– Which disadvantages even the new occupational pension scheme (bAV) does not eliminate –
Both the Federal Ministry of Labour and Social Affairs (BAMS) and the Federal Ministry of Finance (BMF) are currently interested in improving occupational pension schemes (bAV). On the one hand, there is the concept of a “new” implementation route via the collective bargaining parties as the sponsors of the occupational pension (“Nahles pension”). On the other hand, the discussion is about optimising support via tax and social security law, as well as, for example, a subsidy obligation on the part of the employer. This subsidy should correspond to the amount that employers have already saved on social security and will have to pay in the future.
No new implementation channel for occupational pension schemes
Conceptually, it is old wine in new bottles: “Collective agreement, pure contribution commitment by the employer, minimum benefit commitment by a social partnership-controlled sole pension provider, collective protection in the event of default of the pension provider. This is not a new implementation method of occupational pension provision, but a variant of the minimum benefit contribution commitment, with the special feature that only the contribution commitments are made by the employer.” (Hanau/Arteaga: Legal opinion on the “social partner model occupational pension”).
Secure release of employers from liability through a pure defined contribution plan
With the Nahles pension, the employer is to operate only like a paying agent, and no longer have to be legally and economically responsible for its labour-law commitments, as was previously the case. The actual pension commitment will then be made by the occupational pension provider alone, a new Pensionskasse or a new Pensionsfonds under the influence of the parties to the collective agreement: this is to be supplemented by a guarantee (benefit commitment) from the new occupational pension provider (contribution commitment with minimum benefit) and the prospect that these occupational pension providers may also become insolvent. If this institution of the collective bargaining parties gets into difficulties, the guarantee given is in turn to be “protected” via the Pension Security Association (PSVaG) or a rescue company (“Protector”) for ailing life insurers. Up to now, when Protector or PSVaG came on the scene, this regularly meant a secure pension reduction compared to the commitment in the employment contract. Basically, the legislator can dispense with the “guarantee” of the bAV institution of the collective bargaining parties right away and, as with every occupational pension scheme and every life insurance company, provide for the possibility of reducing benefits if the investments have not developed as expected or promised. This would certainly always avoid expensive bankruptcy proceedings. The administrative costs of a settlement via the rescue company Protector or the PSVaG can then also be avoided from the outset. In the end, it will be the employees who will have to foot the bill for any reductions in benefits – and no longer the employer on the basis of its previous obligation to assume responsibility in accordance with the promise of a company pension previously made in the employment contract. In addition, this would also save the contributions to the PSVaG for bankruptcy protection as administrative costs.
Current employer liability for occupational pension commitments
Up to now, employers have mostly used external pension providers (Pensionskasse, direct insurance, pension funds, support funds) to pay a portion of wages and salaries only at retirement age in order to fulfil their employment contract commitments. For example, in the case of a defined contribution plan with a minimum benefit (the sum of the contributions paid in, less the costs for the biometric risk, must be available for the pension payment at the start of the pension), the employer is subject to “subsidiary employer liability”, Section 1 I 3 of the Occupational Pensions Act (BetrAVG).
The fact that, due to the low interest rate, a much higher savings rate (sacrifice of consumption on the part of the employee) is required today for a retirement pension of the same amount in the case of capital cover not only affects the private pensions of employees, but also the content of the commitment made by employers in their employment contracts. The prospect of having to pay up to more than the same amount (of the employee, as a “wage sacrifice” for deferred compensation) again as an employer, because the current commitment goes far beyond what is actually earned with “zero interest minus acquisition and ongoing administrative costs”, is hardly pleasing for employers. One way out of this is timely employer indemnity, through settlement of the occupational pension commitment.
Transfer of existing occupational pension schemes to the “social partner model
Insurance solutions need to be sold – but if there is no commission-driven sales in the new social partner model, the future Nahles contracts could be heavy as lead on the shelf. Some exceptions may be found where works councils advise or collective bargaining parties agree to reduce administrative costs for the future by transferring assets already saved with previous occupational pension providers. This is not likely to eliminate employer liability as a duty of compliance.
Current financial disadvantages due to occupational pensions
Contributions to pensioners’ health insurance (KVdR) and long-term care insurance (PVdR) must be paid by the beneficiary pensioner alone in the case of occupational pensions. It is not only when the occupational pension scheme is implemented indirectly, i.e. via external pension providers, that the employer is liable if the benefits paid by the occupational pension provider fall short of the commitment made in the employment contract (e.g. due to negative capital market interest rates). Reductions in benefits can also result from an external occupational pension provider being wound up by the rescue company Protector or from a total loss at a provident fund (also without protection by the PSVaG). The first pension funds are discontinuing new business and going into liquidation because the model is no longer viable for them in view of low interest rates. For employees, this is a hint that they will also have to deal with recourse liability due to the employer’s obligation to pay – or to settle for a fraction of the promised occupational pension. Moreover, company pensioners increasingly have to pay income tax on old-age and occupational pension schemes. Even those who as employees (because they have reached the income threshold) have not saved any SHI contributions through occupational pension schemes are often still allowed to pay SHI contributions on the occupational pension payments. The waiver of the occupational pension or the prompt severance payment would have prevented or at least greatly mitigated this financial disadvantage. In addition, Riester and occupational pension schemes are counted towards basic income support, so that the savings made by foregoing consumption ultimately only lead to a loss of income in the present – but not to a supplementary pension in old age. Even average earners not infrequently choose not to save in this way, according to the motto “live today, maybe save later”.
Total loss of occupational pension scheme in the event of private insolvency and foreclosure
The legislator has provided for a prohibition of severance payments in the case of occupational pension schemes in connection with the termination of employment, Section 3 of the German Occupational Pensions Act (BetrAVG). Employers who are well advised by actuaries tend to settle the occupational pension commitment for employees who are still in employment in order to completely discharge themselves today – this is also still possible for many pensioners. In addition, there are often considerable surcharges in the benefits of the insurer after effective revocation, due to incorrect advice, as well as through savings opportunities in social security for employers and employees – and a more favourable arrangement is also possible from a tax point of view. In the event of private debts or insolvency, the legislator has not yet provided for a right of the employee to have the occupational pension savings paid out immediately in order to reduce his debts. This drives up the interest burden on employee debt unnecessarily and uneconomically. A challenge to the occupational pension scheme on the grounds of incorrect advice may then be expedient. For example, the Federal Court of Justice (BGH, decision of 11.11.2010, file no. VII BZ 87/09) ruled that in the case of a direct company insurance policy the future claim for payment prior to the occurrence of the insured event is attachable. However, individual labour judges already consider the employer to be obliged to agree to the immediate liquidation of employees’ occupational pension assets out of consideration. This allows debts to be settled promptly and no further interest will then accrue. After all, the insolvency administrator of the employee (insofar as the occupational pension scheme was only financed by the employer) cannot draw the surrender value from the assets after termination and distribute it to the creditors (BGH, decision of 5 December 2013, ref. IX ZR 165/13). Depending on family circumstances and the structure of the employment contract, income from work can legally be exempt from garnishment to the tune of thousands of euros – not just the amount according to the garnishment table.
Old-age provision through pay-as-you-go or funded?
Numerous large providers of old-age provision are relying on the capital market – also for occupational pension schemes. The risk-free interest rate, for example on German government bonds, has already become negative. If these savings are also burdened with acquisition costs including commissions as well as ongoing administration costs, the saved assets are reduced accordingly – year after year. If this is not to be a milkmaid’s calculation, one will have to take into account the real development of purchasing power, i.e. real inflation or individual deflation, according to the personal shopping basket – not the fantasy of the Federal Statistical Office. Without actuarial expertise, voluntary optimization will hardly succeed. If life insurers had enough equity capital, they would also be in a position both to offer guarantees and to achieve higher returns on the capital market by investing in more volatile assets such as shares. Thus, however, they are forced to invest largely in low-yielding, safe interest-bearing securities. The lack of equity has a system – as a result, after-tax profits of up to more than 30% on equity can be achieved. If equity capital were doubled in order to be able to invest more in shares, this would mainly have a positive effect on policyholders – shareholders, on the other hand, would have to share the profits in relation to the increased equity capital, i.e. settle for about half the profit per share. So there is no incentive at all to increase equity.
Alternative: Pension directly with the investor or the municipality
Real estate and infrastructure investors as well as some municipalities in the context of private partnership projects already rely on financing through the direct sale of annuities. Although these life annuities can compete with the best life insurance policies and even offer higher guarantees than the non-binding surpluses they promise, this is a particularly favourable and long-term secure form of financing for municipalities and investors. The costs of unprofitable intermediaries such as insurance companies and banks as capital collection points are eliminated in this way, which benefits both the pensioner and the investor. In order to sell pensions, an investor or a municipality does not need any additional equity capital, certainly not in accordance with the requirements of Solvency II. Moreover, he does not have to calculate men’s pensions at the same low level as women’s pensions, as insurers do, because the General Equal Treatment Act only applies to insurers here. A few advisors specialize in these opportunities.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.pt-magazin.de (published 11/18/2016)
Publisher C.H.BECK oHG
Editorial office “BC – Zeitschrift für Bilanzierung, Rechnungswesen und Controlling
published in BC 12/2016
published in “Der Koment, Fachzeitung für Schausteller und Marktkaufleute” 10.11.2016 (issue 5552, page 4-5)
http://www.neopresse.com (published 11/25/2016)
www.procontra-online.de (published on 31.10.2016 under the headline: Can occupational pension reform prevent increasing old-age poverty?)
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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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