8. July 2020

Pension commitment

Direct pension commitments to controlling managing directors and members of the management boards of corporations are part of the general equipment standard for this group of persons. According to current estimates, the number of such commitments amounts to more than one million in Germany. Against this background, this consulting field is on everyone’s lips in daily consulting practice. Tax and financial consultants are active in the most complex and demanding field of occupational pension provision.

In addition to the indispensable legal assessment and review, the main starting points in qualified consulting within the framework of a pension commitment granted or to be granted to the above-mentioned group of persons are the company-internal tax and accounting control options through the use of a pension commitment. This results in numerous advantages and effects both from the point of view of the company and the person entitled to benefits.

A pension or direct commitment to the above-mentioned group of persons is a civil law benefit commitment by the company to the controlling shareholder-managing director or shareholder-managing board to make a fixed pension payment in the event that certain conditions for benefit are met. As a rule, these benefit conditions are retirement from the company due to age or occupational disability. However, pension payments for surviving dependants in the form of widow’s or orphan’s pensions are also possible if the death of the person entitled to benefits is defined as a prerequisite for receiving these benefits under the pension commitment.

It should also be noted that this group of persons fulfils a “double function”. On the one hand, there is the representative of the company with representative and management functions, on the other hand, there is the (co-)owner of the company. For this reason, the managing director or board of partners is managed as an employee from the point of view of wage tax, but as an entrepreneur from the point of view of labour law. Against this background, such pension commitments do not fall within the scope of protection of the BetrAVG – German Company Pension Act, so that, for example, insolvency protection for pension commitments to the aforementioned group of persons cannot be provided by the statutory insolvency protection of the “PENSIONS-ASSURANCE-ASSOCIATION, mutual insurance association”. Rather, insolvency insurance under civil or private law must be provided.

In the case of intra-company financing of pension commitments to controlling managing directors or members of the management board, both the assets and liabilities sides of the company balance sheet must be considered:

The “basic financing” of a pension commitment takes place via a tax-effective formation of provisions in the company’s income tax balance sheet. Section 6a of the German Income Tax Act (EStG) regulates the relevant prerequisites for the recognition of a profit-reducing pension provision. The difference between the pension provision at the beginning and end of a financial year results in the annual amount of the allocation to the provision and the reversal of the provision. Only the balance of all allocations and reversals for the individual pension obligations is recognized in the income statement. This results in period-related liquidity advantages for the company which can be used to finance the pension obligation from the pension commitment. This means that, as a rule, the company concerned will build up assets on the assets side of the balance sheet which will bear the pension benefits to be paid at a later date. In this context, however, it should be noted that a company is under no obligation to finance or “re-fund” a pension commitment to a shareholder-managing director or to a shareholder-managing board. For many companies, especially in medium-sized companies of the Federal Republic of Germany, it is, however, often indispensable to select a reinsurance investment to finance the pension obligation. Otherwise, the company would bear the unmanageable risk of having to finance the subsequent pension benefits from ongoing business operations, which could then lead to situations threatening the existence of the company.