7. October 2021 By Sandra Weis
Contribution ceiling is set to be lowered – this also affects company pension schemes
Article 1a of the German Company Pensions Act (Betriebsrentengesetz, BetrAVG) regulates the entitlement to a company pension through the conversion of earnings into pension contributions. This states that the employee has the right to demand that their employee pay part of their future earnings – up to four per cent of the relevant contribution assessment ceiling for the statutory pension fund – into their company pension scheme through said conversion of earnings into pension contributions (deferred compensation). This is an important measure to protect workers from old-age poverty. In the past, the maximum taxable contribution for company pensions could be raised or lowered – generally the former – via an annual adjustment of the contribution ceiling. But everything has changed now due to COVID-19. The social security ratio for 2022 is based on wage growth in 2020, which was negative. According to the draft bill from the BMAS, the contribution ceiling for 2022 will be adjusted accordingly, i.e., it will be lowered for western Germany. This also has implications for company pension schemes.
Expected calculation basis for 2022
Pursuant to Article 3(2) of the BetrAVG, vested entitlements may be paid by the employer without the consent of the employee if they do not exceed a de minimis limit. Adjustments are also expected for 2022.
Effects of the adjustment of the contribution ceiling on company pension schemes
There will be no additional compliance work for companies. In addition, no new information requirements will be introduced or amended nor will existing ones be waived, at least according to item E.2 in the draft bill from the BMAS. Whether this will also apply to company pension schemes has not been determined.
Let’s assume that an employee agrees with the company that part of his or her future earnings – four per cent of the relevant contribution ceiling – will take the form of deferred compensation. The employee therefore waives a portion of their gross salary – every month, for instance – and the company pays this as a contribution into a pension fund policy. The German Act to Strengthen Occupational Pensions (Betriebsrentenstärkungsgesetz, BRSG) coming into force in 2018 meant that employers were obliged to support their employees in building up a pension by making a contribution to their deferred compensation if certain conditions were met. Previously, this contribution was only obligatory for new policies dated 1 January 2019 or later. As of 1 January 2022, employers will be obliged to pay this contribution for all existing deferred compensation policies. The employer contribution amounts to a flat rate of 15 per cent of the deferred compensation amount – provided that the employer actually saves the social security contributions.
The regulations on reinsurance-funded pension plans present a unique challenge, since policymakers require that contributions remain constant or increase under Article 4d the German Income Tax Act (Einkommensteuergesetz, EStG) in order for the contributions to be recognised for tax purposes.
Implications for employers
If the contribution ceiling is lowered, not only will the contribution for deferred compensation be smaller (in this case: the pension fund policy), but the employer contribution could also change. The employer is required to take the adjusted amount of deferred compensation into account in payroll accounting. The employer contribution must be adjusted unless it continues to voluntarily pay this at the same, unchanged rate. The new total contribution will need to be paid to the insurance company or the pension provider – in this case, to the pension fund.
Implications for employees
The benefits provided by the insurance company or pension provider resulting from the deferred compensation decreases and the pension gap for the employee increases, even if it is only a one-time reduction and a small one at that. The employee is notified of this in corresponding documentation, such as the addendum to the insurance policy.
Challenges for insurance companies and pension providers
Insufficient or a total lack of technical support is often a major challenge. This is especially true in cases where employers would like to continue to pay the 2022 employer contribution at the same rate they did in 2021. Variable premium products, where payments made to the insurance company or pension provider are included as a boilerplate in the insurance policy, can however also present a number of challenges. Employers could make contributions that exceed the maximum amount free from social security contributions. The insurance company would then need to find ways to deal with challenges like this.
In addition, the existing administrative system is often not fully suitable to handle a reduction in the contribution ceiling or automatically process the transactions resulting from this.
Information and communication needs
There is clearly an increased need for information and communication on the part of all parties involved. This includes, among other things, acquiring information in order to be able to make decisions, preparing information in a manner suitable for the target audience and then making the content available to the relevant parties involved via different communication channels.
The time required for implementation and the increased need for information and communication should be kept within limits. It’s important to take a practical approach while also still considering the possible implications and defining appropriate measures. Possible measures by employers and insurance companies or pension providers could include:
- Obtaining professional support
- Improving technical support
- Using a variety of different communication channels
- Preparing documentation such as informational material, workarounds and telephone guidelines
- Making changes to resource planning to account, for example, for an increased volume of calls
Experts with practical experience and extensive business expertise should verify the effects as well as define and, if necessary, implement appropriate measures based on this information. They should be familiar with the topic of company pension schemes and also have technological skills in order to assist in making the necessary changes to the IT systems, such as the administrative system, if necessary.
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