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Company pensions: Supplementary claims by employees against the employer in the case of employer-financed occupational pension insurance or direct life insurance

05.11.2014

Where company pension commitments are calculated, errors can often creep in that are mostly detected and have an economic impact only much later, by which time there is very little scope for rectifying the problem. This is why here, in particular, the principle of “Prevention is better than cure” should be observed - even where the supposedly “straightforward” insurance-type pension scheme routes of the occupational pension insurance (Pensionskasse) and the direct life insurance (Direktversicherung) are concerned. Due to the long-term nature of claims to pension provision, even small errors can, in some circumstances, have considerable financial consequences. Employers are ill-advised to simply rely on the pre-printed forms provided by insurance companies, which often fail to take account of all eventualities. This can have negative consequences long before pension benefits are due: if the employee leaves their employment before the company pension maturity date, the employer’s “secondary liability” (Subsidiärhaftung) (Section 1(1), sentence 3 of the German Act on the Improvement of Company Pensions (Gesetz zur Verbesserung der betrieblichen Altersversorgung – BetrAVG)) could result in employees unexpectedly asserting fulfilment or liability claims which, in most cases, could have been easily avoided. All that is required is opting for the “insurance-law solution” (“versicherungsrechtliche Lösung”) in good time and drafting the insurance contract accordingly.

The quota procedure as a liability trap for employers

The employer’s liability risk, frequently overlooked by employers and often ignored on insurance forms, arises from the basic calculation procedure provided by the legislature for unforfeitable pension entitlements, known as the “quota procedure” (Quotierungsverfahren): if an employee leaves their employment before the maturity date of the unforfeitable pension entitlement, the future claim to benefits from their former employer remains. This is the case for pension commitments granted since 1 January 2009 if the employee is aged over 25 on leaving their employment and if the pension commitment has existed for five years. Under a transitional arrangement, pension commitments granted prior to 1 January 2009 are subject to deadlines of differing lengths.

According to the basic quota procedure for the calculation of unforfeitable pension entitlements pursuant to Section 2(1) BetrAVG, the portion of the pension granted by the employer that the employee is entitled to retain corresponds to their actual period of service in relation to their potential period of service had they remained with the employer.

Benefits of occupational pension insurance or direct life insurance

Calculating pension claims in line with the quota procedure, however, often results in employee claims against their former employer for higher pension payments than they would actually receive through the occupational pension insurance or the direct life insurance under the insurance contract. This is because the quota procedure does not take account of usual insurance policy costs and/or fees payable by the employer (e.g. costs of concluding the insurance, administrative fees). For this reason, particularly at the start of a pension insurance, there is often a considerable difference between the pension claims against the employer calculated using the quota procedure and the employee’s pension claims against the (occupational pension or direct life) insurance for which – many companies are surprised to discover – the employer is actually liable. The Federal Employment Court (Bundesarbeitsgericht – BAG) clearly stated in its recent judgement of 18 February 2014 (3 AZR 452/13) that under Section 1(1), sentence 3 BetrAVG, the employee has a supplementary claim against the employer for this difference. This case law will have to be applied to direct life insurance pension provision.

Choice of the “insurance-law solution” in order to avoid liability

The employer can avoid liability for the difference described – even under the case law of the Federal Employment Court (BAG) – if it opts in good time for the “insurance-law solution” instead of the quota procedure. The employee’s pension claims – even against the employer – are then limited to the sum payable by the occupational pension insurance or the direct life insurance under the relevant insurance contract. This option thus makes it possible to exclude any supplementary claim by the employee. Speed is often of the essence here, however, as the employer must exercise its option right no later than three months after the employee has left the company (Section 2(2) sentence 3 and (3), Section 2(3) sentence 3 BetrAVG). If it fails to do so (in good time), it is subject to the employee’s supplementary claim.

In addition, double the provision must be made where the pension commitment and the pension contract are concerned, as opting for the “insurance-law solution” presupposes, firstly, that the social requirements in the insurance contract prescribed by Section 2(2) sentence 2 et seq. and Section 2(3) sentence 2 et seq. BetrAVG have been met and, secondly, that “interest-bearing accumulation” (verzinsliche Ansammlung) (as opposed to a “cash dividend”) has been selected as the form of discretionary participation. Without an insurance contract that meets these requirements, it is not possible to opt for the “insurance-law solution” and liability for the difference pursuant to Section 1(1), sentence 3 BetrAVG is inevitable.

In order to be able to opt for this – extremely straightforward – solution, the employer must, of course, know of it and make corresponding contractual arrangements in advance. For this reason, where contractual arrangements for pension commitments are made, it cannot be repeated often enough that prevention is better than cure.

Employment & Pensions

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