Direct Pension Promise (Pensionszusage)

Concept

A direct pension promise (Pensionszusage) is an employment-law commitment under which an employer individually undertakes to an employee to pay a defined pension benefit directly from the company in old age, on disability, or to the employee’s survivors on death – as opposed to indirect provision through an external pension fund or group insurance policy. The employer bears the full biometric and financial risk of the promise itself.

Balance-sheet provision and funding

For a direct pension promise, the employer is required to establish a pension provision on the company’s balance sheet, calculated on actuarial principles and representing the present value of the future obligation; while this provision constitutes a liability on the balance sheet, it is not necessarily backed by actually available liquid funds. To reduce this performance risk, direct pension promises are in practice regularly funded through pension backing insurance, whose benefit on survival, disability, or death flows to the company to meet the promise.

Relevance for insurance practice

Because a direct pension promise, unlike contribution-based schemes, guarantees a fixed benefit amount, the employer bears both the investment risk and the longevity risk of the promise; when advising, choosing appropriate backing cover and regularly reviewing the pension provision on an actuarial basis are essential to limit balance-sheet risk and any potential personal continuing liability of the entrepreneur.