From the five different methods of implementation, companies often prefer to choose insurance-oriented solutions to offer an attractive and balance sheet-neutral provision plan. The reform was triggered by a decision of the BAG (German Federal Labor Court) of May 19, 2016, which is likely to apply to all insurance-oriented solutions under Article 2 (2) and (3) BetrAVG (Act on the Improvement of Company Pensions).

The judgment affects any company that realizes provision plans via direct insurance or pension funds – regardless of whether these are employee- or employer-financed. 

Background of the judgment:

• The amount of the legally vested entitlement of a prematurely leaving employee is determined according to the quotation principle of Article 2 (1) BetrAVG (the entire entitlement is being time-proportionally reduced)
• The benefit amount calculated in this way often differs from the actual amount paid by the insurer
• The employer has the right to use an insurance-oriented solution and to set the benefit amount according to the benefit amount of the insurer

What is new:

• It is no longer sufficient to generally inform employees in the course of their employment that an insurance-oriented solution for benefits is being applied
• The employer must explicitly communicate the application of the insurance-oriented solution in connection with an employee’s leaving!

If the employer fails to meet this obligation to inform, the former employee is entitled to benefits equivalent to the legally vested entitlement according to the quotation principle. This method of determination can lead to benefit amounts different from the insurance cover, which may result in an obligation for the employer to make supplementary payments.

For future vested resignations, we recommend implementing a process for the explanation of the insurance-oriented solution to the leaving employee and the insurer which satisfies the criteria of the judgment.