Pensioner Company Overview

What is a Pensioner Company?

A Pensioner Company is simply a corporate entity, such as a limited liability company (GmbH), whose sole purpose is to be appropriately funded and pay pensions as and when they are due. A Pensioner Company allows for a complete risk transfer of pension liabilities from the ceding company. This distinguishes it from other models, such as CTAs¹ , pension funds, and support funds, where some of the risk is retained. It has no active employees, no other obligations, nor any other business operations. 

It can be created by ceasing or outsourcing business operations, or by a carve-out (via a spin-off or hive down according to § 123 UmwG) of a specific Pensioner Company. Any spin-off or hive-down creates joint liability to pay the pensions for the following ten years under the German Restructuring Act (§ 133 UmwG). The joint liability ceases after 10 years from the date of spin-off or hive down.

Unlike a comparatively expensive insurance solution, which also allows for (possibly partial) derisking, Pensioner Companies are not subject to insurance company regulation but rather to the standard corporate legal requirements. The specific requirements that need to be fulfilled for the funding of a Pen-sioner Company are essentially stated in the Federal Labour Courts judgement of 11 March 2008 (3 AZR 358/06).

How does a Pensioner Company work?

The sole purpose of a Pensioner Company is to manage pension entitlements and ensure that all pension payments are fully paid. This means that the company needs to be appropriately funded and designed in terms of protections for the pensioners (and deferred pensioners). The initial funding (capital investment) must be aligned with the cashflow forecast under appropriate demographic and financial assumptions as well as allow for a suitable buffer against adverse shocks over the lifetime of the liability. This requires appropriate assetliability modelling to achieve an optimal mix of asset classes (cash, bonds, equities, etc).

In addition to financial security buffers, the legal structure of the Pensioner Company must also ensure longterm, professional, and sustainable operation. Thus, we believe it is most appropriate that the assets are secured in a suitable Contractual Trust Arrangement (but even here there are circumstances when it is not needed). This requires a design that carefully balances the opportunity to invest in higher-yielding assets with the risks of not achieving these investment returns both for the pensioners and the ceding company.

How is it implemented?

However, in order to adequately implement the diverse requirements of a Pensioner Company, we recommend a four-phased implementation project as follows:

1. Framework concept: First, we clarify the objectives to be achieved by implementing the solution. In this context, financial aspects (such as balance sheet, P&L, and liquidity), tax position, as well as risk tolerance play a central role, from which the requirements for the structural elements (capital investment, security structures, control, or competence requirements) are derived.
2. Selection of provider: There are several asset managers that offer Pensioner Company solutions in this area, offering various designs and bespoke options.
   
3. Detailed concept: With the involvement of internal requirements (i.e., the ceding company's finance, tax, legal and HR departments) and external specialists, the desired target structure can be successfully designed. Note that it is critical that these areas are coordinated to provide the best solution – some of the issues are quite path dependent and therefore need to be thought through from the beginning.
   
4. Implementation: All stakeholders are closely coordinated and produce the required contracts, and the Pensioner Company is then sold to the external Alternative Asset Manager.
   

Why is the solution of the Pensioner Company solution better than a classic insurance quote?

A pension obligation is essentially a set of cashflows that depend on how long retirees live and what pension increases they receive. The present value of the liability depends critically on the discount rate used to value these cashflows. For accounting purposes, the discount rate uses the spot rate for AA Corporate bonds for IAS19 and USGAAP, and a ten year average for HGB. An insurance company has specific insurance solvency requirements, which means that pricing is based on very conservative assumptions.

The advantage of the Pensioner Company is that it offers greater freedom to choose its investment portfolio while maintaining adequate security in the payment of pensions. This greater freedom means that future investment returns are higher and therefore the discounted value of the liability is lower than other solutions. This means that it is possible to outsource pension obligations at a much closer level to the book value of pensions than using an insurance type solution. In 2022, IAS19 discount rates rose quickly, while HGB discount rates continued to fall due to the ten year averaging, but we believe this provides an opportunity for easier offloading.

Please feel free to contact us for further questions or background information on the Pensioner Company.

_{1 A contractual trust arrangement (CTA) is a trust model to secure assets against insolvency. Pension obligations can be netted with assets secured in the CTA.}