or support fund promise
• value of accrued capital in case of direct insurance, German
pension fund or Penisonskasse promise
8
Are participants permitted to transfer retirement savings?
• Transfer from occupational plan to occupational plan:
– Governed by Sec. 4 BetrAVG
• transfer allowed based on voluntary agreement between old employer
and new employer and employee:
– employee requests transfer of transfer value from old employer to
new employer within one year after end of employment
relationship, and
– pension is financed via German pension fund, direct insurance or
Pensionskasse, and
– transfer value does not exceed social security contribution ceiling
(roughly 67 k EUR)
=> backed by corresponding „best practice transfer guidelines“ on
German insurance industry
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Are participants permitted to transfer retirement savings?
• Transfer from occupational plan to private plan:
– Generally possible and common standard that employees
continue direct insurance commitments with private
contributions after end of employment relationship
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What type of obligations do employers/plan sponsors have with
respect to participants who are no longer active employees? What
about participants with unclaimed benefits?
• Pro rata entitlements vest five years after pension has been promised if
employment ends after age 25
• Employer is always (secondary) liable for vested entitlements, i.e. employer
must pay in case external funding vehicle is unable
• Participants have information rights as regards
– level of benefits at retirement age, and
– amount of the „transfer value“ (Übertragunsgwert), i.e. lump sum that the new
employer would have to pay to the current employer in case employee changes
employers
• Adjustment of benefits
– either 1% increase per year, or
– test every three years whether benefits can be adjusted to development of costs of
living in light of the employer‘s economic situation
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Dr. Nicolas Rößler, LLM
Dr. Nicolas Rößler, LLM
Partner, Frankfurt
Practice: Employment & Benefits
nroessler@mayerbrown.com
T: +49 69 79 41 2231
Nicolas Rößler is a partner in the Employment and Benefits practice in Mayer Brown’s Frankfurt office. He
advises and represents national and international clients in all areas of individual and collective employment
law and in connection with the set-up and restructuring of benefit schemes. His work especially focuses on
matters concerning occupational pension schemes, especially the implementation of funding mechanism for
such schemes such as German pension funds or Contractual Trust Arrangements (CTA). Nick also regularly
advises his clients on restructurings and employment and pensions law issues in M&A transactions.
Nick heads our German pensions product group, in which Mayer Brown combines forces from different
practice groups, such as finance, tax, employment & benefits and insurance to provide interdisciplinary fullservice legal advice on all matters related to occupational pensions, including plan mergers and asset
management and selection advice.
Nicolas is a regular speaker on employment and pensions law topics at seminars and conferences. He has
lectured at King’s College School of Law in London on European Employment Law.
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