Bridge to retirement: Mannheim model instead of a traditional severance payment?

Staffing reductions among employees close to retirement

When downsizing, termination agreements with severance pay have proven an effective method of making it easier for employees to leave the company. This is particularly true when reducing staff among employees approaching retirement.

A solution exists for employees close to retirement age, in particular, which is more advantageous than severance pay in many respects: the Mannheim Model.

What is the Mannheim Model?

The Mannheim Model is based on the idea that

instead of making a traditional severance payment to the employee leaving the company, the employer and employee draw on the options offered by social security law.

The employer finances a compensation payment which is transferred to the German Pension Insurance (DRV) as a value credit at the end of the employment relationship. The German Pension Insurance then makes monthly payments to the former employee from the credit balance until retirement.

This enables the employee to leave their job earlier yet still receive monthly payments from the German Pension Insurance in the time between leaving and when the pension begins. The law essentially creates a fictitious employment relationship between the end of the actual employment relationship and the start of pension payments.

The Mannheim Model: The devil is in the details

However, the devil is in the details here: Not all compensation paid by an employer is suitable for the Mannheim Model. Only benefits which are actually subject to social security contributions can be transferred as value credits. Precisely this is not the case with the classic severance payments, which are not subject to social security contributions.

In order for an employer payment to be classified as subject to social security contributions, it has to be linked to the employee’s past service for the company in some way.

This then allows a one-time payment to be transferred to the German Pension Insurance as a value credit, and then paid out to the employee after the end of the employment relationship until retirement.

Value credit model has to be created

For this to work, the company needs an established value credit model. For example, the company needs to have long-term accounts for employees in which special payments and overtime, etc. can be accrued. With a view toward staffing reductions, the special payment would have to be paid into an account like this as a credit balance.

If companies have not yet established a credit account of this nature, through a collective agreement, a company agreement or via employment contracts, they may be well advised to implement accounts like this for employees in the future. A company agreement is one means of doing so.

Benefits for employees = benefits for employers?

The Mannheim Model offers many advantages for employees approaching retirement:

• essentially “early retirement”,
• monthly payout,
• lower health insurance contributions,
• no pension deductions due to earlier retirement,
• the interim time from credit balance increases the pension,
• no dispute with the employment office soon before retirement and
• value credits are insolvency-proof and inheritable.

Yet do employers also stand to benefit? Financially, this model is essentially a zero-sum calculation compared to severance pay.

The advantage arises from the fact that this model is so attractive, especially to employees approaching retirement, that the employees are far more likely to agree to this than to just a monetary severance payment.

In view of this, companies may well benefit from enabling employees approaching retirement to take advantage of the Mannheim Model and to lay the groundwork for this option throughout the company.