What are pension provisions?
In accounting, provisions for pensions are defined as provisions made for payments from the company pension scheme . They are used for later payment to eligible employees of a company.
The term “company pension scheme ” is one of the three pillars of old-age insurance in Germany. The other two are statutory pension insurance and private provision. The legal basis for pension provisions is the Company Pension Act (BetrAVG) of December 19, 1974, which regulates almost all aspects of company pension provision in Germany. The last change came into effect on January 13, 2019.
The specific benefits that are guaranteed by pension provisions as part of the company pension scheme depend on the type of agreement between the employer and the employee. In addition to the so-called pension commitment – i.e. the retirement pension – which is a compulsory part of the provisions, benefits in the event of disability or death can also be agreed as payments to relatives. Possible forms of agreement are collective bargaining agreements, works agreements or salary regulations.
The pension commitment is a so-called direct commitment, which means that the obligation to fulfill the commitment lies solely with the employer. It cannot therefore be delegated by the company to another paying body such as a pension fund, pension fund or life insurance company . If an employee is entitled to a claim, the employer is obliged to meet these claims.
Accounting for pension provisions in the commercial and tax balance sheet
One problem with accounting for pension provisions is that they relate to payment obligations in the future, for which at the time the balance sheet is drawn up it is not yet possible to specify when and in what amount these obligations will arise – not even whether they will arise at all . In the balance sheet accounting, pension provisions are therefore not shown as liabilities , but as provisions . They are to be shown on the liabilities side of the balance sheet. The contributions are calculated according to actuarial principles (see also the “Valuation” section).
You must also check in advance whether your company is even obliged to set up pension provisions. In any case, this is the case if there are corresponding agreements and a direct commitment: This represents a direct obligation that you as an entrepreneur have to fulfill, even if it only occurs in the distant future.
It is fundamentally important to distinguish whether the amounts that have to be raised for the company pension scheme are indirect or direct obligations. The direct commitment is always a direct obligation, while other forms of company pension scheme represent indirect obligations and must also be accounted for accordingly. Indirect obligations arise, for example, when external providers of pension models – such as pension funds, pension or benefit funds or direct insurance – are involved. This distinction is made in the “Law for the Improvement of Company Pensions” (Company Pension Act – BetrAVG).
Accounting for pension provisions in the commercial balance sheet
In commercial law, pension provisions are considered uncertain liabilities within the meaning of Section 249 (1) HGB. There is a general obligation to passivate these obligations, but there is one exception: the so-called “old commitments”. This means direct pension obligations, the legal entitlement to which arose before 01.01.1987. There is an unlimited passivation option for these claims.
In the commercial balance sheet, you have to state the pension provisions according to the structure of Section 266 (3) HGB, liabilities (source of funds), B, point 1: Provisions for pensions and similar obligations.
Attention: For indirect obligations, there is a passivation option for both old and new commitments if it is sufficiently probable that they will be used. In practice, however, accountants hardly ever make use of this option, much more often they prepare a report that appears in the appendix to the trade balance sheet.
It is also important to know that the type of pension commitment agreement is not relevant under commercial law, so verbal agreements also apply. A written commitment is advisable because the written form requirement applies under tax law.
Accounting for pension provisions in the tax balance sheet
The basis for the preparation of the tax balance is § 5 EStG. It is essentially based on the trade balance sheet – here, too, you have to list pension provisions as liabilities, i.e. on the liabilities side of the tax balance sheet. However, differences arise primarily from the BilMoG (explanations: see section Evaluation).
The inclusion of pension provisions in the tax balance sheet has tax consequences that primarily affect the equity ratio and income tax:
- The ratio of debt to equity changes because pension provisions are to be viewed as debt. The consequence is a decrease in the equity ratio. This can be problematic insofar as the equity ratio is an important indicator for a positive company valuation , especially by rating agencies. A possible downgrade due to excessively high pension provisions will have a negative impact on creditworthiness.