Reinsurance: Optimising financial security for occupational pensions
05/04/25
9
Minutes
Katrin Straub
Managing Director at nextsure
A pension commitment is a powerful tool for retaining employees, but it carries financial risks for companies. Backing insurance offers a proven solution to hedge these risks externally and reliably finance occupational pension provision. Find out how you can use this instrument optimally for your company.
The topic in brief and concise terms
A reinsurance policy is a life insurance policy taken out by the employer to finance pension commitments to employees and serves to transfer risk.
It offers advantages such as balance sheet optimisation, evidence of the seriousness of the commitment and insolvency protection (particularly for managing director-shareholders (GGF) through pledging).
The contributions are business expenses; offsetting the pension provision and the insurance asset value is possible under certain conditions.
Understanding the basics of reinsurance cover
A reinsurance policy is a life or pension insurance policy taken out by an employer. It serves to finance pension commitments to its employees. The employer is the policyholder and premium payer. In the event of a benefit payment, the insurance benefits flow to the company. This enables it to fulfil its obligations to the employee entitled to the pension. The reinsurance policy itself is not a delivery route for occupational pension provision, but rather a financing instrument. It helps to transfer the risks associated with a direct commitment, such as longevity or early invalidity, to an external insurer. This creates planning certainty for the company, which must at least ensure that the contributions paid in are preserved.
Maximise benefits for companies and employees
Taking out a reinsurance policy offers companies several advantages. A key advantage is the outsourcing of biometric risks. It can also improve the balance sheet appearance and serves as evidence to the tax office that the pension commitment is serious. For shareholder-managers (GGF), sustainable insolvency protection can be achieved by pledging the reinsurance policy. Employees benefit indirectly from the greater security of their promised pension benefits. The contributions to the reinsurance policy are business expenses for the employer. The company's liquidity is initially not burdened by the formation of pension provisions. The funding is provided through the insurance contributions. This can have a positive effect on a company's creditworthiness, as rating agencies assess the securing of pension obligations.
Take accounting and tax aspects into account
In the company’s commercial balance sheet, the pension obligation is recognised as a liability. The entitlements from the reinsurance policy are recognised as an asset. Under Section 246(2) of the German Commercial Code (HGB), offsetting is generally prohibited. Under certain conditions, particularly where there is collateral assignment and if 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, the contributions to the reinsurance policy are deductible as business expenses. The later benefits from the policy are business income for the company. For the employee, the contributions to the pension commitment during the accumulation phase are tax-free; only the later pension payments are subject to deferred taxation, often at a lower personal tax rate. Careful coordination with a tax adviser is essential when setting this up. The tax treatment of direct insurance policies differs from this.
Choosing the right design options and commitment types
Reinsurance policies can be used for various types of commitments. A distinction is made between defined benefit commitments and contribution-based defined benefit commitments. In a fully matched reinsurance policy, the benefits from the insurance exactly match the pension commitment. This is often the aim in order to achieve full funding. However, there are also partial reinsurance policies that only cover certain risks (e.g. death) or parts of the commitment. Structuring the term life insurance as reinsurance is one option. Companies should carefully assess the form that is right for them. The following aspects are important when making a selection:
Amount of guaranteed benefits.
Flexibility in premium payments (regular or single premiums).
Treatment of surpluses (offsetting or benefit increases).
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 special case of shareholder-managing directors (GGF)
For shareholder-managing directors (GGF) of corporations, special tax requirements apply to a pension commitment. The commitment must be commercially justified and meet criteria such as seriousness, affordability and appropriateness. A waiting period of usually two to three years after joining the company is often required. The pension commitment must not permanently jeopardise the company’s ability to operate. In the case of reinsured commitments, affordability is usually ensured if the ongoing contributions are manageable. Pledging the reinsurance policy to the GGF is a common means of insolvency protection. This is particularly relevant because the GGF often does not fall within the protection of the Pensions-Sicherungs-Verein (PSVaG). The amount of the commitment should not exceed 75 per cent of active salary in order to avoid a hidden profit distribution. The endowment life insurance policy can play a role here.
Understand practical examples and payout modalities
A typical example: A company promises a senior executive a monthly pension of EUR 750 in retirement. To finance this, it takes out a reinsurance policy that provides a corresponding capital sum or annuity benefit when retirement begins. The payout from the reinsurance policy can be made as a one-off capital payment or as a lifelong pension. This flexibility is an advantage. The decision depends on the individual design of the pension commitment and the beneficiary’s preferences. It is important that the payment arrangements of the reinsurance policy match the obligations arising from the pension commitment. The choice between annuity and life insurance as cover influences the options. In the event of a claim, the insurer pays the company, which then provides the benefit to the employee. If a pledge is made, the employee may have direct claims against the insurer in the event of the company's insolvency.
The Occupational Pensions Act (BetrAVG) forms the central legal basis for occupational retirement provision in Germany. Among other things, it regulates the vesting of entitlements and insolvency protection. For reinsurance policies, Section 1b BetrAVG is relevant, which regulates the preservation of entitlements when an employee leaves the company. Current judgments can influence interpretation and application. For example, the Federal Labour Court ruled that changes to accounting provisions alone are not grounds for a subsequent amendment to pension commitments, even if they lead to higher provisions. A judgment of the Federal Fiscal Court (BFH) of 11 May 2023 (V R 1/21) dealt with the tax exemption of a pension fund when it is interposed as a reinsurance arrangement. Our expert tip: Have the pledge agreement reviewed by a legal professional to ensure optimum protection in the event of insolvency. The Pension Fund of German Business is another player in the bAV landscape. The complexity often requires specialist advice.
Ensure insolvency protection and preserve value
A key aspect of reinsurance policies, especially for GGF, is insolvency protection. By pledging the claims under the reinsurance policy to the beneficiary, their benefits can be secured even if the company becomes insolvent. Without such a pledge, the reinsurance policy would form part of the insolvency estate. In a judgment of 7 April 2005 (IX ZR 138/04), the Federal Court of Justice (BGH) ruled that the insolvency administrator must use the proceeds from a pledged reinsurance policy that is not yet due to secure the later claims. It is crucial that the reinsurance policy has sufficient value and covers the promised benefits. Our expert tip: Check regularly that the commitment and the backing policy are aligned to avoid gaps in cover. An employer group insurance policy can cover other risks, but here the focus is on individual commitments. Careful structuring and ongoing monitoring are essential for effective protection.
Design your bespoke solution with nextsure
The reinsurance policy is a versatile instrument for financing and securing pension commitments. It offers benefits for companies and employees, but requires careful planning and design. Given the complex tax and legal framework, expert advice is essential. At nextsure, we see ourselves as your partner for digital and tailored insurance solutions. We support you in finding the optimum reinsurance policy for your needs and in making your occupational pension provision future-proof. Our experts analyse your specific situation and develop a tailor-made strategy. Use our expertise for your financial security. Request your individual risk analysis now.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific optimisation suggestions.
More useful links
Wikipedia offers a comprehensive overview of reinsurance cover.
Federal Ministry of Labour and Social Affairs (BMAS) offers official information on occupational pensions.
Publications of the Federal Government contain a publication on occupational pensions.
Federal Ministry of Finance provides a statement by the German Insurance Association (GDV) on the Act 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.
Working Group for Occupational Pensions (aba) is a leading association for occupational pensions in Germany.
IHK Munich offers information on occupational pensions, especially on tax aspects.
Pension Protection Association (PSVaG) is the statutory provider of insolvency protection for occupational pensions in Germany.
FAQ
What is the difference between direct insurance and reinsurance policies?
In the direct insurance scheme, the employee is the policyholder and the direct beneficiary. In the reinsurance policy, the employer is the policyholder and beneficiary; it serves to finance a pension commitment granted directly to the employee.
How does pledging a reinsurance policy work?
In the case of a pledge, the employer assigns its claims under the reinsurance policy to the employee entitled to pension benefits (often managing director/shareholder, GGF). This serves 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, the contributions to the reinsurance policy are operating expenses. For the employee, the benefits paid under the pension commitment are tax-free during the accumulation phase; taxation only takes place when the pension is drawn (deferred taxation).
What does congruent reinsurance mean?
Congruent reinsurance cover means that the benefits (amount, due date, type) from the reinsurance policy exactly match the obligations from the pension commitment. This ensures full funding.
Does a reinsurance policy have to be recognised on the balance sheet?
Yes, the entitlements under a reinsurance policy constitute an asset and must be recognised on the asset side of the company’s balance sheet. The pension obligation is recognised as a liability item on the other side.
What role does the Pensions-Sicherungs-Verein (PSVaG) play in reinsurance policies?
The PSVaG protects certain statutory occupational pension schemes in the event of employer insolvency. In the case of direct commitments financed by reinsurance policies, the PSVaG applies to non-controlling shareholder-managers and regular employees. Controlling shareholder-managers often secure their claims by pledging the reinsurance policy.
