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Germany: Pensionskassen insolvency protection bill approved

Retirement|Health and Benefits|Total Rewards
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By Dr. Rafael Krönung | May 28, 2020

PSV, a national mutual insurance fund, would insure the payment of DB pensions if an employer becomes insolvent, under certain conditions.

Employer Action Code: Monitor

Parliament has approved a draft bill that would extend insolvency insurance protection to company defined benefit (DB) pension promises funded via pensionskassen. Currently, the Pensionssicherungsverein (PSV), a national mutual insurance fund, insures the payment of promised DB pensions in the event of employer insolvency, but only for promises financed via book reserves (i.e., direct promises), support funds (unterstützungskassen) and pensionsfonds. Employers with such plans pay a premium to the PSV based on the size of their pension liability. The full premium rate is determined annually by the PSV — currently 3.1 per mille (0.31%) of liability — with only 20% of the full premium payable in respect of liabilities secured by pensionsfonds.

The government’s proposed extension of PSV coverage (and premiums) to pensionskassen is driven by a December 2019 judgment of the European Court of Justice (ECJ) in the case PSV v. Günther Bauer, which found that it would be “manifestly disproportionate” for a pension reduction due to insolvency to result in a former employee living “below the at-risk-of-poverty threshold determined by Eurostat for the Member State concerned,” even if the former employee is still receiving at least half of his or her pre-insolvency pension amount. At present, in the absence of PSV or other coverage, any pension reductions made by a pensionskasse that cannot be made up by an insolvent employer are not protected.

Key details

  • PSV coverage, and corresponding employer premiums, would apply only to those pensionskassen that are not members of Protektor, the national insolvency protection scheme for the life insurance industry. Most pensionskassen liabilities (approximately 75%) are not covered by Protektor.
  • PSV protection for pensionskassen would cover all employer insolvencies that occur from January 1, 2022. Retroactive PSV coverage would also apply for prior insolvencies, but only in accordance with the minimum requirements set out by the ECJ, i.e., in cases where benefits provided by the pensionskasse were reduced by more than 50% or the pensioner falls below the poverty risk threshold as a result of the pension cut.
  • Employers with DB pension plans funded by pensionskassen (not covered by Protektor) would be required to pay annual premiums to the PSV starting in 2021. For 2021 the premium would be 3.0 per mille of liability. During 2022 to 2025, it would be the normal rate of PSV premium plus an additional 1.5 mille; thereafter, the normal premium rate determined by the PSV would apply.
  • The methodology for determining the liabilities for this purpose would be based on a simplified model and would not require actuarial valuations. The same method would also apply for pensions financed via pensionsfonds in the future and replace the existing system for determining the PSV contribution basis.

Employer implications

The bill is expected to be passed by the Federal Council (Bundesrat) and formally published in the official gazette by July. The change would apply to a significant share of national employer pension liabilities: 26% of liabilities were funded via pensionskassen in 2017 (according to Arbeitsgemeinschaft für betriebliche Altersversorgung data). Employers with DB liabilities funded via pensionskassen should prepare for the new PSV premium cost and the administrative burdens related to the premium payment.

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Dr. Rafael Krönung
Director, Retirement

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