Germany: Adjusting Occupational Pension Plans To Upcoming German Pensions Act Amendments
Practical Implementation And Recommended Actions

Pension law in Germany will be significantly amended by the transposition of the European Mobility-Directive (Directive 2014/50/EU) into German law, as announced on December 30, 2015. The new rules will come into effect in 2018. Employers that operate pension plans in Germany should use the time remaining to thoroughly analyze the impact of the new rules on their pension plans and to make any necessary adjustments.

THE ACT'S MAIN CONTENT

New Rules on Vesting, Sec. 1b, para. 1, BetrAVG (new)

The vesting period for acquired pension entitlements will be reduced from five years to three years. The minimum age for the accrual of vested pension entitlements will be reduced from 25 years to 21 years.

Prohibition of Discrimination Against Former Employees, Sec. 2a, para. 2, BetrAVG (new)

In contrast to the current rules, which provide for static vested entitlements, under the new rules, any plan amendments or changes to the benefit calculation will also have to be applied for former employees with vested entitlements or pensioners if non-application would disadvantage these individuals relative to comparable active employees. The new law offers a range of possibilities as to how such disadvantages can be avoided by adding specific adjustment mechanisms to the plan rules.

Stricter Requirements on Compensation for Mini Pension Entitlements, Sec. 3, BetrAVG (new)

If a former employee begins a new employment relationship in another EU member state, pension entitlements vis-à-vis his former German employer can only be paid out as a lump sum with the employee's consent and if the employee informs his former employer about his new employment no later than three months after termination of the employment relationship. This applies only to mini pension entitlements. All other lump sum payouts remain prohibited.

Broader Information Rights of Current and Former Employees, Sec. 4a, BetrAVG (new)

At an employee's request, employers and pension providers must inform the employee if and how the employee may acquire pension entitlements, about the current value of the pension entitlements and the expected benefits upon reaching retirement age, about the effects of a termination of the employment relationship on the pension entitlements and how the employee's entitlements will increase after such termination. The information must be comprehensible in text form and must be provided within a reasonable period of time.

Employees with vested entitlements and pensioners must be informed about the amount and the expected future increase of their pension entitlements.

ADDRESSING THE NEW RULES IN PENSION PLANS – BEST PRACTICE

Given the complexity of the subject matter, it is obvious that there is no one-size-fits-all solution to address the changes in the law concerning pension plans. All employers are advised to investigate and identify potential pitfalls in their pension plans.

First Step: Analyze the Status Quo

As a first step, employers should diligently review and analyze existing plan rules. Building on the results of this exercise, we recommend the following high-level implementation steps:

Actions Regarding the New Vesting Rules

• Provisions in pension plans that cite the current or former rules on vesting will become invalid in 2018. To avoid the potential for misunderstandings and disputes, it is recommended to adjust the text of these provisions accordingly.

Action to Avoid Discrimination Against Former Employees

• Pension plans that were still open to new entrants on May 20, 2014, and either provide for a static continuity of former employees' vested pension entitlements or are silent on this point need to be supplemented with provisions to avoid discriminating against former employees.
• The new law offers a set of structuring possibilities. To determine the best fit solution legal certainty as well as economic effects need to be considered in each case.

Action Regarding the New Information Rights

• Any template information letters should be revised.
• The new requirement that information needs to be provided in "a comprehensible way" raises the standard for the unambiguous quality of the content and requires that the text be comprehensible for a well-informed layperson.

The necessary actions described will often require the involvement of employees or their representative bodies. This can be a good opportunity to update any other rules that are no longer in compliance with the law or contemporary standards.

In addition to these legal aspects, administrative systems as well as the respective communication tools for employees may have to be adjusted. For these reasons, we recommend taking the aforementioned actions promptly.

Originally published 16 June 2016

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.