The draft bill on the implementation of the EU Mobility Directive

In order to enhance worker mobility, the EU Mobility Directive (Directive 2014/50/EU) of 16.4.2014 aims to eliminate the obstacles to worker mobility such as long vesting periods for occupational pension schemes, the lacking preservation of vested occupational pension rights, the paying-off of vested pension rights without the informed consent of the employee, and the insufficient information of employees. This covers all occupational pension schemes which were open to new workers on 20.5.2014. The deadline for transposing the EU Mobility Directive into national law ends on 21.5.2018.

The Federal Ministry of Labour and Social Affairs (Bundesministerium für Arbeit und Soziales – BMAS) recently presented a draft bill for the transposition of the EU Mobility Directive into German law (draft German Occupational Pension Schemes Act) (Betriebsrentengesetz – BetrAVG-E). This provides for statutory amendments and new regulations in the area of occupational pension scheme law from 1.1.2018. This legislation in particular contains the following changes:

Shortening of vesting periods

For pension entitlements newly granted from 1.1.2018, the vesting period for pension rights is to be reduced from five to three years. According to the EU Mobility Directive, the waiting periods provided for by occupational pension schemes may not exceed three years because waiting periods may have a similar effect to vesting periods.

At the same time, the minimum age for the preservation of vested pension rights if an employee leaves a company earlier is to be reduced from twenty-five to twenty-one years.

Dynamic adjustment of pension rights of former employees with vested pension rights

To date, changes in pension rules and assessment bases for former employees with vested pension rights have not in accordance with Sec. 2 (5) BetrAVG been taken into account (“frozen pension principle”). On the basis of the EU Mobility Directive, however, pension rights of former employees may not in principle be treated differently than pension rights of active workers. In accordance with the draft act, Sec. 2 (5) BetrAVG is therefore to be deleted and it is to be regulated in a new Sec. 2a BetrAVG that changes to the pension entitlement and the assessment bases are also fundamentally to be taken into account after an employee has left the company. For former employees, the pension rights based on periods of employment from 1.1.2018 are also dynamic after they have left the company. This regulation will above all be of significance for salary-linked pension schemes and overall pension entitlements and will often lead to increased expenses for the employer. It is, however, in principle conceivable, that the changes – if legally permissible – increase the costs for employees.

Exceptions to this obligation to dynamically adjust pension rights which are important in practice exist for insurance-based instruments (pension plan, pension fund, direct insurance) if former employees with vested pension rights also benefit from all earnings. Dynamic adjustment is likewise not to apply to fixed-amount entitlements and pension schemes in accordance with the “module system” (Sec. 2a (1) sentence 2 no. 1 BetrAVG-E).

Paying-off of minimum pension rights

According to Sec. 3 (2) BetrAVG, minimum pension rights can to date also be paid-off without the consent of the employee. Minimum pension rights are those which would not per month amount to more than 1 % (i.e. EUR 28.35 monthly in 2015) or in the case of capital payments not more than 12/10 (i.e. EUR 2,835.00 in 2015) of the monthly reference value in accordance with Sec. 18 of the German Social Code IV.

A paying-off of minimum pension rights should in future only be possible with the consent of the employee if the employee has moved to a Member State of the European Union within one year after termination of employment. The legislator would therefore only limit the paying-off of minimum pension rights to the extent required by the EU Mobility Directive.

Information obligations

Employers or pension funds have to date been obliged in accordance with Sec. 4a BetrAVG if legitimate interests of the employee exist to inform the employee in writing upon request about the amount of the vested pension rights on the pension start date and about the transfer value. According to the draft bill, the employer should in future be obliged to provide information regarding

• whether and if applicable, how the vested rights are acquired,
• how high the pension claim based on the vested rights acquired to date is and how high this will probably be when the age limit provided for in the pension regulations is reached,
• what effect any termination of employment has on the vested rights, and
• how the vested rights will develop after termination of employment.

This information is at the request of the employee to be provided in an understandable text form (letter, e-mail, etc.) and within a reasonable period.

Changes to the adjustment regulations

The legislator is using the opportunity beyond the transposition of the EU Mobility Directive to also change the regulations relating to the employer’s obligation to review the necessity of changes (Sec. 16 BetrAVG). The legislator is therefore reacting to several decisions of the Federal Labour Court of 30.9.2014. The Federal Labour Court had for example ruled that employers are also then obliged to review the necessity of and decide on changes in accordance with Sec. 16 (1) BetrAVG if they carry out the provision of the pension via a regulated pension fund and this uses a maximum interest rate approved by regulators which is above the maximum interest rate of the Actuarial Reserves Ordinance (Deckungsrückstellungsverordnung – DeckRV), and always then if the pension fund or direct insurance entitlement was granted prior to 16.5.1996 (cf. Federal Labour Court, judgement of 30.9.2014, case no. 3 AZR 613/12).

The decisions of the Federal Labour Court lead to enormous uncertainty for employers regarding future occupational pension scheme liabilities and – in terms of practical application – to high additional financial burdens. The legislator’s intention with the obligation to review the necessity of adjustments is to provide employers with the “necessary planning security” and not to jeopardise the establishment and expansion of occupational pension schemes.

Conclusion

The legislator would by implementing the draft bill provide greater legal certainty with respect to the obligation of the employer to review the necessity of adjustments.

The shorter vesting period and the restriction with respect to the paying-off of minimum pension rights will in practice lead to the fact that in future more (employer-financed) vested pension rights remain upheld for former employees and the – rather rare – minimum pension rights can no longer be paid-off directly when the employee leaves the company, but at the earliest one year after the employee leaves employment and, if applicable, only with the consent of the employee. The extended information obligations will lead to an additional administrative and financial burden for employers.

The change which is certainly most important for employers will be the dynamic adjustment of the pension rights of employees who have left the company. Employers should review in good time whether and which changes are necessary and possible with respect to their pension schemes in order to avoid unscheduled additional charges. Converting final salary-based pension schemes to contribution-based pension schemes can for example make sense. This should, however, be done in due time so that any necessary changes can still be made before these new statutory regulations come into effect.