Pension Protection in the Draw-Down Phase: Approaches to Maintaining Pension Longevity - The German Perspective

1. Pension Protection in the Draw-Down Phase: Approaches to Maintaining Pension Longevity- The German Perspective IPEBLA Conference 2013 Rome, Italy May 2013 Dr. Nicolas Roessler Partner + 49 69 7941 2231 nroessler@mayerbrown.com

2. Agenda • Can participants receive benefits at times other than retirement? Are there any penalties for doing so? • What are permissible forms of payment from plans? Specifically, are annuity payments standard/common/permitted from DC plans? From DB plans? • Do plans have investment options (participant-directed or otherwise) that are structured to provide a change in investment as the participant nears retirement and/or retirement age? • Are participants permitted to transfer/”rollover” retirement savings? If so, are those opportunities limited to any specific type of plan/savings account/annuity? • What type of obligations do employers/plan sponsors have with respect to participants who are no longer active employees? What about participants with unclaimed benefits?

3. Can participants receive pension/benefits at times other than retirement? • Yes, under Sec. 6 ofthe German PensionsAct (BetrAVG) • Participantsareentitledtobenefitsasofthedayatwhichtheydraw an old-agepension in the German statutorypensionscheme • Earliestpossibleagevariesdepending on type ofold-agepension (e.g. age 60 forhandicappedparticipants, age 62 forparticipantswith 35 contributionyears, born after 01 Jan 1952) • Createsparallelismbetweenoccupationalold-agepensionsbenefits and statutoryold-agepensionbenefits

4. Are there any penalties if participants receive benefits at times other than retirement? • Noautomatism • Depends on plan rules • Plan rules must be transparent and in linewiththedoctrineof just and equitabletreatment • In theabsenceofspecificlanguage in the plan rules: gap must befilledbymeansofinterpretation (worksonlyfor pre-1975 plans) • PracticalImplementation • Regularlyactuarialreductionsof 0.5% ofbenefits per monthofearlierdrawing • In so-called „bricksystems“, in whichone „pensionbrick“ isearned per year, nofurtherbricksareearned

5. What are permissible forms of payment from plans? • Generally every form ofpaymentispermissible • annuitypayments • lump sumpayments • installments • benefits in kind (electricity, housing, gas, coal, etc.) • Toqualifyas a „pension“ in themeaningofthe BetrAVG, thebenefit must begrantedwiththepurposetoensurethebeneficiary‘s (orhis/her dependants‘) standardofliving after retirement

6. What are permissible forms of payment from plans? • Are annuity payments standard/common/permitted from DC/DB plans? • Always minimum benefit guarantee in Germany (“pure” plans not statutorily recognized) • Payment form mainly depends on financing method (Durchführungsweg). Very generally speaking, the typical payment forms are:

7. Do plans have investment options (participant-directed or otherwise) that are structured to provide a change in investment as the participant nears retirement and/or retirement age? • Manymajorplanshaveadaptedliabilitydriveninvestmentorlifecycleinvestmentset-ups in the last fiveyears • lifecyclemainlyfor so-calledcontribution-oriented DB plans (employerpaysdefinedcontribution, but isliablefor a certainbenefit, whichiscalculatedactuariallyatthe time atwhichthepensionpromiseismade) • liabilitydriveninvestment strategies mainlyformore traditional DB plans • Rarelyanyparticipant-directedinvestment • employerbearsriskofminimumbenefit • insurancecompaniesneedtomeetminimuminterestrequirements and generateprofit • Somecompanyorindustryspecificfundingvehicles (Contractaul Trust Arrangements, German pensionfunds, etc.) have „investmentcomittees“, withseatsforemployee/unionrepresentatives • Somenewplansoffer „investmenttoys“

8. Are participants permitted to transfer retirement savings? • Transfer fromoccupational plan tooccupational plan: • Governedby Sec. 4 BetrAVG • transferallowedbased on voluntaryagreementbetweenoldemployer and newemployer and employee: • transferofliability and underlyingpensionpromisefromoldemployertonewemployer, or • transferof so-calledtransfervalue (Übertragungswert) fromoldtonewemployer, providedthatnewemployergivespensionpromiseof „equalvalue“ (wertgleich) • Whatisthe „transfervalue“? • Calculateddifferently, depending on financingmethod: • presentvalue (Barwert) ofvestedentitlements in caseofdirectpromiseorsupportfundpromise • valueofaccruedcapital in caseofdirectinsurance, German pensionfundorPenisonskassepromise

9. Are participants permitted to transfer retirement savings? • Transfer fromoccupational plan tooccupational plan: • Governedby Sec. 4 BetrAVG • transferallowedbased on voluntaryagreementbetweenoldemployer and newemployer and employee: • employeerequeststransferoftransfervaluefromoldemployertonewemployerwithinoneyear after end ofemployment relationship, and • pensionisfinanced via German pensionfund, directinsuranceorPensionskasse, and • transfervaluedoes not exceedsocialsecuritycontributionceiling (roughly 67 k EUR) => backedbycorresponding „bestpracticetransferguidelines“ on German insuranceindustry

10. Are participants permitted to transfer retirement savings? • Transfer fromoccupational plan to private plan: • Generally possible and commonstandardthatemployeescontinuedirectinsurancecommitmentswith private contributions after end ofemployment relationship

11. What type of obligations do employers/plan sponsors have with respect to participants who are no longer active employees? What about participants with unclaimed benefits? • Pro rataentitlementsvestfiveyears after pensionhasbeenpromisedifemploymentends after age 25 • Employerisalways (secondary) liableforvestedentitlements, i.e. employer must pay in caseexternalfundingvehicleisunable • Participantshaveinformationrightsasregards • levelofbenefitsatretirementage, and • amountofthe „transfervalue“ (Übertragunsgwert), i.e. lump sumthatthenewemployerwouldhavetopaytothecurrentemployer in caseemployeechangesemployers • Adjustmentofbenefits • either 1% increase per year, or • testeverythreeyearswhetherbenefitscanbeadjustedtodevelopmentofcostsofliving in lightoftheemployer‘seconomicsituation

12. Dr. Nicolas Rößler, LLM Nicolas Rößler is a partner in the Employment and Benefits practice in Mayer Brown’s Frankfurt office. He advises and represents national and international clients in all areas of individual and collective employment law and in connection with the set-up and restructuring of benefit schemes. His work especially focuses on matters concerning occupational pension schemes, especially the implementation of funding mechanism for such schemes such as German pension funds or Contractual Trust Arrangements (CTA). Nick also regularly advises his clients on restructurings and employment and pensions law issues in M&A transactions. Nick heads our German pensions product group, in which Mayer Brown combines forces from different practice groups, such as finance, tax, employment & benefits and insurance to provide interdisciplinary full-service legal advice on all matters related to occupational pensions, including plan mergers and asset management and selection advice. Nicolas is a regular speaker on employment and pensions law topics at seminars and conferences. He has lectured at King’s College School of Law in London on European Employment Law. Dr. Nicolas Rößler, LLM Partner, Frankfurt Practice: Employment & Benefits nroessler@mayerbrown.com T: +49 69 79 41 2231

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