Employer’s pension commitment

In the case of an employer’s pension commitment, the employer undertakes vis-à-vis the employee to provide specific occupational provisioning benefits. This can be an old age, invalidity or survivor’s pension. The costs can be borne by the employer or the employee in the form of salary sacrifice.

The employer recognises the corresponding provisions in the balance sheet for the liabilities under the commitment on a regular basis during the term of the employment relationship.

To finance the provisioning claims, it is wise to take out reinsurance or to back the commitments reported in the balance sheet with separate assets, such as investments in securities (“funding”).

There are no investment rules or regulatory supervision for an employer’s pension commitment. There is a certain level of security in the event of insolvency through the Pensions Insurance Association, into which the insolvency guarantee contributions are to be paid by the employer once the pension becomes vested under law.

Neither the employer’s pension commitment nor the conclusion of a reinsurance policy gives rise to a tax liability on the part of the employee. However, the provisioning benefits paid under the employer’s pension commitment are treated as taxable income. Employer’s pension commitments are not eligible for state incentives under AVmG.

As a result of the internal financial impact of the employer’s pension commitment, this form of provisioning was used in the past by many companies to build up additional retirement provisioning for employees whilst avoiding liquidity outflows. Of course, many companies are now seeing the other side of the coin here and find themselves in a stranglehold produced by the clear increase in the biometric risks and the associated insufficiency of provisions. Such companies require in-depth advice from financing experts such as ourselves.