Pension Backing Insurance (Rückdeckungsversicherung)
Pension backing insurance is a life insurance policy taken out by an employer on an employee's life to financially fund an employment-law pension or severance commitment.
Comparison profile
- Trigger
- Fixed sum insured
- Insured interest
- The employer's own economic interest in financing a contingent employment-law pension or severance liability; the insured biometric risk is the survival, disability, or death of the employee whose commitment is being funded.
- Rating basis
- Employee's age and health declaration, Sum insured aligned to the underlying pension/severance commitment, Premium payment mode (single or regular), Occupation and employer risk class
- Typical limits
- The sum insured is aligned one-to-one with the calculated present value of the underlying employment-law pension or severance commitment; there is no standard market maximum, as capacity is driven by the employer's balance-sheet liability.
- Target segments
- Employers with direct pension promises, Employers with legacy severance-pay obligations, SMEs and family businesses with key-employee commitments
Insured events
- Survival of the employee to the agreed pension date
- Disability of the employee
- Death of the employee
Key exclusions
- War and warlike events
- Suicide within the initial contract period
- Material misrepresentation of the employee's health at underwriting
- Fraudulent conduct by the employer as policyholder
Concept
Pension backing insurance is a life insurance policy that an employer takes out, as policyholder and beneficiary, on the life of an employee in order to financially fund an employment-law commitment – such as a direct pension promise or a severance obligation under the old severance-pay system (Abfertigung ALT). The employer remains directly obliged to the employee to provide the promised benefit; the backing policy is merely the internal financing instrument and does not create any independent claim by the beneficiary employee against the insurer.
How it works and its benefits
Regular, long-term plannable premium payments build up a guaranteed sum over the policy term, which becomes payable on the employee’s survival, disability, or death and enables the employer to meet the promised benefit without having to free up liquidity at short notice. Pension backing insurance also reduces the balance-sheet risk arising from unfunded pension and severance provisions and, depending on its structure, can help secure an entrepreneur’s continuing liability in the event of a business sale.
Relevance for insurance practice
For companies with employees still under the old severance-pay system or with individual pension commitments, pension backing insurance is a key tool of corporate risk provision; when advising, intermediaries should always consider the underlying employment-law commitment, its amount and due date, and the tax treatment of the premiums and the eventual insurance benefit.
Comparison and delineation
Pension backing insurance is closely related to a standard term life policy taken out on an employee’s life, but is delineated by its purpose and beneficiary structure: it is an internal financing instrument for a specific pension or severance commitment, with the employer as policyholder and beneficiary, rather than a direct protection product for the employee’s own dependants. Unlike a stand-alone term life policy, its sum insured and duration are dictated entirely by the underlying employment-law liability rather than by the employee’s personal protection needs.