Enjoying carefree retirement – with the certainty that the company pension is covered via a pension fund – should not be a problem. But what happens if the pension fund runs into economic difficulties and has to cut its benefits? Normally, the employer must then fill the resulting pension gap. But what happens if the employer also files for insolvency? First, the good news: Since January 1, 2022, company pensions via pension funds have become more secure for employees. This is because pension funds now also fall – at least for the most part – under the insolvency protection of the Mutual Benefit Association for Pension Security (Pensionssicherungsverein auf Gegenseitigkeit, PSVaG or just PSV). In specific terms, this means that if the pension fund is unable to provide the full benefits promised by the employer and if the employer is also unable to step in due to insolvency, the PSV will cover the resulting gap!
This means that all four methods of implementing company pension plans – the direct commitment, the direct insurance, the support fund and the pension fund – are now covered by the PSV against insolvency under certain conditions.
Risk assessment by PSV certificate
In the future, employers who have promised their employees a company pension through a pension fund will have to pay contributions to the PSV, which will finance the costs incurred. To determine the required contribution, each employer who is a member of the PSV must submit a so-called PSV certificate to the PSV by September 30 of each year. This is used to estimate the volume of risks to be insured by the PSV. For this purpose, the number of affected commitments must be determined separately for beneficiaries and members with vested benefits, and the annual pension benefits for these commitments must be assessed. This assessment results in the so-called contribution assessment basis.
Based on the reported contribution assessment bases and the number of claims incurred in that year (including a forecast for the rest of the year), the PSV sets the contribution rate to be paid for the current year in mid-November.
Today, the PSV has a total of 100,000 contributing members and covers 13.8 million beneficiaries. This means that a capital value of 368 billion euros is under the protection of the PSV. To date, the PSV has stepped in to cover 20,000 claims and has made payments totaling 29 billion euros.
Why now a PSV obligation for pension funds too?
Discussions about also covering commitments made through pension funds through the PSV have been going on since 1974, but the decision to do so was not made until 2020 and was influenced primarily by two factors: on the one hand, the low-interest phase that has now lasted for more than a decade is increasingly causing financial problems for pension funds, and on the other hand, on December 19, 2019, the ECJ ruled that under the European Insolvency Protection Directive, at least a certain minimum level of retirement benefits must always be protected against insolvency. The full protection that has now adopted goes far beyond this minimum and is thus intended to further strengthen confidence in company pension plans.
The exceptions to the PSV obligation previously mentioned in the introduction are understandable: pension funds that belong to the Protektor protection scheme are already protected against insolvency by this scheme and therefore do not require any additional protection by the PSV. This is also unnecessary for public-sector institutions such as the VBL, since public-sector employers cannot become insolvent.
The protection for a company pension plan implemented via pension funds only takes effect for insolvencies from 2022 onwards. For old cases, only the minimum level prescribed by the ECJ is protected and, in this case, although handled via the PSV, it is paid by the federal government, as no employer contributions have been made to the PSV for this period.
Special features for pension funds
In the years 2021 to 2025, employers who implement their company pension plans via pension funds will also have to pay increased contributions to the PSV in order to build up security assets for these commitments for particularly high-loss years in addition to covering ongoing costs, as is the case for the other implementation methods.
However, one risk remains for employees: In the event of an employer's liquidation, the commitment can be taken over by the pension fund itself without the employee's consent. If the pension fund later reduces the benefit due to economic difficulties, there is no longer an employer who could cover the resulting gap, and since there is no insolvency in this case, neither is the PSV responsible. This gap in coverage is justified by the fact that it cannot be the task of the PSV to assume the complete investment risk of the pension fund.
If an employer becomes insolvent, the supervisory authority (usually BaFin) checks whether the pension fund could also become distressed as a result. If this is the case, the supervisory authority can order a transfer of the capital attributable to the employees of the employer in question to the PSV, which then takes over the entire commitment.
An overdue step that strengthens trust
The inclusion of pension funds in the protection of the PSV is a very sensible and is even an overdue step. It guarantees a strong protection against insolvency for all implementation methods of company pension plans, which is generally indispensable for strengthening confidence in pension schemes due to the long-term nature of the commitments.
With in|sure CollPhir adesso insurance solutions GmbH offers a standard software solution for the administration of company pension plans, which can also automatically generate PSV certificates in the implementation methods for support funds and pension funds, by taking into account all special features. In this way, employers can also avoid unnecessarily increased PSV contributions that arise when, in order to simplify the calculation, (partial) entitlements are also included in the contribution assessment basis that are not yet subject to PSV. Although such contributions without a legal basis are not rejected by the PSV, they do not trigger any obligation on the part of the PSV to pay in the event of insolvency. Consequently, they do not offer any benefits to the employees concerned.