“Pay-and-forget” model finds its way into company pension schemes practice

With the enactment in 2018 of the German Act to Strengthen Company Pensions (Betriebsrentenstärkungsgesetz – BRSG), the legislature introduced the option of a pay-and-forget model (defined contribution plan consisting of “only” an obligation to pay contributions) in connection with company pension schemes (see section 1(2), no. 3 of the German Company Pensions Act (Betriebsrentengesetz – BetrAVG)). However, these options have remained largely unused. After the company Uniper concluded an association-level collective bargaining agreement that introduced the so called “social partner model” for its employees, the first social partner model in company retirement benefits was introduced industry-wide a few days later. This was agreed between the Mining, Chemical and Energy Workers‘ Union (Industriegewerkschaft Bergbau, Chemie und Energie – IGBCE) and the German Federation of Chemical Employers’ Associations (Bundesarbeitgeberverband Chemie ‒ BAVC) (Grünes Licht für Deutschlands erstes Branchen-Sozialpartnermodell (bavc.de)). It remains to be seen how employers and employees will respond to this social partner model. At least from the employer's perspective, it offers a few attractive benefits.

Statutory provisions on the social partner model

The main difference between the social partner model and previous forms of company pension schemes is that the liability of employers and their responsibility for employees' receiving the promised benefits have been strictly curtailed. In the case of the social partner model, the employer’s commitment is limited solely to the payment of the agreed contributions to the respective pension insurer. Neither the employer nor the pension insurer guarantees or is even permitted to guarantee that the subsequent benefit will be in a specific amount (section 22(1), sentence 2 of the Company Pensions Act). This means that, after they have paid the respective contributions into the company pension scheme, employers no longer need to worry about the subsequent benefits (hence “pay and forget”). In other words, the investment risk is borne by the employee alone.

Even though at first glance the social partner model appears attractive from the employer’s point of view, it took more than four years before the first employers in the chemical industry were actually given the opportunity to offer a social partner model. This is because a contributions’ commitment under the social partner model can only be made through a collective bargaining agreement or through a works agreement based on a collective bargaining agreement. Moreover, a social partner model can only be implemented through a pension fund, an occupational pension insurance or a direct life insurance; it can also be financed through deferred compensation.

For its introduction, a social partner model presupposes an agreement between the social partners, i.e. an employer or employers’ association on the one hand and a trade union on the other, which is why mere contribution company pension schemes are also referred to as the “social partner model”. Accordingly, the social partners are allocated a central role in the case of the such company pension schemes.

The Company Pensions Act also requires the social partners to go beyond simply agreeing to provide company pension schemes in the form of a social partner model. Instead it requires them to participate in implementing and managing the company pension scheme (section 21(1) of the Company Pensions Act). In addition, the social partners are required, among other things, to agree upon payment of an additional amount to secure the mere contribution company pension schemes, which will be borne by the employer (section 23(1) of the Company Pensions Act). Even if the obligation in section 23(1) of the Company Pensions Act is not mandatory, the trade unions in particular will, in practice, normally insist on an agreement of such kind so as to minimise the investment risk that employees have to bear.

Finally, the social partner model can also extend to employers and employees who are not bound by collective bargaining agreements. If the pension provider handling the pension scheme agrees, employers and employees may include in individual employment contracts a clause with a dynamic reference to the “relevant provision of a collective bargaining agreement” (section 24 of the Company Pensions Act). The mention of the “relevant” collective bargaining agreement means that reference can only be made to a collective bargaining agreement that is relevant in terms of its geographic scope, period of validity and the industry and employees covered, i.e. one that would anyway apply between the parties to the employment contract if they were bound by a collective bargaining agreement.

Significance for the chemical industry and options for taking action

Just how successful the social partner model will be in practice will first become evident in the next few months. For the more than 400,000 employees in the chemical industry, however, the social partner model ‒ which provides simply for an old-age pension and (under certain conditions) a survivor’s pension – can offer attractive retirement benefits because of the opportunities for higher returns. By dispensing with the necessity for guarantees, the capital saved can be invested more broadly, thereby improving the chances of an increase in value.

In the chemical industry, the new social partner model is to be applied to all new hires as well as to all employees who claim collectively agreed retirement benefits for the first time. This is, however, conditional on both sides being bound by the collective bargaining agreement or the relevant collective bargaining agreement provision having been effectively referenced. It will also be possible to use the social partner model for salaried employees and executive staff.

Collectively agreed pension schemes that are already in existence will, in principle, continue unaltered on their existing terms. Whether it will be possible, by way of exception, for current employees to change to the new model will need to be examined on a case-by-case basis. In general, however, the protection of legitimate expectations principle and the proportionality principle will apply to enable current employees to join an existing collectively agreed pension scheme in order to participate in the social partner model through future contributions.

If an employee changes employers, section 4 of the Company Pensions Act also allows for the transfer of vested pension rights to the new employer and thus also the opportunity to change the type of the company pension scheme. In this respect, section 4(3) of the Company Pensions Act provides that an employee may, within one year from the termination of their employment contract, require their former employer to transfer the transfer value (i.e. the value of the vested company pension entitlement acquired by the employee) to their new employer or to a pension insurer pursuant to section 22 of the Company Pensions Act of their new employer if

• the company pension scheme has been implemented through a pension fund, an occupational pension insurance or a direct life insurance policy and
  
  
• the transfer value does not exceed the contribution ceiling for the state pension scheme.

The reference to section 22 of the Company Pensions Act covers precisely the social partner model. Thus an employee may transfer the capital accumulated in the previous company pension schemes of an old employer to a social partner plan. The new employer may also draw the employee’s attention to this. For those already employed in the chemical industry prior to 1 January 2022, there is thus the possibility, at least for those who change jobs, of also benefitting from the advantages of the social partner model.

Employers in the chemical industry who are bound by collective bargaining agreements as well as those who can bind themselves to the collective bargaining agreements for the chemical industry by including in individual employment contracts a clause with a reference to the “relevant” collective bargaining agreements should therefore familiarise themselves with the social partner model in good time. At the end of the day, any assessment of the social partner model will have to take into account the opportunities that it offers in terms of both its attractiveness for employers as well as for existing company pension schemes.

Would a social partner model also be suitable for other sectors?

The social partner model could also be an alternative to existing company pension schemes for employers outside the chemical industry since it would, on the one hand, lower their risks (liability) and, on the other, offer employees an attractive, opportunity-oriented company pension scheme. As the new social partner models show, the negotiations that would have to be conducted with trade unions are unlikely to be insurmountable obstacles since the model offers advantages for employers as well as for employees.

At companies where there have not until now been any collective bargaining agreements in place, employers may, in view of the option of incorporating relevant collective bargaining agreements by reference, find negotiating with trade unions or company employee representatives worthwhile. After all, social partner models can offer advantages for both employers and employees.