Germany: Compulsory employer contribution for deferred compensation

The year 2022 has hardly begun and already brings new challenges for employers. As of 1 January 2022, employers are obliged to pay an employer contribution to all deferred compensation in occupational pension schemes. According to the Occupational Pensions Reinforcement Act (Betriebsrentenstärkungsgesetz, “BRSG”), the employer contribution was initially only to be granted to employees who started deferred compensation on or after 1 January 2019. From January 2022, employers are now obliged to pay the corresponding contribution for all deferred compensation, whether agreed individually or collectively, regardless of the date the deferred compensation contract was concluded.

Employers and pension providers are therefore facing pressure to act. At the same time, uncertainty is spreading: How is the statutory employer contribution to be calculated? What effects does this have on existing (voluntary) employer contributions? What options are there with regard to existing deferred compensation contracts?

Calculation of the employer contribution

The BRSG, which has been in force since 2018, stipulates that employers who carry out deferred compensation via a direct insurance policy (Direktversicherung) or pension fund (Pensionskasse or Pensionsfonds) and save social security contributions in the process must subsidise the deferred compensation amount of their employees. The compulsory contribution is generally 15% of the deferred amount, but is limited in each case to the savings in social security contributions that result for the employer from the social security-free deferred compensation. The only exception of this is if an applicable collective agreement contains a provision that deviates from the BRSG.

Employers have the choice of either providing a compulsory contribution in the exact amount of the social security contributions saved, limited to 15% of the deferred compensation. In this way, employers ensure that only the statutory prescribed minimum amount is paid as a contribution. However, the resulting administrative efforts should not be neglected, as the contribution would have to be calculated individually and on a monthly basis for each employee who carries out deferred compensation. In order to limit the administrative efforts, there is the option of granting a lump-sum contribution, which may, however, result in a somewhat higher contribution as statutory required. Which of both options is recommended for the employer depends on many factors and must be assessed in each individual case.

Crediting of voluntary contributions

It is not possible to give a general answer as to whether a contribution for deferred compensation already granted by the employer on a voluntary basis, irrespective of the statutory obligation, can be credited against the statutory minimum contribution. Rather, the creditability particularly depends on the respective underlying agreement on which the deferred compensation is based. In view of this, employers are urgently advised to review existing deferred compensation agreements to assess whether the provision with regard to the employer’s contribution contained therein already credits the statutory contribution obligation.

If the deferred compensation agreement does not contain a creditability clause, the creditability of voluntary contributions is to be assessed according to the objective of the respective employer contribution. If the employer grants the voluntary contribution independently of deferred compensation, it cannot be credited against the statutory compulsory contribution. Particularly controversial are voluntary employer contributions where it remains unclear whether they are granted because of the saving of social security contributions. Some German legal literature considers it sufficient if the employer wants to promote deferred compensation by means of the voluntary contribution. If the employer has already connected the voluntary allowance with the social security savings in the past, it should be permissible to credit it against the statutory compulsory contribution. In order to avoid ambiguities in this regard, future deferred compensation agreements should always provide for the possibility of creditability. Employers should examine the possibility of adaptation for old contracts.

Options for arrangement and adaptation

Especially in the case of existing deferred compensation agreements, the arrangement of the now obligatory employer contribution can cause problems. First and foremost, it can be possible to pay contributions into existing deferred compensation agreements. However, the payment into existing agreements may fail because the respective pensions insurer does not allow the contribution or at least not completely (e.g. due to high guaranteed interest rates in old deferred compensation agreements). In this case, it would have to be assessed whether the pensions insurer itself allows the payment of the contributions into a new deferred compensation agreement. If this is not possible, paying the contributions into another method of implementing the occupational pension scheme may be considered, but must be assessed in each individual case.

If none of the above-mentioned options leads to success, the reduction of the deferred compensation could be considered, with the consequence that the employer’s contribution must be paid on the lower amount. The supplementing of the reduced deferred compensation amount by means of the (higher) statutory employer’s contribution might be used to continue the deferred compensation contract unchanged by paying in an amount in the previous level.

Regardless of which option for arrangement is chosen, an agreement between employers and the employees concerned is required for the adjustment of the deferred compensation agreement. A unilateral adjustment by the employer without the consent of the employee concerned is not possible.

Prospects for practice

Offering occupational pension schemes is now part of the standard programme of employee benefits and is therefore a mandatory prerequisite in many sectors in order to remain attractive as an employer. In this context, deferred compensation continues to enjoy great popularity among employees in Germany. This applies even more if deferred compensation is subsidised by the employer. In view of the mandatory employer contribution, however, employers must review existing deferred compensation agreements and adapt them to the new legal situation, if necessary. In particular, employers should keep in mind the administrative effort, which should not be neglected, that arises from an individual and cent-precise monthly calculation of the mandatory employer contribution and consider alternative solutions.