Reinsurance: Optimising financial security for occupational pension schemes
5 Apr 2025
10
Minutes
Katrin Straub
CEO at nextsure
A pension commitment is a powerful tool for employee retention but poses financial risks for companies. Reinsurance provides a proven solution to externally secure these risks and to solidly finance company pensions. Discover how you can optimally use this tool for your company.
The topic in brief and concise terms
A reinsurance policy is a life insurance taken out by the employer to fund pension commitments to employees and serves for risk outsourcing.
It offers advantages such as balance sheet optimisation, proof of the seriousness of the commitment, and insolvency protection (particularly for managing directors through pledging).
The contributions are operating expenses; an offsetting of pension provisions and insurance asset value is possible under certain conditions.
Understanding the Basics of Reinsurance
A reinsurance policy is a life or pension insurance contract taken out by an employer. It is used to finance pension commitments to its employees. The employer is the policyholder and contributor. In the event of provision, the benefits from the insurance flow to the company, fulfilling its obligations to the employee entitled to a pension. The reinsurance policy itself is not a method of implementing occupational pension schemes, but rather a financing tool. It helps to transfer the risks associated with direct promises, such as longevity or premature disability, to an external insurer. This creates planning security for the company, which must at least ensure the preservation of the contributions paid.
Maximising benefits for businesses and employees
Taking out a reinsurance policy offers companies several advantages. One significant plus is the outsourcing of biometric risks. Additionally, it can improve the appearance of the balance sheet and serves as evidence of the seriousness of the pension commitment to the tax authorities. For shareholder-managers (GGF), pledging the reinsurance policy can achieve sustainable insolvency protection. Employees benefit indirectly from the increased security of their promised pension benefits. The contributions to the reinsurance policy are operating expenses for the employer. The company's liquidity is initially not burdened by the creation of pension provisions. Financing is achieved through insurance contributions. This can positively influence a company's creditworthiness, as rating agencies evaluate the securing of pension obligations.
Consider accounting and tax aspects
In the company's balance sheet, the pension obligation is recognized as a liability. The claims from the reinsurance policy are recognized as an asset. According to § 246 para. 2 HGB, there is generally a prohibition on offsetting. Under certain conditions, particularly in the case of pledging and when the policy qualifies as so-called plan assets, offsetting is possible. This can reduce the balance sheet total and improve the equity ratio. For tax purposes, contributions to the reinsurance policy are deductible as business expenses. The later benefits from the policy are considered business income for the company. For the employee, the contributions to the pension commitment are tax-free during the accumulation phase; only the subsequent pension payments are subject to downstream taxation, often at a lower personal tax rate. A careful consultation with the tax advisor is essential when setting it up. The tax treatment of direct insurance differs from this.
Optimally choose design possibilities and commitment types
Reinsurance policies can be utilised for various types of commitments. A distinction is made between benefit commitments and contribution-oriented benefit commitments. With congruent reinsurance, the services from the insurance are exactly aligned with the pension commitment. This is often the objective to achieve full financing. However, there are also partial reinsurance policies that only cover certain risks (e.g., death) or parts of the commitment. Designing the term life insurance as reinsurance is one option. Companies should carefully examine the form that suits them best. The following aspects are important when selecting:
Level of guaranteed benefits.
Flexibility in premium payments (ongoing or single contributions).
Handling of surpluses (offsetting or benefit increase).
Investment options (traditional or unit-linked).
A thorough analysis of needs and objectives is crucial. This leads to the next consideration: the specific situation of managing directors.
Mastering the Exceptional Case of the Shareholder-Director (GGF)
Special tax requirements apply to pension commitments for shareholder-managers (GGF) of corporations. The commitment must be business-related and meet criteria such as seriousness, affordability, and appropriateness. A waiting period of usually two to three years after starting employment is often required. The pension commitment must not permanently endanger the company's viability. Financing is generally assured for reinsured commitments if the ongoing contributions are manageable. Pledging the reinsurance policy to the GGF is a common method for insolvency protection. This is especially relevant, as the GGF often does not fall under the protection of the Pension Protection Association (PSVaG). The amount of the commitment should not exceed 75 percent of the active salary to avoid a hidden distribution of profits. The whole life insurance can play a role here.
Understand practical examples and payout modalities
A typical example: A company promises a senior executive a monthly pension of 750 euros at retirement age. To finance this, it takes out reinsurance, which provides a corresponding capital or annuity payment upon retirement. The payout from the reinsurance can be made as a one-off capital payment or as a lifelong annuity. This flexibility is an advantage. The decision depends on the individual design of the pension commitment and the preferences of the beneficiary. It is important that the payout modalities of the reinsurance align with the obligations from the pension commitment. The choice between an annuity and a life insurance policy as reinsurance affects the options. In the event of a claim, the insurer pays the company, which then provides the benefit to the employee. In the case of a pledge, the employee can have direct claims against the insurer in the event of the company's insolvency.
Expert Depth: Consider legal frameworks and recent rulings
The Occupational Pensions Act (BetrAVG) forms the central legal foundation for occupational pension schemes in Germany. It regulates, among other things, the non-forfeitability of entitlements and insolvency protection. For reinsurance policies, § 1b BetrAVG is relevant, which governs the maintenance of entitlements when an employee leaves the company. Recent rulings can influence interpretation and application. For example, the Federal Labour Court has decided that changes in accounting regulations alone are not a reason for subsequently altering pension commitments, even if they result in higher provisions. A ruling by the Federal Fiscal Court (BFH) dated 11 May 2023 (V R 1/21) dealt with the tax exemption of a pension fund when interposed as reinsurance. Our expert tip: Have the pledge agreement legally reviewed to ensure optimal protection in the event of insolvency. The Pension Fund of the German Economy is another player in the occupational pension environment. The complexity often requires specialised advice.
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More useful links
Wikipedia provides a comprehensive overview of reinsurance.
Federal Ministry of Labour and Social Affairs (BMAS) offers official information on occupational pensions.
Publications of the German Federal Government include a publication on occupational pensions.
Federal Ministry of Finance provides a statement from the German Insurance Association (GDV) on the law to modernise the Insurance Tax Act.
Federal Statistical Office (Destatis) contains press releases and statistics that may be relevant to occupational pensions.
German Pension Insurance offers a brochure on occupational pensions.
Association for Occupational Pensions (aba) is a leading association for occupational pensions in Germany.
IHK Munich provides information on occupational pensions, particularly on tax aspects.
Pension Protection Association (PSVaG) is the statutory institution for insolvency protection of occupational pensions in Germany.
FAQ
What is the difference between direct insurance and reinsurance?
In the direct insurance, the employee is the policyholder and directly entitled to benefits. In reinsurance, the employer is the policyholder and beneficiary; it is used to finance a pension promise made directly to the employee.
How does the pledging of a reinsurance policy work?
In the case of a pledge, the employer assigns its claims from the reinsurance policy to the employee entitled to benefits (often a managing director). This acts as security for the pension commitment, especially in the event of the employer's insolvency.
What tax advantages does a reinsurance policy offer?
For the employer, contributions to reinsurance coverage are operating expenses. For the employee, benefits related to the pension commitment are tax-free during the accumulation phase; taxation only occurs upon retirement (deferred taxation).
What does congruent reinsurance mean?
Congruent reinsurance means that the benefits (amount, maturity, type) from the reinsurance policy exactly match the obligations from the pension commitment. This ensures a complete funding.
Does a reinsurance policy need to be recognised on the balance sheet?
Yes, the claims from a reinsurance policy represent an asset and must be reported on the asset side of the company's balance sheet. The pension obligation is shown as a liability.
What role does the Pension Security Association (PSVaG) play in reinsurance?
The PSVaG legally secures certain occupational pensions in the event of employer insolvency. For direct commitments funded by reinsurance, the PSVaG applies to non-controlling shareholder-directors and regular employees. Controlling managing directors often secure their claims by pledging the reinsurance.
