Pension promises
Employers can supplement their employees’ statutory pension cover through voluntary pension insurance.
Voluntary pension insurance can be individual or collective:
• Individual voluntary pension insurance is taken out for individual employees
• Collective voluntary pension insurance is taken out for a group of employees and is not directed at named or otherwise individually designated persons
Because of tax restrictions on individual pension insurance, such as the retirement age and maximum contribution limits, it is not always possible to take out individual pension insurance even where there is a clear need to do so.
A carefully drafted pension promise can be the solution to the challenge of employer pension insurance.
It is a good idea to prepare a precise written description of the contents of the pension promise, taking into account in advance how the pension promise will be affected by, for example, possible changes in occupational pension legislation.
In recent years, the minimum age for entitlement to a statutory occupational pension has been lowered and is now gradually being raised again.
If the pension promise is not insured, the employer has liabilities which are usually assumed by insurance companies. If a pension promise is made to provide a lifelong retirement pension, the employer is exposed to the cost of the employee living past the retirement age projections.
Employer’s pension promise (direct supplementary pension plan)
In colloquial language, reference may be made to, for example:
- Employer’s pension promiseCompany promise
- Pension fund
- Employer-provided pension or book reserve pension
- In practice, this refers to a voluntary arrangement whereby an employer has promised his employee a pension that is supplementary to the statutory provision.
A pension promise may, for example:
• allow for an earlier start to the pension, or
• include an additional pension on top of the statutory occupational pension, paid out of the employer’s coffers
The pension promise is not separately insured, for example by a life insurance company, a pension foundation or a pension fund, but is the sole responsibility of the employer.
The employer has a protection obligation and a duty of disclosure in respect to any direct supplementary pension scheme the employer has set up.
The Act on Safeguarding Direct Pension Promises in the Event of Employer Insolvency entered into force on 1 April 2015.
Obligation to provide security
Under the act, the employer must protect at least half of the amount of the pension liability under the direct supplementary pension scheme in the event of the employer’s bankruptcy or reorganisation. This obligation applies to all employers who may be declared bankrupt and who are directly committed to a supplementary pension scheme. The obligation applies, for example, to limited companies, associations, foundations and other legal persons.
- Direct supplementary pension schemes are covered by the protection obligation only to the extent that it relates to the period of retirement. Early retirement pensions are not covered by the protection obligation.
- The protection obligation applies even if the pension benefit of a direct supplementary pension scheme has been transferred to a widow or a child under the age of 18 after the death of the employee. If the pension benefit is transferred to another person on the death of the employee, the protection obligation ceases on the death of employee.
- This obligation does not apply to a pension promise made to a managing director or an entrepreneur.
Ways of protecting a pension promise
An employer may protect the pension promise:
1. By taking out credit or surety insurance to cover the liability
2. By providing security, such as a bank guarantee
3. By depositing the security in an escrow account
4. Other similar means to secure the supplementary pension in the event of the employer’s insolvency
The employer must provide the employee or other beneficiary with a written statement of the amount of the pension liability and how the security obligation has been met by each accounting year. The statement must be submitted within four months of the end of the financial year.
Porasto’s experts can take care of pension promises on behalf of the pension promisor. Examples:
- Drafting of the pension promise agreement
- Calculation of the amount of the pension
- Pension payment
- Calculation of liability for the purposes of the financial statements and the protection obligation, and the provision of a written statement of the pension liability