Servus #20

April 2024

Table of Contents

• Increase in statutory pensions as of 01.07.2024
• Pension package II
• Flexible retirement models due to the abolition of supplementary income limits
• Case law: The Federal Fiscal Court (Bundesfinanzhof, BFH) judgement on the one-fifth rule
• Levels on the Rhine rising steadily
• Generation Z’s preferences in fringe benefits: Looking at current trends
• Expiry and limitation of statutory holiday entitlement
• Right to Disconnect – The right to switch off

Increase in statutory pensions as of 01.07.2024

The regular pension adjustment, as always on July 1^st of each year, will be higher than expected as well as significantly higher than the expected average price trend. The pension will be adjusted by 4.57%, and for the first time by the same amount in the old and new federal states. Now that the pension value for the old and new federal states has already been standardized in 2023, the pension adjustment in the east and west can be considered complete for the 21 million pensioners in total. The pension value itself will be increased from 37.60 euros to 39.32 euros this year. This is the third year in a row that the pension increase has exceeded 4%.

The fact that the pension will be increased more than originally forecasted is due to the favorable development of the relevant wages and salaries. And as consumer prices are expected to rise by 2.8% in 2024, this will also result in a higher income after adjusting for inflation. Looking at the period from 2014 onwards, consumer prices rose by an annual average of 2.4%, while pensions rose by 3.9% (East) and 2.9% (West).

Pension package II

To be able to pass the planned Pensions Package II before the summer break, the draft bill has now been submitted for departmental approval by the German government. The core elements of Pension Package II are securing the pension level and the introduction of capital cover.

On the one hand, the pension level is to be fixed at 48%. On the other hand, a long-term funded element is intended to dampen the threat of an increased rise in contributions from the mid-2030s. This so-called generation capital was already agreed in the coalition agreement and is initially to be endowed with 12 billion euros (for comparison: the federal government currently contributes 100 billion euros annually to the pension fund). This amount is to be increased annually, reaching a volume of 200 billion in 2035. The fund will initially be set up and managed by Kenfo, the “Fund for the Financing of Nuclear Waste Management”.

Other Federal Government’s plans include reforming occupational pension schemes and private pension schemes, including the Riester pension, by the end of the year. In addition, the Federal Ministry of Labour and Social Affairs intends to present a draft bill on mandatory retirement provision for the self-employed before the parliamentary summer break.

Flexible retirement models due to the abolition of supplementary income limits

The coronavirus pandemic has not only permanently changed the world of work (keyword “home office”). The significant increase in supplementary income limits for early retirees, which was introduced as a special regulation, has also become permanent, although it was originally intended to be temporary. In fact, all supplementary income limits have been abolished. This means that completely new combination options between early retirement and (partial) continued employment are now possible in company practice.

Before coronavirus, people claiming an early retirement pension had to observe supplementary income limits if they were still in employment alongside their pension. If this limit was exceeded, the pension was reduced. The supplementary income limit was 6,300 euros Gross per year, meaning that more than marginal employment was effectively ruled out. Due to the aforementioned temporary coronavirus exemption, up to 46,060 euros remained exempt from offsetting so that former employees who had already retired could be taken into account due to the pandemic.

The permanent abolition of the additional earnings limit has opened new opportunities to adjust and reevaluate retirement planning and the transition to retirement. Company pension schemes should also be taken into consideration in order to optimize the structure for employees depending on the pension scheme.

Case law: The Federal Fiscal Court (Bundesfinanzhof, BFH) judgement on the one-fifth rule

The BFH once again dealt with the so-called fifth rule of § 34 para. 2 no. 4  EStG in the context of company pension schemes (BFH case no. VI R 5/21). Under this regulation, in case of extraordinary income, the taxable portion in the year of payment only increases by one fifth of the total amount of the payment. The additional tax calculated in this way is then multiplied by a factor of five by the tax office. Due to the typical tax progression, this results in a significant tax advantage for certain one-off payments. The prerequisite for the application of the one-fifth rule is that the remuneration is for a multi-year activity. It must also be extraordinary income. According to the case law of the BFH, remuneration for multi-year activities is generally only extraordinary if the accumulation of income does not correspond to the contractual or typical course of the respective income generation.

However, there  has been regular disputes before the BFH for years as to whether a one-off payment of company pensions can be taken into account by the tax office using the one-fifth rule, as this would lead to significantly lower taxes. However, the BFH handles the scope of application of the one-fifth rule restrictively. This was also the case in the recently decided event. It concerned the question of whether a pension that is paid partly as a monthly pension and partly as a lump sum benefits from reduced taxation. The case concerned a pension arrangement under which the former employee could choose between a regular benefit (pension) or a partial pension plus a lumpsum payment of equal value when the pension  was payable. The current pensioner made use of this option and applied for reduced taxation for the one-off lump-sum payment, which he chose in addition to the partial pension, in accordance with Section 34 (1) and (2) no. 4 EStG. This was rejected by both the tax office and the tax courts.

The BFH still considered the first requirement for the application of the one-fifth rule – remuneration for several years of work – to be fulfilled. However, extraordinary nature was not given. The decisive factor was that the partial pension and the capital payment were based on a uniform legal basis. This is because the lump-sum payment is not a special payment that can be distinguished from the ongoing pension benefits and is intended to fulfil an independent pension entitlement. The one-off payment should therefore not be assessed separately, but together with the ongoing pension benefits promised for life, reduced by the one-off payment. And since this is paid monthly and over several pension periods, the BFH is of the opinion that only the one-off payment is not extraordinary. In the view of the BFH, this would only be conceivable if the one-off payment and the pension were based on different legal grounds and not, as in the case decided here, on a single legal ground. The application of reduced taxation of the capital payment in accordance with Section 34 EStG was therefore denied by the BFH in the case decided.

Business development of the Pension Security Association (Pensionssicherungsverein a.G, PSV)

Many of our clients use the EPF Euro-BetriebsPensionsFonds e.V. (EPF) to provide their employees in Germany with company pension commitments. The EPF is a congruently reinsured provident fund.

Provident fund commitments are subject to insolvency insurance via the Pensions-Sicherungs-Verein Versicherungsverein auf Gegenseitigkeit (PSV). The PSV is a semi-public body and collects annual contributions from the obligated companies in the capital cover procedure in order to provide the promised benefits that would otherwise be cancelled due to insolvency instead of the insolvent companies.

The EPF therefore requests its sponsoring companies to make contributions to the PSV in September of each year. Despite an increase in insolvencies in Germany last year (+52% compared to 2022), the contribution level remains stable at a moderate level – a contribution rate of 1.9 ‰ of the assessment basis was set for 2023 (2022: 1.8 ‰, long-term average: 2.7 ‰).

In 2024, the claims expenditure to date is slightly below the previous year’s level. However, the PSV expects the number of insolvencies to rise in the coming months, particularly due to the (after) effects of high interest and inflation rates. The capital market environment remains dynamic and challenging. Provided there are no fundamental changes to the general conditions, however, the premium level is likely to remain stable at the current level.

Generation Z’s preferences in fringe benefits: Looking at current trends

Generation Z, born between the mid-1990s and early 2010s, has fundamentally changed the world of work with their unique preferences and expectations. Fringe benefits play a crucial role in employee retention and satisfaction. They can range from flexible working hours to health benefits and perks. But what does Generation Z prefer when it comes to these additional benefits?

Flexibility and individualization are at the top of the list. Generation Z appreciates being able to organize their working hours flexibly and having the opportunity to work from different locations. Traditional benefits such as occupational health insurance and pension schemes are still important but benefits that appeal to the lifestyle and needs of this young workforce are also valued.

Another important aspect is the focus on wellness and work-life balance. Generation Z values their health and well-being. Companies that offer benefits such as gym memberships, mental health programs and sabbaticals can position themselves as attractive employers and encourage the engagement of their young employees.

Sustainability is also playing an increasingly important role. Generation Z’s environmental awareness is increasing, and they prefer companies that are committed to social and ecological sustainability. Benefits such as paid volunteer work or subsidies for environmentally friendly transportation are therefore particularly appreciated.

When looking at the different generations, interesting differences in preferences regarding fringe benefits can be observed. While Generation Z often values flexibility and work-life balance, older generations such as Millennials (born between 1980 and 1995) or Generation X (born between 1965 and 1980) often prefer more traditional benefits that offer long-term security, such as a solid occupational pension and health insurance plan. The baby boomer generation also tends to value these traditional employer benefits, as well as an appropriate work-life balance and increased opportunities for professional/personal development and training.

It is important to take these differences into account when introducing employee benefits to meet the different needs and preferences of employees from different generations and create an inclusive working environment. It is therefore advisable to pay attention to which generation is predominantly active in the company to be able to offer the right benefits portfolio.

Expiry and limitation of statutory holiday entitlement

Even though the law only provides for the statutory minimum holiday entitlement to be taken to a limited extent, the topic often leads to discussions between employers and employees. Employees often want to take holiday days into the next year in order to have a certain ‘buffer’. Here we would like to point out the employer’s stricter obligations to provide information on the statutory holiday entitlement and its forfeitability – any additional holiday granted is not affected by this and can be freely regulated by the employer. The statutory minimum entitlement is 20 days per year with a 5-day week.

Forfeitability. For some time now, it has no longer been possible to forfeit statutory holiday entitlement without further ado. As small and medium-sized companies in particular outsource the area of payroll accounting and the associated administrative activities, it is particularly important to mention that employers are obliged to ask their employees to take leave in good time and in writing and also to inform them of the respective expiry deadlines, such as 31 December of the same year or 31 March of the following year (see BAG, judgement of 20 December 2022, case no. 9 AZR 266/20). However, the ‘circular mail’ method commonly used in practice is no longer sufficient – a personal letter is recommended. It should also be noted that employers are responsible for ensuring that employees are able to take their holiday entitlement, even if Section 7 (3) BUrlG describes exceptions. A forfeiture should therefore only be considered if employers can prove compliance with the above-mentioned obligations and thus the voluntary waiver of the realisation of the holiday entitlement on the part of the employees. An exception is made in the case of long-term illness. If employees are unfit for work without interruption from the beginning of the holiday year until 31 March of the following year, the holiday entitlement lapses, even if they have not been informed.

Limitation period. The above-mentioned information obligations also apply in the context of the statute of limitations. In principle, the statutory limitation period of three years set out in §§ 195, 199 BGB applies to the statutory holiday entitlement. However, the expiry of this limitation period does not begin at the end of the holiday year, but at the end of the year in which the employer properly requests its employees to take their holiday and informs them of the specific holiday entitlement and the expiry periods. The employer has the opportunity to make up for missed deadlines and thus set the deadline, albeit late.

Right to Disconnect – The right to switch off

The ‘right to disconnect’ refers to the right of employees not to be reachable after work or not to respond to work-related communications. It is intended to promote work-life balance and reduce the risk of burnout and stress. The concept was inspired by similar laws in other countries and the increasing digitalization of the world of work. The ‘right to disconnect’ is not enshrined in law in Germany. However, employees have the right to ignore emails and other work-related communication during their free time without fear of negative consequences. Furthermore, the existing regulations on working hours and rest periods for employees in Germany provide an important framework. It is important that both sides – employer and employee – understand and respect the benefits and limits of the ‘Right to Disconnect’. This right should help employees to recover better in their free time and thus be more productive and satisfied at work.

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