GERMANY - The Pensions-Sicherungs-Verein (PSV), an association that insures corporate pensions against insolvency, is being sued by some of its employer-members over costs related to its shift from a pay-as-you-go (PAYG) financing model to a capital-backed one.

Sanctioned by the government in May 2006, the PSV's shift entails the creation of a multi-billion euro fund over the next two decades.

This transition also means dealing with €2.2bn worth of pension liabilities stemming from 170,000 employees whose firms have gone bankrupt.

To resolve the issue, the PSV decided to split the €2.2bn cost equally among the more than 55,000 employers who were its members in 2005. The members can either pay the extra charge at once or do within 15 years. (For more information see earlier IPE story: Germany plans huge pension insolvency fund)

But a handful of these employers have now sued the PSV over the way it split the cost. They argue it is unfair because it ignores the fact some employers are bigger than others and because members who joined after 2005 will not have to share the cost.

"The PSV's method is not simply unfair, but, in our view, unconstitutional," said Andreas Hintermayer of Munich law firm Ecovis, which is representing several firms suing the PSV.

The PSV has rejected the firms' lawsuit as "groundless", adding it fully expected an administrative court to rule in its favour.

Martin Hoppenrath, PSV's chief executive, also noted if the association had not split the €2.2bn equally, its bigger members would have been unfairly burdened. "That's because they pay more in contributions to the PSV than smaller ones though account for fewer insolvencies," he said.

German employers are legally obliged to insure pensions they provide. Those using book reserve schemes (Direktzusage in German) rely on the PSV to do so. Currently, the PSV has almost 65,000 employer-members whose insured pension assets total €264bn.