The pension transition: five things you need to know

The core of the changes is the abolition of the final-salary and average-salary systems and the streamlining of available defined contribution schemes. Schemes with pre-defined benefits are no longer permitted. Instead, pension assets are accrued at the individual level by investing the contribution. There are three variants: the solidary (shared risk) contribution scheme, the flexible contribution scheme, and the contribution benefit agreement. The differences lie in the method of investing, the degree of risk-sharing, and the method of payment. What the three variants have in common is that the contribution must be age-independent (flat) and is capped for tax purposes, for the time being at 30 percent.

The introduction of a flat contribution scale may be disadvantageous for groups of older participants. They will have to be compensated for this. According to the legislator, this must be done ‘adequately and cost-neutral’, terms that were deliberately kept somewhat vague. It is clear that this leaves room for limited changes in the expected pensions.

Additionally, in the case of pension schemes administered by pension funds, not only the future accrual must take place in accordance with the new scheme, but accrued pensions must in principle also be transferred to the new scheme (transitioning). Contrary to common practice, the Wtp does not grant participants and inactive parties an individual right of objection in this respect. On 21 January 2025, a proposal was submitted to the House of Representatives to amend the Wtp with regard to this transitioning and to make a ‘transitioning referendum’ mandatory for all members of a pension fund.

If the pension scheme is administered by a pension fund, the employer must submit its transition plan to the fund by 1 January 2025 at the latest. It has become apparent that many employers have failed to meet this deadline, which, incidentally, does not result in a sanction. Employers who have placed their scheme with an insurer or Premium Pension Institution (PPI) have more time: until 1 October 2027. The entire process must be finalised by 1 January 2028 at the latest.

There is one exception: an employer who had a progressive graduated-scale scheme with an insurer or PPI on 1 July 2023 can have it continue after 1 January 2028 (protective effect). For employees who take up employment after the transition to the new pension system, however, the employer must introduce a flat-rate contribution scheme.

Amendments pursuant to the Wtp must comply with the general rules for changing a pension scheme. The usual methods for this are:

• Amendment via a CLA
• (Tacit) individual agreement
• Application of a unilateral amendment clause

Except in the event of amendments via a CLA, the prior consent of the Works Council is required. The weighing of interests and compensation schemes play an important role in this respect. An inadequate compensation may result in an employer not being able to obtain the consent of the works council and implement a change by means of a unilateral power. Tacit individual agreement (“silence gives consent”) is not a simple matter; employees must be well informed and have the option to object. This is in line with the employer’s duty of care and obligation to warn with regard to the pension employment condition. Employees must be aware of the consequences of their consent.

Finally, in the case of transitioning, it is important that former employees (pensioners and so-called sleepers) are also bound by the new scheme. This is an additional point for attention for both funds and (former) employers.

The pension transition requires a careful approach, where transparent communication and a clear strategy are essential to engage all parties involved in this fundamental reform.