– Asset protection for employees or release from liability for companies? –
Severance pay for company pension schemes (bAV) as a tax-saving model
The State Social Court of Baden-Württemberg (ruling of 24 March 2015, file no. L 11 R 1130/14) decided that the early settlement of occupational pension entitlements is also to be treated as pension benefits, Section 229 SGB V. Accordingly, neither contributions to unemployment insurance nor to statutory pension insurance are to be paid on it. Added to this is the reduction of income tax via §§ 19, 34 EStG.
The employer will have to make sure that the taxes owed are withheld and paid – even if the payment to the employee is made directly by the occupational pension fund (e.g. direct insurance, pension fund) or if a creditor of the employee enforces this by sovereign attachment. The employer may be obliged to pay compensation for the occupational pension commitment for reasons of consideration for the employee, Section 241 II BGB.
Ban on severance payments in connection with the termination of employment
The probability that a company pensioner will experience the insolvency of his employer is up to more than 10%. These assets, which are often accumulated by the employer by waiving wages, are only secured if they have been paid out in full or have been settled beforehand. If the employer does not want to pay twice in the end, his severance agreement must be clearly and unambiguously formulated (BAG, ruling dated April 20, 2010, Case No. 3 AZR 225/08). In addition, there must not be a time connection with the termination of the employment relationship, § 3 BetrAVG.
occupational pension assets are based on the commitment under labour law – not on reinsurance
The present value of the commitment under labour law should be calculated using financial mathematics before severance payments are made, because the “reinsurance” (e.g. the assets of a relief fund or direct insurance) can be significantly lower, for example due to acquisition costs, lending, termination or pledging by the employer. Often, brokers or agents still provide the employer with the “model of a pension scheme”:
The actuary can then point out which gaps in coverage have arisen in the occupational pension scheme, with the employer’s obligation to pay the employees and the possibility of recourse against the occupational pension management consultant. According to case law, such “models” regularly contain gross errors, such as the employer’s reservation of the right to reduce or discontinue its occupational pension benefits at any time. Since 01.01.2003, employment contracts have been subject to AGB control, so that the reservation of the right to revoke the occupational pension commitment at any time is also invalid, § 308 No. BGB.
Destruction of the occupational pension commitment through challenge
As a rule, it will be possible to find reasons – at least if employer and employee agree on this – why the occupational pension commitment can be challenged and was null and void from the outset. Then all restrictive regulations of the Betriebsrentengesetz (BetrAVG) will have been removed and the transaction can be reversed. A one-off additional payment of wages agreed for this reason can be arranged in a tax-efficient manner. As a rule, after termination of the employment relationship, it is no longer burdened with social security contributions in any way.
Destruction of deferred compensation or reinsurance through revocation
At least for non-legal persons as employers, the “perpetual” possibility of revocation due to ineffective revocation instructions exists at least for a large proportion of the life insurance policies concluded from 1995 to 2007, also for reinsurance or deferred compensation. According to BGH rulings, the full premiums plus all interest benefits drawn by the insurer can be reclaimed here as well – the insurer can only deduct something for the risk assumed. This then provides a greater financial basis for paying the employee a higher payment than would be the case if the life insurance policy were simply surrendered.
Settlement of current occupational pension plans
Well-advised companies offer their company pensioners high severance payments for current pensions. These are based, for example, on the provisions that currently have to be formed for pensions under the German Commercial Code. For the employer this is balance sheet neutral. However, it thus avoids an increasing need for provisions under HGB in the next few years due to falling interest rates and thus future balance sheet risks.
Transfer of pension obligations to pensioner company
The Federal Labor Court (BAG, ruling dated March 11, 2008, Case No.: 3 AZR 358/06) decided that employers can transfer their pension liabilities to a pensioner company by way of a spin-off, and without the pension recipients having the right to object. The Pensionssicherungsverein does not have to agree either. If the employer does not provide the pension company with sufficient capital for the pension payment, including legal adjustments, the (also former) employee only has a claim for damages – and this can then also become time-barred. Through “legal form shopping”, i.e. the targeted use of foreign company forms in Germany, the co-determination of the works council can be regularly undermined.
Foreseeable insolvency of the pensioners’ company without state liability?
If the pensioner company becomes insolvent after years, the now responsible insolvency administrator cannot proceed due to a joint liability of the employer, because he is not authorized to do so (BGH, decision of 20.06.2013, Az. IX ZR 221/12). Employees affected would therefore have to become active themselves, regularly obtain information and, with professional support, ascertain whether the capital of the pensioners’ company is (still) sufficient – if necessary, a declaratory action for a declaratory judgement would be necessary because of a claim for damages that might already be foreseeable. Employees should in particular be able to prove that the BAG’s requirements for capital resources were met, after shorter (i.e. realistic instead of very cautious) life expectancies and higher (i.e. realistic) market interest rates at the time of the decision (e.g. 5%) had been expected more frequently than cautiously low ones such as 1%.
Retirement companies and utility companies in the group without PSV protection
In a BAG ruling dated May 20, 2014 (NZA 2015, 225) it was clarified that a bAV commitment issued by a group company – e.g. the group parent – which is not itself also the employer of the employee in question does not constitute a company pension commitment covered by the BetrAVG and therefore does not fall under the insolvency protection provided by PSV aG.
In principle, this means that a pension commitment to employees of another group company by a group company that is not itself an employer may be an insurance business subject to licensing under the ISA. The Federal Financial Supervisory Authority could initiate criminal proceedings and order the liquidation if – as is usually the case – no licence for the insurance business is available. It would also be conceivable to convert the group company into an insurance company with all its obligations and a considerable need for additional financial reserves due to other calculation bases.
Sufficient for the necessity of a BaFin approval is that the group company formally assumes a performance obligation (on bAV) of a third party (the employer). For reasons of liability shielding, it cannot be assumed in principle that the group companies – also with regard to pension commitments – will pursue a uniform strategy and, if necessary, stand up for each other.
Whether in individual cases the criterion of assumption of benefits (for third parties) is materially not fulfilled will have to be examined on the basis of the group contracts, because splitting up into liability blocks of different corporations also regularly serves to limit risks between the group companies and does not lead to a joint and several liability, especially since the occupational pension commitment is regularly not additionally granted by the employer in the group.
Simple solution also for medium-sized businesses
The Carta-Mensch-Stiftung, for example, is concerned with the development of such occupational pension schemes outside the restrictive regulations of the BetrAVG by corporate group foundations. For medium-sized companies, they even offer a simple trustee foundation solution of their own, if necessary with reinsurance of only the extreme longevity risk.
This is done by taking advantage of the fact that, for example, if there are only up to 100 pension commitments, there is no collective that justifies the acceptance of insurance business. Another model developed there is the very favourable financing of medium-sized companies – as well as infrastructure projects or municipalities – through the sale of BGB life annuities. These can also be acquired by employees, which means that they are not covered by occupational pension schemes. Properly designed, it is neither insurance nor does it fall under the concept of financial instruments.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.experten.de (published on March 3, 2016)
www.hm-infinity.de (published in Infinity magazine 03/2016, page 20-21 under the heading: Outsourcing, severance pay or elimination of the company pension scheme (bAV))
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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