bAV: Total loss, social welfare and old-age poverty instead of ?life insurance with pension commitment?

by Johannes Fiala, Lawyer (Munich), M.B.A. (Univ.Wales), M.M. (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Banker (www.fiala.de)
In the beginning there is often a tax saving model: For the family business, which is usually run as a GmbH (limited liability company), the company pension scheme (bAV), for example as a pension commitment, first of all means a tax saving. Numerous product providers, especially insurance companies, usually propagate a pledge to the managing director and his wife as insolvency protection.
Social welfare is pre-programmed: Every year, about 19,000 limited liability companies go bankrupt. If the company becomes insolvent, the entrepreneurial family is usually left empty-handed when it comes to occupational pension provision. The advertising slogans of product providers are just as deceptive about the dangers as the reassurance pills that come from the mouths of some brokers.
No effective protection against seizure: It is a fact that insolvency administrators also terminate life insurance policies. The surrender value has fallen into the insolvency estate,” they say succinctly. The Ministry of Justice (BMJ) also recognised that “according to the current legal situation, private pension and life insurance policies are generally attached and seized by the creditors”. [oder den Insolvenzverwalter] be realised? Under German law, there is regularly no effective attachment protection for the subsistence level of the entrepreneur concerned.
Old-age poverty: The BMJ’s statement was prompted by the petition of an entrepreneur who had become insolvent after 30 years of self-employment. Unfortunately, his “life insurance (with pension commitment)”, which he had taken out in 1989, had been confiscated by the insolvency administrator. The Petitions Committee was unable to help (cf. German Bundestag, printed matter no. 15/5570 of 01.06.2005 and the statement of the Federal Ministry of Justice to the Petitions Committee). However, some insurance companies do not only play down this total loss risk in a sales-oriented manner instead of offering more conclusive concepts.
Liability for incorrect information: With the selling of financial products not only the mediators, but also the backers (e.g. product offerers and selling companies) cling, if they lead for example with training courses by wrong statements the mediator in the mistake (BGH judgement of 28.02.2005, Az. II ZR 13/03), or for instance truth-wrongly the security of the investment promote (OLG Celle, judgement of 15.12.2005, Az. 11 U 107/05).
Total loss risks: In occupational pension schemes, not all products can regularly be used without risk. The jurisdiction gives a security-oriented line: In the judgement of the LG Stuttgart of 19.10.2004 (Az. 7 O 249/04) it concerned an investment ?for the security of the standard of living in the long term? ? the court found that ?80% securities ? and 10% venture capital ? with an immanent total loss risk are unsuitable for old-age provision. The OLG Jena (Az. 5 U 693/04) means that shares are unsuitable for the age precaution (and for the time value account naturally also!), the OLG Frankfurt/Main (Az. 13 U 24/03) holds investment funds for regularly little suitably around an age precaution to place surely. Also the OLG Koblenz (judgement of 21.10.2005, Az.: 8 U 1295/04) considers pension and share funds unsuitable for the structure of an age precaution. In contrast, some initiators propagate closed investments with considerable entrepreneurial risks for the company pension plan, up to the total loss.
Financing risk: A glance at company balance sheets reveals that two thirds of the capital required to honour the pension commitments made is missing, according to specialist books. For the family entrepreneur, this means that his pension will end after a few years in case of doubt. This risk is often not recognized simply because, under tax law, it is sufficient to recognize the low present value of the defined benefit obligation in the balance sheet at the time of the commitment. Only the comparative offer of a lifetime annuity by an insurer reveals the magnitude of the funding gap.
Practical example: An entrepreneur has saved money in a life insurance policy in the amount of approximately 140,000 euros as a surrender value. The promised pension amounts to 3,000 euros per month. 500,000 is earmarked for death coverage. An occupational pension consultant comments on the situation with the words ‘I’m not worried about the 60% widow’s pension, but as an entrepreneur you yourself would have to retire on time before your 70th birthday ? otherwise this type of financing will never work out’.
Duty of disclosure: Financial service providers have always had to provide information about the total loss risk of investments and financial concepts (also in the case of occupational pensions) ? the agent cannot exclude this, because it is a core obligation (BGH judgement of 20.01.2005, Az. III ZR 251/04). Insurance brokers must provide information here on an ongoing basis without being asked to do so. For the tax adviser the obligation goes still further, because it is to be referred after the supreme court iurisdiction forced to a legal adviser actively (last OLG Cologne, judgement of 27.01.2005, Az. 8 U 66/04), because the entrepreneur threatens substantial damage, if for example the insolvency risk materializes.
Solution approaches: The solution approaches are as diverse as the problems in the individual case. Sometimes it is sufficient to change the implementation method, even though not every provident fund is safe from the insolvency administrator. A restructuring of the company and its financial management can be just as effective a cure as a partial pension or company transfer. The vast majority of family businesses have considerable financing gaps in their company pension schemes: There is a need for action ? even if the company is unlikely to be able to close the financial gap on its own.

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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