DIE WELT of August 03, 2005, page 1 reports:
A recent study by the German Institute for Retirement Provision (DIA) reveals that the statutory pension is no longer sufficient. However, almost 60 percent of all households do not make sufficient provision for their old age. Nearly one third of the population is even threatened with relegation to old-age poverty, which means the need for social assistance.
The following article shows that this can also threaten the shareholder-managing director (GGF) of medium-sized companies with an effective pledged pension commitment as a bAV.
Economic loss due to dissolution of reinsurance: The Federal Court of Justice (BGH) allows the insolvency administrator to withdraw the reinsurance despite effective pledging and vesting of the commitment (ref. IX ZR 138/04). Of course, the pledgee (GGF) of a pension commitment can demand security from the insolvency administrator, §§ 1282 I, 1228 II BGB. One practical way of doing this is to deposit the money with the court. 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 reinvested, section 149 InsO. In principle, the ward security of the system is prescribed by law.
Pension commitment may fall to the insolvency estate:
According to the conditions, the deposit lasts until the insured event occurs. If the condition later fails, for example because the benefit case from the pension commitment can no longer occur, the insolvency administrator subsequently distributes the money among the creditors! This means that there can no longer be any talk of “insolvency-protected occupational pension schemes”; in some cases, the money does not accrue to the heirs of the GGF but to the insolvency estate. Another variant for the early death of the pension commitment can be a challenge by the insolvency administrator: This tricky topic is also usually not found in the training materials of “even competent-looking occupational pension distributors”.
Further disadvantages due to the cancellation of the reinsurance policy: Experts from the insurance industry know the potential damages:
– Cancellation deductions may be made when the reinsurance policy is terminated.
– The payment of the reinsurance can trigger immediate taxation, cf. § 19 EStG.
– With a severance payment arrangement, taxation is due in accordance with the one-fifth rule, cf. § 34 EStG.
(This also applies to the “release” by the insolvency administrator or the change of CC):
Payment as an annuity is usually more favourable for the GGF from a tax point of view.
– With the termination of the reinsurance policy, it is possible that the commitment to the GGF or his family in the areas of death and invalidity will no longer be covered.
– The guaranteed interest on the money in the life insurance policy no longer applies, as does the continued participation in life insurance surpluses.
Excursus – Risk with direct insurance:
If, in the case of direct insurance, the subscription right is not granted as irrevocable in good time (from the time of vesting in accordance with the BetrAVG), the employer is only liable for a breach of duty of care: in the event of insolvency, therefore, only to the quota! This means that disappointment is pre-programmed when the insolvency administrator dutifully collects the money from the direct insurance policies (without or with only revocable subscription rights) to the insolvency estate: And again no insolvency protection!
Vesting essentially concerns only the employment contract – the subscription right concerns the relationship with the insurer. No insolvency protection at the personal level of the GGF: If a GmbH goes bankrupt, it is not uncommon for the managing director to be additionally held “manager” liable. The most frequent opponents are the insolvency administrator, the tax office and the health insurance companies. Most GGFs also personally guarantee the debts of the GmbH with credit institutions: The credit institution and other personal creditors of the GGF can (if the pledge is not contested by the insolvency administrator) fully access the money in the reinsurance policy. The same applies to the GGF with his direct insurance; the irrevocable subscription right only protects against access at the GmbH level.
In practice, many insolvency administrators release the reinsurance policy by means of a simple declaration (execution of a change of VN from GmbH to GGF) – the contract thus falls to the GGF, the personal creditors of the GGF could therefore seize it. However, as with direct insurance, payment is only made when it falls due.
No pension payment for the GGF, no seizure protection for the GGF:
In practice, hardly any insolvency administrator will pay out the pension in instalments because this service is probably simply not worthwhile. Without payment in instalments, the GGF often does not even have the monthly garnishment-free amount (§ 850 ff. ZPO) from the pension at his disposal: Since 01.07.2005, this has been €989.99 for single persons and €1,359.99 for married persons (possibly higher if maintenance is paid, e.g. to children). Whoever as a GGF also personally goes through the insolvency proceedings would have to be content with this for six years – after the residual debt discharge the GGF would again have the full “pension” at his disposal. However, this requires a provision that is not due or attachable in one fell swoop. In practice, there is usually a lack of insolvency-proof structures: Most training documents of occupational pension distributors do not know this.
Interest rate risk:
If the GGF is able to save his money from the pension commitment in the event of the insolvency of “his GmbH”, he will almost certainly find that the capital is insufficient: the retirement pension cash value – calculated according to the now unrealistic 6% of the 1998 Heubeck tables – is no longer up to date according to the assessment of the bAV consultant Dipl.-Kfm. Edmund J. Ranosch due to the considerably reduced returns on the capital markets:
“The interest effect on the present value of the old-age pension is already enormous if the pension amount is constant. However, if the pension/commitment is designed dynamically, there is a further acceleration in the level of the capital stock. If, in addition, the vesting phase were also designed dynamically, this would result in a further acceleration in the growth of the present value of the old-age pension.”
The interest rate of 6 % p.a. is based on the assumption that the capital stock within the pension provider (usually a limited liability company) earns interest if it receives the capital amount in the 65th year of life of the pension recipient. From this capital stock, the GmbH pays out the old-age pension, the value of which is zero after 16.5 years according to the old 1998 Heubeck tables, provided that interest is always paid on the remaining capital at the rate of 6 % p.a.. If the capital stock is invested externally, a lower interest rate per year is more likely to be assumed.
Today, insurers are calculating with a guaranteed interest rate of 2.75% in the long-term sector and are already aiming for a guaranteed interest rate of 2.25% p.a. following the latest BVG ruling on the fairer distribution of hidden reserves among future insurance contracts. The lower the interest rate below 6% p.a. in the future, the higher the capital stock must be at the start of the pension.
If today for an advance annual pension of 12,000 ” to a 65-year-old still approx. 118,000 ” according to Heubeck tables 1998 are sufficient, a higher capital stock must be built up already now. It is not so much the increase in life expectancy that is having an impact, but rather the reduction in the long-term interest rate level.
If at 6 % interest according to the old Heubeck tables 1998 still approx. 118,000 – are sufficient to pay the above old-age pension for 16.5 years, at 4 % interest on the capital stock already approx. 140,000 – and at only 2.75 % p.a. even 152,000 – must be saved in the reinsurance. interest even 152.000 – have to be saved in the reinsurance. These are reinsurance gaps of over 20 % to 30 % for the old-age pension alone from the outdated mortality tables. In the more recent DAV mortality tables 2004 R, the comparable present value is
- at approximately 146,000 at 4% interest, and
- about 158,000 at 2.75% interest.
This widens the reinsurance gap to between 30% and 40%. The occupational pension expert, Mr. Diefenbach at Alte Leipziger Versicherung, clarifies this: What is calculated here is only the pure old-age pension, without the usual 60% survivor’s pension and without the costs of disability cover.
No life annuity:
At the same time, the lifelong pension for the GGF has not yet been finally secured. The Heubeck calculations assume that, in a larger portfolio, the pension payments to GGFs who live longer (than the average life expectancy suggests) and the savings for GGFs who die earlier balance each other out. This is unlikely to be the case with one, two, three or even ten retired GGFs. The GmbH thus bears the risk of having to pay pensions to the GGF for longer than the capital stock is sufficient. In other words: The Heubeck table does not include a lifelong pension for the individual case, in fact only a limited “time pension”. For lifelong pensions of 12,000 – insurers calculate with the guaranteed interest of 2.75% p.a. today already a capital stock of low taken approx. 180,000 -.
Mind you, this is for a larger pension portfolio in which early deaths and longer-lived retirees experience some pre-calculated lump-sum compensation. But only a few GGF in a GmbH can count on such a compensatory effect.
At present, the solution does not always lie within the country, as the latest draft law from the Federal Ministry of Justice proves (cf. press release of 23.06.2005). In Germany, there is currently at best a surprising potential for liability, e.g. due to incomplete sales training and incorrect advice by occupational pension brokers. Only very few specialists are even familiar with the entire range of legally secure restructuring of pension commitments. The sales statement “Our pension commitments are insolvency-proof” is perhaps aptly translated by the American philosopher William James:
“A lot of people think they’re thinking, but they’re just rearranging their preconceptions.”
by Dr. Johannes Fiala
DIE WELT of 03 August 2005
www.channelpartner.de ( published Jan 25, 2006)
www.channelpartner.de (published 03/16/2006 under the headline: Company owner: pension in case of insolvency?)
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About the author
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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