Dynamic pensions – Definition and legal foundations
Dynamic pensions are an important concept in German social security law as well as in occupational and private pension schemes. They are characterized by regular adjustments of their payment amount according to certain reference factors, usually the development of living costs or wages. This serves to compensate for the loss of purchasing power due to inflation and to secure the standard of living of pension recipients. Dynamic pensions are found particularly in statutory pension insurance, in various supplementary pension systems, and in contractual agreements for private and occupational pensions.
The following section provides a detailed overview of the legal framework, functioning, different types, and the significance of dynamization in pension law.
Legal foundations of dynamic pensions
Social Code and dynamization
Under German law, it is primarily the Sixth Book of the Social Code (SGB VI) that forms the basis for the dynamization of statutory pensions. According to § 68 SGB VI, pensions from statutory pension insurance are adjusted annually to reflect general wage and salary developments. The amount of this dynamic adjustment is determined by the so-called pension value, which is regularly reviewed and adjusted in accordance with § 65 SGB VI.
The aim of the pension adjustment is to adapt retirement provision to economic developments in order to prevent pension recipients from being disadvantaged compared to active employees.
Detailed statutory regulations
Pension adjustments are made on July 1 of each year. Based on the latest pension insurance report and the recommendations of the social partners, the Federal Government issues a pension adjustment regulation, which sets the amount of the adjustment.
The mathematical formula for calculating the new pension value takes the following factors into account:
- The gross wage development of the previous year
- The so-called sustainability factor (ratio of contributors to pensioners)
- The contribution rate to statutory pension insurance
The Pension Adjustment Act stipulates that the relevant mechanisms are regularly reviewed and adjusted. In exceptional cases, the Federal Government may deviate from the obligation to increase pensions, such as by suspending the pension adjustment during economic crises (§ 68a SGB VI).
Dynamization in occupational pension schemes
Legal basis for occupational dynamization
The dynamization of pension entitlements and ongoing pension payments is also a central element of occupational pension schemes (bAV). The minimum legal requirements are particularly governed by § 16 Occupational Pensions Act (BetrAVG). According to this, pension providers are generally required to review ongoing occupational pension payments every three years and to increase them if necessary to maintain purchasing power (so-called adjustment review obligation).
Types of dynamization in occupational pensions
There are various types of dynamization:
- Automatic percentage adjustment (e.g. annually by a fixed percentage)
- Linking to indices (e.g. consumer price index)
- Adjustment based on wage and salary developments
The employer may refrain from an adjustment if the company’s economic situation does not permit it or if the scheme is implemented via a pension fund, pension scheme, or direct insurance whose surpluses are used to increase benefits.
Effects on pension entitlements
A dynamization can also be agreed upon for pension entitlements acquired during active employment. This usually happens through contractual provisions or collective bargaining agreements. The aim is to ensure that the future pension is not devalued by long vesting periods.
Dynamic pensions in private retirement provision
Contract design and clauses on dynamics
In private pension provision, such as with private pension insurances, dynamic adjustments are often offered as a contractually agreed option. This dynamization can affect both the amount of premium payments and the subsequent pension payment. Typically, an annual percentage increase is agreed upon that is independent of actual wage and cost developments.
A central distinguishing feature is whether the dynamization is guaranteed or dependent on the insurer’s surpluses. Contractual clauses on dynamization must be drafted clearly and transparently under contract law.
Consumer protection requirements
The legislator requires providers to inform policyholders comprehensively about the effects and mechanisms of dynamization (e.g. under the Insurance Contract Act, VVG). In particular, information on annual increases, the possible impact on the total contribution, and the ratio of contributions to the expected pension must be presented transparently.
Function and significance of dynamic pensions
Protection against loss of purchasing power
The essential goal of dynamic pensions is to protect pension recipients against the effects of inflation. Regular adjustments prevent retirement provision from losing real value over time. In all three pillars of retirement provision (statutory, occupational, private), dynamization therefore carries significant social and labor law weight.
Legal consequences of missing dynamization
If a legally or contractually required dynamization is not implemented, those affected can assert claims for back payment or adjustment. In occupational pension schemes, the employer bears the burden of proof if he refuses adjustment (§ 16 para. 4 BetrAVG).
Tax aspects of dynamic pensions
Taxation of dynamic pensions
Dynamically adjusted pensions are subject to taxation – like other pension benefits. What is decisive is the respective type of income (income from non-self-employment for occupational pensions, other income for private pensions). The amount of tax payable may change due to annual adjustments and the resulting increased payment amounts. In the case of the statutory pension, the principle of deferred taxation applies (§ 22 EStG).
Dynamic pensions – Summary and outlook
Dynamic pensions are a key element of German pension law and make a significant contribution to achieving the goal of inflation-secured retirement provision. They are comprehensively regulated by law and apply equally to statutory, occupational, and private pensions. Their legal structure guarantees not only transparency but also adaptability to changing economic conditions. Dynamization thus ensures that pensions continue to contribute to securing livelihoods in retirement over the long term.
See also
References
- Gürtner, G.: Die Dynamik der Renten, 2021, Verlag C.H. Beck
- Rolfs, C./Giesen, D./Kreikebohm, R./Kreft, W.: Commentary on SGB VI, current edition
Web links
Frequently asked questions
How is the legal adjustment of dynamic pensions to general wage development carried out?
The adjustment of dynamic pensions to general wage developments is enshrined in the law on statutory pension insurance, in particular in § 68 SGB VI. In general, each year it is reviewed how gross wages and salaries have developed in the previous calendar year. Pensions are adjusted according to this development, which is regulated by the so-called pension adjustment formula. In addition to wage developments, factors such as the sustainability reserve, the pension insurance contribution rate, and the so-called “Riester factor”—which takes demographic trends into account—also play a role in this calculation. The adjustment is made each year on July 1, and the relevant adjustment factor is set by statutory regulation and published in the Federal Gazette. As a result, dynamization ensures that statutory pensions remain closely tied to economic developments in Germany. However, legislators can change pension benefits at any time, so there is no complete guarantee regarding actual wage and price developments.
What statutory provisions govern the dynamization of pensions?
The legal foundations for the dynamization of pensions are laid down in the Sixth Book of the Social Code (SGB VI). Of particular relevance are §§ 68 to 71 SGB VI, which detail pension adjustments and the calculation procedure. In addition to these regulations, social policy interventions through amending laws or statutory regulations can bring about short-term deviations. For professional pension schemes and occupational and private pensions, there are sometimes separate statutory requirements for adjustments: Companies that provide direct commitments or support funds are, for example, obliged by § 16 Occupational Pensions Act (BetrAVG) to adjust ongoing benefits unless there are grounds for exclusion. The respective statutory bases determine if and to what extent dynamization is required and how it is to be calculated.
Are there legal exceptions or restrictions to pension adjustments?
Yes, the law expressly provides for exceptions and restrictions. Under § 68 para. 3 SGB VI, if extraordinary economic circumstances exist, the Federal Government may, via statutory regulation, deviate from the regular pension adjustment. Unscheduled adjustments, such as “zero rounds” (no increase) or caps, may also be decided, especially in economically difficult times. In the field of occupational pension schemes, § 16 BetrAVG allows the employer, under certain economic conditions, to suspend adjustments if it is demonstrably unreasonable due to the economic situation. Furthermore, adjustments due to reduced earning capacity pensions are not made or are limited in certain circumstances. In private pension insurance contracts, the form and scope of dynamization are contractually agreed and subject to insurance contract law.
What legal claims do pensioners have to a dynamic adjustment?
Pensioners who receive benefits from statutory pension insurance have a legal right to have their pension reviewed annually and adjusted according to legal requirements. This claim arises directly from SGB VI. Once an adjustment is made, pensioners receive a corresponding notification from their pension insurance provider. In occupational pension schemes, such a claim exists only if the requirements of § 16 BetrAVG are met—that is, unless the company’s economic situation dictates otherwise. In private pension insurance, dynamization is usually part of the contract; the claim arises according to the individual contract terms and general contract law (BGB, VVG).
Is subsequent correction of pension adjustments possible?
A subsequent correction of the pension adjustment is generally excluded once the adjustment notice has become final. However, the Social Code provides that in the event of calculation errors or subsequently known facts, a review and, if necessary, correction may be made retroactively (§ 44 SGB X: Revocation of unlawful administrative acts). Legislative changes may also lead to retroactive adjustments, provided an explicit legal basis is created for this, although this is rare. In occupational and private pensions, the possibility of corrections depends on contractual or labor law as well as, if applicable, collective bargaining provisions.
How are dynamic pensions legally related to inflation development?
Legally, the dynamic pension is primarily linked to the development of gross earnings and not directly to inflation (price increases). Nevertheless, there is an indirect link, since wage and salary increases are often triggered by higher living costs. Legally, the coupling is only to be made to collectively bargained and labor law-based payments as set out in § 68 SGB VI. The pension insurance does not guarantee full maintenance of purchasing power; the law does not require such a guarantee, since even in the event of stagnant or decreasing wages, pensions do not necessarily have to rise in line with inflation.
What legal options exist in disputes over dynamization?
If there is a dispute over pension adjustment, statutory legal remedies are available to those affected in statutory pension insurance, in particular an objection to the adjustment notice within one month of its notification (§ 84 SGG). If the objection is not resolved, a claim can be filed with the competent social court. In occupational pension schemes, employees can request the employer in writing to adjust benefits by referring to § 16 BetrAVG and, if approval is refused, take legal action in the labor courts. In the area of private insurance, the insurance contract law also grants defences and, if necessary, a complaint can be lodged with the Federal Financial Supervisory Authority (BaFin). All proceedings are subject to the respective deadlines and formal requirements of social, labor, or civil courts.
