*by Johannes Fiala, Lawyer (Munich), MBA Financial Services (Univ.Wales), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Lecturer (Univ. of Cooperative Education), Banker (www.fiala.de ) and Dipl.-Math. Peter A. Schramm, Actuary DAV (Diethardt), Actuarial Expert (www.pkv-gutachter.de )
“Smile and be happy, it could be worse!” And I laughed and was glad – because worse was coming. (Otto Waalkes)
Numerous entrepreneurs have recently been asking themselves whether they were well advised in their implementation of company pension schemes or whether they have fallen into numerous liability traps. The following case is of course fictitious ? Similarities with (not yet?) insolvent U-Kassen are purely coincidental, but not intentional.
Trust is good? ? Control is better ! A well-established company with about 1000 employees receives mail from the actuary, because the entrepreneur wanted to know how the changeover to the new balance sheet regulations according to IFRS would affect the company. The controller had asked the question. It was ?only? about the question whether and how high a possible employer liability would have to be accounted for in the occupational pension scheme?
The actuary calculates for the company: In the last three years, you have paid a good 3.7 million euros into ‘your’ U-cash. U-Kasse. A good 3 million euros have been used up to now in commissions, other deductions and administrative costs ? the rest corresponds to the current ?value? of a roughly estimated 0.7 million (of 3.7 million paid in or deferred compensation, as mentioned).
Who really deserves this? It gets even better. The actuary calculates that, assuming a contribution payment period of 25 years, a total of around 8.7 million ?costs? will have been consumed. The converted remuneration actually invested by the employees ? or partly used for appropriate risk protection ? will not even be able to reach the sum of the contributions at the end, even with interest ? the costs of the U-Kasse and the insurer are too high.
The company checks the creditworthiness of the U-Kasse and the intermediary (he called himself an “occupational pension consultant”). It is decided to file a lawsuit ? and so that no one can “save” themselves in the medium term through insolvency, all the criminal law stops are pulled out. The company management consults the supervisory board beforehand ? they agree to have the U-cash model examined by a lawyer. It dawns on the management that the intermediary alone has already earned his lifetime income by “setting up this company pension scheme”.
Misappropriation of deferred compensation: Initial enquiries with the reinsurance providers reveal that the U-Kasse has by no means reinsured all the money ? Parts of the money are missing or were invested years late. Documents of the reinsurance insurer were never submitted to the employer ? the employer had only ever received indirect information from the U-Kasse. For example, the U-Kasse had also chosen unrealistic terms for the reinsurance ? Final age e.g. 96 years (the longer the term, the higher the commission). As a result, the insurer paid out a multiple of the usual commission ? of course, this money is missing from the annual financial statement of the U-Kasse as income; someone has once again “taken a little something” from the salary conversion for themselves. In addition, of course, the establishment of the company pension scheme was commissioned for the employer and paid for by the employees. A miraculous increase of money ? for the one; mirror-inverted a fiasco for the employer. If only the tax consultant had never thought of the conversion of the balance sheet ?
But the U-Kasse doesn’t understand what the fuss is about – everyone must know that costs are incurred because you can’t work for free and this procedure is common and well-known. And for the three million in costs collected from deferred compensation, the company had also received an equivalent value, namely really good advice, and this was simply not available in the occupational pension system. as everyone knows – particularly complex and expensive.
The audit by the tax advisor: The tax advisor and auditor is also involved in the case – and finds out that the U-cash has entailed a tax liability from the very beginning. He evaluates the lawyer’s research, and here comes his argument:
– The U-Kasse has partially invested in investment funds. The growth of the fund’s assets should have resulted in an increase in the commitment ? but they didn’t exist. The U-Kasse should have avoided this reinsurance without providing guarantees. The tax advisor expects that the tax authorities will still charge the entrepreneur a hefty back tax payment ? which would then have to be passed on to the board of the U-Kasse. Whether the latter can cope with this economically is written in the stars.
– The company had not received any annual balance sheets and changes in the value of the reinsurance from the U-Kasse ? the insurer itself refused (quite correctly) to give any information directly to the company anyway, because it was not a contracting party. The U-Kasse then finally delivered these documents shortly before the insolvency, the U-Kasse. The company then wanted to appoint an employee to the U Fund Advisory Board because of an investment improvement. The U-Cash responded by banning the company’s employees from the premises. The company’s tax advisor is of the opinion, which is basically correct, that in the absence of de facto participation by the employees of the sponsoring company, a tax liability of the U-Kasse is almost certain.
– However, the tax advisor also has another argument for the tax liability of the U-Kasse: the articles of association state that the contributions of the sponsoring company may only be invested with ‘Pfefferminzia-Versicherung’. Thus the advisory co-operation of the coworkers of the carrier enterprise is void in things of the investment of funds already after statute and benefit plan. From a tax point of view, the tax advisor explains, the criterion of a “social institution” no longer applies. ? full tax liability ! The management asks the intermediary: The latter in turn documents that he has not undertaken any plausibility check in this respect to date ? full liability explains the lawyer after he hears about it.
U-Kasse in insolvency: The tax liability of the U-Kasse leads directly to insolvency. The commissions never arrived there (?but they usually never do!? ? correct: already if one justifies oneself with the supervisory-legal commission delivery prohibition) – however for it now the insolvency manager comes on the plan.
His offer: The reinsurance in the U-Kasse is not protected against insolvency in its concrete form ? the management had a completely different understanding of the U-Kasse’s advertising brochures on insolvency protection. The insolvency administrator calculates that the mediation costs have already been paid and offers:
The company has paid in 3.7 million, 0.7 million is available as value ? and against further ( ! ) payment of 0.7 million the insolvency administrator would release this value of the existing reinsurance contracts ? You will save the renewed acquisition costs by continuing, please recalculate and then inform me of your decision in the short term. Other letters are not answered? Bird eat or die? is what the management thinks. It is pointed out that one does not know what the outcome of the insolvency will be in the end.
When asked what the insolvency administrator would do with the additional 0.7 million, the terse remark is made that such proceedings cost a lot of time and take years ? as the tax advisor suspects, until many claims are time-barred.
The retired prosecutor: The department for white-collar crime was his last position, he knows the controller of the company from a chess club. It is decided to convene a round of experts to clarify the further details. The analysis of the reinsurance shows that contracts ?with return of premium? were chosen for the management ? and then follows a merciless analysis:
The public prosecutor arrives with his brother, who is an insurance broker: “Yes, if you die at 64, Mr. Board, the U-Kasse will get the contributions back, without interest, but your heirs will not see a cent of it. A look at the statutes and benefit plan reveals the gap in the concept. The board of directors is furious ? he was verbally “sold” the opposite during the mediation process.
Insurer’s liability: Another meeting follows ? the intermediary of the company pension scheme is present. In the meantime, the lawyer has obtained the credit reports of all parties involved. A long meeting follows, and the question of who is responsible for which mistakes. At the end the mediator has learned something ? this is also worth a lot to him and not in vain, so that he can console himself with it because of the countervalue to be brought up for it: he may bring his own home ?into the friendship? ? no criminal charges are brought against him for this. It is decided to sue the insurer together, who has threaded the U-cash concept (its name is to be taken from statute and benefit plan !). The intermediary discloses all training documents ? he still has them, except for a few gaps that colleagues help him to fill. Meanwhile, the lawyer reveals the details of the finance ?as a factual understanding? so that the company survives the case reasonably unscathed. The revelation of liability under IFRS brings the company itself to the brink of insolvency.
Fate: The agent loses his home ? and his wife through divorce. The works council is also involved and demands securities for the bAV salary conversion, the company as employer has to provide a guarantee ? the actuary calculates the appropriate amount. The only ray of hope ? the insurance broker and brother of the retired public prosecutor presents the commission-free and value-equal concepts of new implementation ways. His fee is paid ?out of petty cash? ? at the latest since the beginning of the reorganization it dawned on the board of directors what ?equal value? and ?duty of care under labor law? mean in practice and how expensive ?free? advice can be. free? advice can be.
Now the telephone rings: The managing director of an intermediary GmbH is on the line ? since 2003 he had paid a good 14,000 euros into ?his? U-Kasse ? He has heard from a colleague that the management of the U-Kasse has diverted funds, and the reinsurance company has not responded despite a reminder ? But that was to be expected anyway ? because in the contracts with the U-Kasse any contact between AG and insurer is excluded from the outset and the low value explains itself according to actuary information already alone from the usual calculation methods ? also without an additional ?grasp in the cash ?
PSV costs: The insurance broker explains: The contributions to the PSVaG are now rising to 7-8% in relation to annual deferred compensation and current pensions, and the negative effect on returns is that the company also has to pay these for pensioners.
Equal value: The lawyer wags a current essay, published by the ?Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.. (aba)? Additional U-Kasse administration costs charged to the converted remuneration lead to the (partial) nullity of all contracts – both with the U-Kasse and with the employees (remuneration conversion contracts !).
Restructuring as a solution: The insurance broker has a restructuring idea: There are brokerage-free tariffs with low administration costs ? this is how the future can be shaped, via a serious U fund solution, with pension fund for reinsurance. And what do the intermediaries live on then?
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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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