Dr Mathis Schaller, employment & pension law solicitor at Gleiss Lutz
1. Dr. Schaller, why did you focus on “pension buyouts” in your dissertation? Did you encounter this topic particularly frequently in practice?
When I first heard about the possibility of transferring pension liabilities to commercial providers, the topic was still being discussed primarily in theoretical terms. Personally, I found the idea very exciting and wanted to contribute to this debate. There were already some initial practical examples - involving VEDRA Pensions. However, it was only while writing my dissertation that pension buyouts became a practical reality. Now, clients are increasingly asking us about them.
2. The Federal Labor Court (BAG) already dealt extensively with pensioner companies in its ruling of March 11, 2008 (3 AZR 358/06). To what extent does this ruling influence the academic discussion?
The discussion revolves primarily around how the BAG ruling should be interpreted from today's perspective and in light of the Accounting Modernization Act (BilMoG), which came into force shortly thereafter.
This contextualization of the ruling is important. Instead of developing its own assessment criteria, the BAG would probably now refer to the legislative assessment in Section 253 (1) sentence 2 HGB (“settlement amount”) to assess whether a pensioner company has been adequately equipped. In my view, however, the discussion of the ruling fails to take into account that the BAG did not deal with the transfer to commercial providers in its decision. It was not a matter of a commercially used pension fund. Therefore, the BAG was also unable to address the buyout-specific risk in its decision.
3. What specific risks do you see associated with buyouts, and what suggestions do you have to minimize them?
The risk does not lie solely in ensuring the pension fund is adequately funded. What happens after the transaction is particularly important. In my view, the risk specific to buyouts is an impending loss in value of the fund due to the buyout provider's focus on achieving excess returns while neglecting the security of benefits. The business model therefore involves a conflict of objectives that must be balanced by the providers themselves. For 'black sheep', this creates potential for abuse that can harm reputable providers and also the wider acceptance of pension buyouts.
That is why I have proposed an expanded protection concept, the 'obligation to secure funding', which can be summarized as follows: Simply securing the performance of a pensioner company through a one-off provision does not adequately protect the contractual purpose of the pension commitment. Employers cannot expect 'pay-and-forget' liability relief if they transfer direct commitments to a for-profit provider that decides its own risk profile. In my opinion, therefore, the employer's prospect of final exemption from liability must correspond to an expansion of their obligations – in other words: 'pay-ensure-and-forget'.
Transparent fulfilment of this obligation simultaneously strengthens confidence in the model and helps to avoid unjustified prejudices.
4. What exactly does this benefit protection obligation you are proposing look like?
I do not think it is correct to impose strict limitations on employers and pension buyout providers. Every buyout transaction has its own specific characteristics and risks. The “guaranteed funding” should primarily ensure that the funds are used for their intended purpose, that benefit adjustments under Section 16 of the German Occupational Pensions Act (BetrAVG) are secured separately and that the risk of a value loss due to the buyout provider's investment strategy is minimized. In my dissertation, I examined various security measures that the parties can implement and assessed how they interact to determine whether the employer has fulfilled their obligation to secure the assets.
5. How do you see the future of the pension buyout market, especially now that several new providers are entering the market and some existing “prejudices” have been dispelled?
My impression is that most providers already place great importance on managing their pension liabilities in a way that reflects the level of risk involved. This is evident, among other things, from the interest in my work. This awareness of risk is also one of the reasons why pension buyouts are becoming more commonplace. I am optimistic that, in the long term, the model will become a standard tool for dealing with pension liabilities, for example in connection with M&A transactions or liquidations.
VEDRA conclusion and open question to the community:
Practice shows that providers such as VEDRA Pensions already have a very high level of risk awareness. But is that enough? Or, as with other financial products, are binding rules necessary to prevent abuse and secure the long-term trust of all parties involved, so that buyouts can become a "standard product”?, um Missbrauch zu verhindern und das Vertrauen aller Beteiligten langfristig zu sichern, sodass der Buy-out zu einem „Standardprodukt“ werden kann?
Wir von VEDRA Pensions gehen davon aus, dass sich der Buy-out in den kommenden 5-10 Jahren zu einem etablierten Werkzeug im Umgang mit Pensionsverbindlichkeiten entwickeln wird – vergleichbar mit der Entwicklung von Contractual Trust Arrangements (CTA) in den 2000er-Jahren. Aus unserer Sicht wird dabei Folgendes entscheidend sein:
- Security through equity capital: As a risk carrier, VEDRA invests its own funds in the capital structure alongside the transferring company. This is a conscious decision, not a formal requirement, based on the understanding that the role of a risk carrier requires risk capital. It is crucial that the risk of insufficient RG capitalization is addressed in a sustainable manner.
- Trust via transparency: It is crucial that providers continue to demonstrate how they manage the aforementioned risks specific to buyouts.
- Regulatory clarity: A uniform interpretation of BAG case law (also in light of BilMoG), and if necessary, the implementation of industry-wide standards, would increase legal certainty.
- Success stories: The growing number of positive experiences with pension buyouts in companies, including in relation to transaction processes, means that this model is becoming increasingly standardized.