The stated objective of this legislation is to further strengthen company pensions in Germany as the second pillar of retirement provision. In particular, the law aims to open up the model of the social partners to individual contractual references within certain limits.
The Company Pension Strengthening Act I (CPSA)
A key component of CPSA I from 2018 was the introduction of the pure defined contribution schemes into the German Occupational Pensions Act (Betriebsrentengesetz or BetrAVG). Under this internationally recognized type of commitment, an employer’s obligation is primarily limited to the proper remittance of contributions to an external pension provider. Previously, employers were required under the BetrAVG to make additional commitments, such as ensuring a certain level of benefits. The pure defined contribution plan was designed to limit liability risks for employers and encourage the wider adoption of company pensions.
However, the pure defined contribution plan was available only to a select group of participants. In accordance with the social partner model, only parties to collective agreements (Collective bargaining parties) were permitted to establish company pensions through pure defined contribution schemes.
The Company Pension Strengthening Act II
The uptake of company pension schemes under the CPSA I has been below expectations, particularly with regard to the social partner model, which has so far been infrequently used. In order to further strengthen company pensions, the provisions of the CPSA I are now being further developed. A key element is the advancement of the social partner model. CPSA II incorporates, among other things, the following key innovations:
- The parties to an employment contract should be able, under certain conditions, to apply non-relevant collective bargaining provisions of a social partner model on an individual contractual basis.
Such individual contractual application may be considered, for example, if a relevant and applicable collective agreement (e.g. a company collective agreement) expressly provides for it. In addition, an individual contractual application should also be possible if a trade union participating in the social partner model is organizationally responsible for the employment relationship in question according to its statutes.
The social partners will have to give their consent to such an application, although, according to the explanatory memorandum to the Act, the requirements for such consent should not be too strict. The collective bargaining parties supporting the social partner model may reasonably involve third parties in the costs of implementing and administering the social partner model.
- In the future, opting-out models based on works agreements will also be possible in company pension schemes under certain conditions.
These opt-out systems are characterized by the fact that employees automatically participate in the deferred compensation schemes if they do not object within a certain period of time. However, if employers who are not bound by collective agreements wish to operate a deferred compensation scheme under an opting-out model, the statutory employer subsidy increases from 15% to 20% under the new regulation. Whether this unequal treatment of employers bound by collective agreements and employers not bound by collective agreements will ultimately stand up in court is at least questionable in view of the constitutionally guaranteed negative freedom of association.
- The CPSA II contains various changes for pension funds. For example, pension funds are to be given more leeway in their investments. The draft also provides for a Fictitious settlement of company pension entitlements in the event of a pension fund being dissolved.
- Employees should be given the opportunity to receive a company pension as soon as they receive a partial pension from the statutory pension insurance.
- The CPSA II also includes special funding for employees with lower incomes. Until now, employees with a gross income of less than EUR 2,575 have benefited from additional state funding if their employer offered them a company pension. The CPSA II raises this income limit and makes it more dynamic by linking it to the contribution assessment ceiling.
Outlook
Whether these enacted changes will reach the intended broader Distribution of company pensions, particularly the social partner model, remains to be seen.
Facilitating measures, both at the level of individual contracts and at the level of collective bargaining (works agreements), would have been appropriate for a wider diffusion of pure defined contribution plans among employers not covered by collective bargaining. This is particularly important for small and medium-sized enterprises, the target group of the legislation, where the implementation of occupational pension schemes has been low. There have been numerous, albeit unsuccessful, calls for the social partner model to be opened up further to the operational parties (employers and the works council) within these companies.
Nevertheless, the CPSA II provides further enhancements to the second pillar of retirement provision in practice.
In 2028, the Federal Ministry of Labor and Social Affairs will conduct a review to ascertain whether the objectives set out in the CPSA II have been met. Consequently, the possibility of a CPSA III cannot be discounted.
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