bAV: Reinsurance policy not insolvency-proof – insolvency administrator can withdraw reinsurance of a pension commitment of the GGF

Johannes Fiala, lawyer (Munich), Andreas Michael Bosl, management consultant bAV (Pöcking).
At sales training courses it is often claimed that company pension schemes are protected against insolvency. Even an insolvency administrator cannot access this money – in particular the reinsurance – if, for example, the employer goes bankrupt. This 1, is however simply wrong, as the example of an insolvent GmbH with pension commitment for the partner managing director (GGF) shows. It is correct, as the Federal Court of Justice (Case IX ZR 138104) recently ruled, that the insolvency administrator can collect and realise the reinsurance policy despite the fact that it is non-forfeitable and has been pledged to the GGF. The insurer sued by the insolvency administrator had unsuccessfully invoked the pledge and had to be instructed about the basic features of the lien (§§ 1228 I1 1,1281, 1284 BGB): According to this, a lien on a claim can only take effect when the claim of the pledgee (i.e. here of the GGF) is due. Only in the case of performance does the so-called pledge maturity occur; and only then does the right of collection pass to the pledgee. Until then, the insolvency administrator can terminate the reinsurance policy, which at the same time means the revocation of all subscription rights,cf. § 13 I2 ALB 86. The insolvency administrator may incur personal liability as a result of this method of realisation, in particular if there are more lucrative realisation options, cf. § 168 1nsO. In particular, the insurer was unable to raise the argument of avoidable lapse deductions and tax disadvantages in the aforementioned BGH proceedings. Liability for incorrect training Financial service providers are allowed to give legal and tax advice. This is a legal so-called auxiliary business under the Legal Advice Act – but: insurers are liable for the correctness of training courses in the same way as brokers are liable for correct legal information. The remuneration of the financial service provider for pure fee-based advice, on the other hand, is regularly invalid due to a breach of the Legal Advice Act – the new Legal Services Act is expected to bring about a liberalisation here in future. In practice, a revocable subscription right is granted at most in the pension commitment, even after vesting – in case of doubt, the subscription right of the reinsurance policy does not lie irrevocably with the GGF in practice. In the opinion of Schweizer Leben Pensions Management (SLPM), this is part of the nature of reinsurance.
Scientific studies show that security could be designed differently. The customer must be properly informed. If the GmbH falls into bankruptcy and the GGF is personally liable – for example through a guarantee – the creditors can often access the reinsurance” explains the business consultant Jürgen Abstreiter. If it is seriously intended to secure the GGF even before the benefits fall due, i.e. before the pledge matures, an irrevocable subscription right (as a “genuine contract for the benefit of third parties”) must be granted. Only then can an insolvency administrator no longer access the reinsurance. This is also not a silver bullet if the GGF is personally liable alongside his GmbH.
Procedure of the insolvency administrator
The pledgee (GGF) of a pension commitment can only demand security from the insolvency administrator (§§ 1282 I, 1228 I1 BGB). In practice, this can be done by depositing the money with the court, for example. In this case, as a rule, no interest is paid in accordance with the deposit regulations. The insolvency administrator can only be instructed by the creditors’ meeting or by the insolvency court as to where and under what conditions the money is to be deposited, § 149 InsO. According to the conditions, the deposit lasts until the payment event occurs. If the condition is not met at a later date, e.g. because the benefit event from the pension commitment can no longer occur, the insolvency administrator subsequently distributes the money among the creditors. This means that there is no longer any question of an insolvency-protected occupational pension scheme’. In practice, many insolvency administrators release the reinsurance policy by means of a simple declaration – the contract then falls to the GGF, and the GGF’s private creditors could therefore seize it. In practice, no insolvency administrator will pay out the pension in instalments because this service is probably simply not worthwhile. Without payment in instalments, the GGF does not even have the monthly garnishment-free amount (§§ 850 ff. ZPO) from the pension at his disposal. Taxation according to the so-called one-fifth rule then regularly comes into effect, § 34 EStG. If a GmbH goes bankrupt, it is not uncommon for the managing director to be additionally held liable as a “manager”. In addition to the insolvency administrator, the most frequent opponents are the tax office and the health insurance companies. If, for example, the shareholder has an irrevocable subscription right to a direct insurance policy which the employer (the GmbH) has set up for him, any creditor of the managing director will be able to seize this claim immediately. Protection against enforcement is offered here at most by arrangements with contact to foreign countries. In the case of a garnishment, however, payment is only made when the debt becomes due, i.e. when the utility default occurs. Does the pension commitment offer better protection in the event of insolvency?
If the shareholder has a vested pension commitment, it is often said at some broker training courses that the insolvency administrator pays out the pension and that he cannot close his file for as long as this lasts. In that case, the GGF would receive a pension that is at best only partially attachable. What is not mentioned in such “partial training” is that the insolvency administrator can have the pledgee (GGF) set a deadline by the insolvency court for the realisation of the reinsurance, § 173 InsO. This is also emphasised by the BGH in this most recent decision on pension commitments of 7.4. 2005. According to the M/N-tel rule, the cover capital up to the opening of insolvency proceedings is affected here. At the latest this ends the dream of the insolvency-protected or only partially attachable pension of the GGF, because the entire capital is then paid out to the insured person – and is immediately attachable. There is not only the case of underfunding, but also the opposite: In this case, the pension cash value – calculated according to the currently unrealistic 6 percent according to Dr. Heubeck – is lower than the insurance value including the surpluses. In this case, the insurer pays out the additional amount to the insolvency administrator – which again means no insolvency protection and mathematically no more fully funded reinsurance. Protection against this “tax basis of calculation” for the GGF is sought in vain in the vast majority of pension commitments. The question of how the “replacement value” is calculated will be the subject of many a legal dispute. In the event of a cessation of operations or liquidation, the insolvency administrator can also release himself from the entire pension payment obligation from the insolvency period in accordance with 3 BetrAVG by offering the GGF a one-off settlement; however, this provision of the BetrAVG only applies to the pension entitlements earned after the opening of insolvency proceedings.
Perplexity among insurers?
In cases of doubt, in such cases – with practically frequent additional personal liability of the GGF – at the end of the insolvency proceedings at the GmbH level, the GGF will only apply for “social assistance”. Possible solutions for the restructuring of the GGF are mostly overlooked. More than a dozen insurance employees and broker advisors who were contacted were at a loss as to how the pension payment could be guaranteed in the case of a pension commitment (with insolvency protection at the level of the GmbH) for the GGF, who is often personally liable. After all, the then former GGF cannot force the insolvency administrator to pay out the pension in instalments and subject it to taxation in accordance with § 19 EStG – within the framework of payroll accounting? The possibility of 173 InsO aims at a time-saving settlement – this also applies to the simple release of the insurance.
Competence as an exception
Only three of the insurers approached were spontaneously able to point out the ways in which the § 4 of the German Company Pension Act (BetrAVG). Württembergische Lebensversicherung aG referred to the legal possibilities of transferring the pension commitment. Barmenia Lebensversicherung aG was immediately prepared to discuss and calculate this case individually with the actuary. SLPM pointed out that liquidation direct insurance, which is not offered by every insurer, can be achieved prior to insolvency by means of an ordinary shareholders’ resolution and company liquidation. The transfer to a U-Kasse does not meet with the approval of insolvency administrators, because even with the reinsured variant the company (the GmbH in insolvency) must legally continue to exist. Hermann Siebenhaar, an insurance broker, knows that it makes sense and can be achieved at least by negotiation to transfer to a pension fund: “This can also avoid tax damage to the GGF, which usually arises on dissolution. The design of the subscription right is only one pitfall. Numerous points come into play which can not only endanger the entire pension commitment (hidden profit distribution), but also manoeuvre the GmbH into enormous difficulties if there is a lack of control (SoWIst comparison). According to Siebenhaar over 70 per cent of the pension promises examined by it were incomplete and/or in the case of a tax audit strongly endangered. With a ?current Checkup ?of the text modules of a pension promise for a controlling GGF of a GmbH up to 95 per cent of all examined pension promises will not withstand the at present current work and and/or steuerrechtiichen regulations and conditions. In the last 10 years, there have been numerous administrative directives and court rulings on pension commitments of GGFs. In contrast, the formalities of most existing pension commitments have remained unchanged and have not been adapted to the new case law or legal situation. As a result, many pension commitments are no longer formulated in a legally secure manner or the insolvency protection no longer exists. This often leads to an immediate and total loss of the entire insurance value in the event of insolvency, irrespective of whether the reinsurance policy is pledged or not. An example of this is the so-called revocation proviso in the pension commitments, which is justified under tax law in accordance with the income tax guidelines for commitments for traditional employees, but in the case of controlling managing directors this clause automatically and irrevocably leads to the loss of the entire reinsurance policy in the event of insolvency.
Any pledge thus comes to nothing.
Consequence: The GGF’s entire pension is lost, and there is also the threat of a high tax liability due to the reversal of the provisions.
The only thing that can help here is a concrete expert opinion from a recognised and independent actuary and expert for occupational pension schemes. While the advice given when taking out a reinsurance policy is still acceptable, hardly any advice is given in the savings phase. Important changes in the legislative process are hardly taken into account and the congruence of a reinsurance policy is criminally neglected or hardly checked. This is where highly explosive mines (with some tax consultants) are stored in the boar. Typical liability approach: The insurer writes ? . . . a shareholders’ resolution is necessary for your pension commitment – talk to your tax advisor about it . .”; however, occasionally the tax advisor is neither trained nor insured as a legal advisor. In addition, often a single shareholder resolution is not even sufficient for the pension commitment to become effective. At present, the solution does not always lie within Germany, as the latest draft law from the Federal Ministry of Justice proves (cf. press release dated 23.6.2005). At present, at best, the domestic market offers astonishing liability potential due to incomplete sales training and incorrect advice by occupational pension brokers. The restructuring of pension commitments is proving to be a growth market – without competence in labour, tax and insolvency law, hardly anything can be done professionally here. Far too few insurers are systematically restructuring their own portfolios. The market of insolvent GmbHs or GmbHs in crisis is untapped – hardly any intermediary is familiar with the contestation of insolvency. At least before the crisis, the intermediaries could help the GGF to get his pension commitment out of the GmbH almost tax-free: The commission is on the street, you just have to bend over a bit.

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

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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