What does this mean for insurance companies and pension providers?

The company pension scheme is promoted by the German Act to Strengthen Occupational Pensions (Betriebsrentenstärkungsgesetz, BRSG) of 2018. Special consideration is given to employers who provide company pension schemes for their low-income earners. The employer receives a state subsidy if it pays contributions into a direct insurance policy, pension fund or pension plan for its low-income earners.

A low-income earner is an employee whose gross income does not exceed €2,575 per month (up to 2019: €2,200).

Low-income earners are employees who are below the earnings limits specified in Section 8 of the German Social Code Book IV (Sozialgesetzbuch, SGB). This limit has no significance for the qualification under labour law. In principle, the same labour law provisions apply to low-income earners as they do to other employees. The lower earnings must not lead to the exclusion of benefit entitlements (social benefits, pension scheme). The low-income earner has a duty of disclosure with regard to other employment relationships.

Low-income earners are employees who are below the earnings limits specified in Section 8 of the German Social Code Book IV (Sozialgesetzbuch, SGB). This limit has no significance for the qualification under labour law. In principle, the same labour law provisions apply to low-income earners as they do to other employees. The lower earnings must not lead to the exclusion of benefit entitlements (social benefits, pension scheme). The low-income earner has a duty of disclosure with regard to other employment relationships.

Subsidy regulations

The legislator has laid down the following regulations for the subsidy:

  • The employer must be the employee’s primary source of employment.
  • The employee’s gross monthly income must not exceed €2,575 per month (up to 2019: €2,200).
  • The employer’s contributions must be paid into a direct insurance policy, pension fund or pension plan, provided that there are no deviating regulations in the collective bargaining agreements.
  • The employer’s contribution must amount to a minimum of €20 and a maximum €80 per month or a minimum of €240 and a maximum €960 per year.
  • The employer will receive 30 per cent of the contributions paid, which are reimbursed directly through the wage tax deduction process. The employer’s contribution paid over and above this is deductible as a business expense.
  • The employer’s contribution is paid into a policy that is does not apply a Zillmer adjustment.
  • The subsidy applies from 1 January 2018 for existing policies, provided that the contributions are paid in addition, or for newly concluded policies.

Challenges for insurance companies and pension providers

The company pension scheme is a complex issue – especially with regard to the labour and tax regulations as well as the administration of the policies. The German Act to Strengthen Occupational Pensions (Betriebsrentenstärkungsgesetz) tends to complicate the issue further instead of simplifying it. In the past, insurance companies and pension providers could offer policies that apply and do not apply a Zillmer adjustment. The legislator clearly stipulates that a policy that does not apply a Zillmer adjustment must be agreed in order for the employer’s contribution for low-income earners to be subsidised.

Ideally, the employee wants to increase their company pension by making their own contribution. Pursuant to Section 1(a) of the German Company Pensions Act (Betriebsrentengesetz, BetrAVG), every employee has the right to demand that part of their future earnings – up to four per cent of the relevant contribution assessment ceiling for the statutory pension fund – are paid into their company pension scheme through the conversion of earnings into pension contributions (deferred compensation). This means the employee waives a portion of their gross salary – every month, for instance – and the employer pays this as a contribution into an insurance policy. This usually saves the employee from having to pay social security contributions and taxes on this portion, but it also saves the employer from having to pay social security contributions on this portion in principle, too.

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. 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 challenges for insurance companies and pension providers are plentiful. The company must offer a policy that does not apply a Zillmer adjustment in order for the employer’s contribution for low-income earners to be subsidised. The issuing and administration of the policy must be as cost-effective as possible in order to comply with and in no way exceed the costs calculated in the policy. The legislator permits policies that apply a Zillmer adjustment in the case of deferred compensation, including the compulsory employer contribution. This means that two different policies are documented for the employee in practice. If the legislator increases the low-income earner threshold and the employer wants to adjust the contribution payment for its employee accordingly, the contribution cannot necessarily be increased in the existing policy. This is particularly the case if the agreed actuarial interest rate has fallen and the premium increase is to be documented in a policy with a lower actuarial interest rate.

Administering the different policies is often a major challenge due to the insufficient or a total lack of technical support. The existing administration system is often unsuitable to reconcile the administration of the policies with their different structures, such as an employer or employee-financed, varying actuarial interest rates, as well as policies that do and do not apply a Zillmer adjustment.

The technical options available are often insufficient, or those involved are unaware or do not use them. The administration of insurance policies can be simplified by adapting or expanding the insurance company or pension provider’s IT landscape. Instead of documenting and administering a multitude of policies with a wide range of different conditions for each employee, the number of policies can be reduced. This can be done by documenting a policy with different components for the employer or employee-financed contribution, provided that modern and user-friendly software such as PS|Life is used that offers these technical options. In addition, in black-box processing, processes such as application policies and regular premium increases could be fully automated and processed, that is, not require manual intervention by an employee, making a significant contribution to cost compliance and competitiveness as a result.

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Picture Sandra Weis

Author Sandra Weis

Sandra Weis is a Senior Business Consultant at adesso. She has decades of experience in project management and as a business analyst in the life insurance sector, including occupational pension schemes and biometrics.

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