Suspending company pensions in the Schutzschirmverfahren – liquidity at the expense of pensioners?

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The coronavirus crisis is placing businesses in considerable financial difficulty as they lose sales, while many costs remain the same. In crises like these, some businesses are naturally forced to resort to aspects of insolvency legislation such as the Schutzschirmverfahren or ‘umbrella procedure’, a special form of self-administration under German insolvency law. The umbrella procedure described in § 270b of the Insolvenzordnung (German Insolvency Code) is a kind of self-administration for the purpose of preparing for insolvency proceedings before they actually begin. If a business applies for the opening of insolvency proceedings in self-administration, the insolvency court has to grant it up to three months to draw up an insolvency plan. The insolvency court appoints a preliminary custodian for this three-month preparatory period.

A prominent example of an umbrella procedure currently ongoing is the department store chain Galeria Karstadt Kaufhof. It has emerged that they stopped paying out company pensions in April. Thomas Cook subsidiary Condor also put a stop to payments to its company pension recipients in November last year during an ongoing umbrella procedure. Opposition in the press was predictably strong in both instances, and yet the steps these companies took to ensure liquidity were entirely normal. In this article we will explain why thousands of pensioners initially have to go without, although later they will receive payments.

I. The normal case: insolvency proceedings open and PSV has to step in

If an employee has received a direct guarantee of payments as part of a company pension scheme, then, according to § 7 Par. 1 BetrAVG (German Company Pensions Law), these are protected by a Pensionssicherungsverein (pension assurance association or PSV). If a business applies for insolvency (or its application is declined for lack of assets) – in other words, if the employer is not in a position to service company pensions – the PSV takes over the payment of company pensions and safeguards applicants. But before that happens, the PSV is not obliged to step in. When the PSV steps in, it must cover all future pension payments, as well as payments in arrears for the past 12 months (§ 7 Par. 1a BetrAVG).

II. The special case of the umbrella procedure

The PSV only ever has to pay company pensions once it is subject to the Einstandspflicht, or duty to step in. And that is exactly what is unusual about the umbrella procedure, since the PSV is not yet obliged to guarantee payments during the umbrella stage. The umbrella procedure is not a ‘protection case’ as defined in § 7 Par. 1 BetrAVG, it is merely a precursor to it. The employer, however, in order to protect its liquidity, does not pay company pensions during the umbrella procedure, because the protection case (i.e. opening of insolvency proceedings) is expected to happen in three months or less, and from that point onwards, the PSV will pay company pensions for the past 12 months retroactively.

The umbrella procedure is a special form of insolvency in self-administration. It precedes actual insolvency proceedings and offers employers a voluntary opportunity to introduce their own insolvency strategically and, to a large extent, in the way they choose. Applying late for insolvency carries a penalty, whereas the umbrella procedure normalised in § 270b InsO (German Insolvency Code) aims to offer incentives to apply as early as possible. If all that is facing a company is an inability to pay or excessive indebtedness, this procedure offers its management the opportunity to keep hold of the reins of the reorganisation process and avoid an abrupt loss of control. The business can choose its own custodian, who does not actively intervene in operative business but only monitors it internally. The aim is to set up a reorganisation plan which is then set in motion once insolvency proceedings are underway.

Neither an application for the opening of insolvency proceedings nor an application for the umbrella procedure represents a protection case as described in § 7 Par. 1 BetrAVG, which would provide a legal reason to claim company pension payments from the PSV. This does not happen until the district court responsible has opened insolvency proceedings or declined to open them for lack of assets. So in the interim, there is a pension gap, albeit temporary, for those entitled to receive payments. Unlike active employees, who still get paid their salaries during the umbrella procedure via the advance financing of their Insolvenzgeld, or insolvency substitute benefits, there is no such option available to company pension recipients. The employer withholds company pension payments because it can foresee submitting its insolvency plan and opening insolvency proceedings, and because the PSV is responsible for outstanding company pensions not only once the protection case has been declared, but also up to 12 months before.

III. Exploiting other assets to secure liquidity for company pension recipients?

So, what can company pension recipients do during this unpleasant impasse? They could, for example, activate the rights of lien that are due to them. These could relate to pledged reinsurance policies, or similar. Payments from trust assets (in the form of a contractual trust agreement or CTA) could also be considered. However, these two security systems exist only for a very small number of company pension recipients in Germany. And even then, payments are often triggered only by the opening of insolvency proceedings, or their refusal, and not the umbrella.

IV. Summary

An interruption of payments for several months, as in the case of Galeria Karstadt Kaufhof and Condor, does not mean an ultimate financial loss for company pension recipients. That is because, as explained, the PSV is responsible for covering pension payments in arrears, provided they are from no more than 12 months ago. Payments are therefore made, even if late. But delayed payments can undoubtedly have a considerable impact on some of those entitled to receive them. From the point of view of a business, the umbrella procedure, and the moratorium on payments of company pensions that goes with it, represents a means of quickly protecting liquidity. Another question altogether is how able PSVs will be to pay, if the coronavirus in Germany ends up triggering large-scale insolvencies. That remains to be seen.

Your contact person:
Tobias Neufeld, LL.M., Partner
+49 172 6865 911
E tobias.neufeld@arqis.com

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