There is economic leeway in the redemption of company pension entitlements
In occupational pension schemes (bAV), most dependent employees are in the position of a lender, because the employer has regularly set aside at best a fraction of the necessary funds for a specific purpose. Usually, the employer does not get away from the promise he made for the past, because the employee has also worked for the bAV – only he leaves the money legally in the hands of the employer, for investment for old age.
While every credit institution regularly protects itself from the consequences of insolvency or underfunding by means of loan collateral, employees often blindly trust the promise of a pension that may later somehow be of value. These are only covered for part of the claims by the Pension Security Association (PSV).
Since 18.10.2008, even arithmetically over-indebted companies, including those whose shares are traded on the stock exchange, can continue to operate entirely without the obligation to file for insolvency, provided there is a predominantly probable positive medium-term prognosis for continuation, § 19 II InsO.
Spin-off to a pension company
The Federal Labour Court (BAG, judgement of 11.03.2008, ref. 3 AZR 358/06) ruled that employees cannot object if the employer outsources the funds for the occupational pension scheme to a so-called pension company. The previous employer is then only liable for five years alongside the pension company – in the case of pensions under the Company Pensions Act for 10 years, § 133 III UmwG.
The capital resources of the pension company must only be sufficient for the pension obligations discounted over their remaining term at the average market interest rate of the past seven financial years, § 253 II HGB. The pension adjustment must also be taken into account in view of the development of purchasing power over the past 20 years. Hardly any employee knows that he can demand security within six months (§ 22 UmwG) and that the parties involved are only liable to him for damages for deficits in capital resources until the statute of limitations expires after five years (§ 25 UmwG).
In the case of a spin-off, the employer has the advantage of being able to “net out” the pension liabilities and the reinsurance assets in the balance sheet in order to embellish the balance sheet. Thus, someone who owes EUR 10 million in pension liabilities in 20 years’ time currently only has a liability of around EUR 4.56 million at a discount rate of 4 %. If he now has assets of EUR 4,56 million in securities bearing interest at 2 %, everything is in order on the balance sheet and he could even offset the two amounts and remove them from the balance sheet altogether. In fact, however, it is foreseeable that, with the EUR 4,56 million of securities at 2 % interest, he will have only about EUR 6,8 million of funds in 20 years, when he will need EUR 10 million.
The opposite approach is also conceivable, i.e. leaving the pensioners in the previous operating company (LAG Köln, judgment of 14.01.2013, Case No. 2 Sa 818/12), with appropriately calculated capital resources and withdrawal by the shareholders of everything that can be regarded as “unnecessary” according to the rules of the art of accounting.
The audit of the capital resources of a newly established hived-off pension company is to be carried out upon registration by the registration court. For reasons of simplification, the term is assumed to be 15 years and an interest rate in accordance with the Ordinance on the Discounting of Provisions (e.g. 5.16% in 11/2010) is used for present value discounting. This results in a very low valuation of the pension liabilities, which reduces the capital requirement of the pension company on paper to an amount that must foreseeably lead to its insolvency over the years.
The Federal Labour Court (BAG, judgment dated 17.06.2014, Ref.3 AZR 298/13) ruled that a pension adjustment pursuant to Section 16 of the German Occupational Pensions Act (BetrAVG) can also be demanded by a pension company with insufficient capital. Compensation for employees due to undercapitalisation, however, is not available from the pension company, but only from the transferring company – and this claim becomes time-barred in a few years, §§ 280 I 1, § 241 II, §§ 31, 278, BGB. Without expert assessment, neither employees can secure their legal rights nor can works councils fulfil their duties to protect employees. If the pensioners’ company does not have enough funds to adjust the pensions, but is obliged to do so, then in the end this will only accelerate the already foreseeable end somewhat.
Capital-saving design of pension burdens
In many cases, the employer’s objective will be to provide the pensioner companies legally only in such a way that they end up with the PSV fairly quickly due to insolvency, and to withdraw all capital beforehand except that which is absolutely necessary within the framework of legality.
The cheapest way to get rid of (old) burdens by thousands of company pensions was practiced in the “Kaufhalle” case. The assets were simply extracted, the company was liquidated, and all company pension payments were stopped. The PSV did not even step in at first because there was no case of insolvency (Bundestag Drucksache 16/4063 dated 17.02.2007).
What is little known is that pension provision via the PSV can lead to expectations of up to less than half of what was promised by the employer, because from the time of insolvency or protection, employees often no longer receive any share of the surpluses generated or any company pension adjustment. In the case of senior employees, there is often only “protection” via the PSV for a fraction of the pension anyway.
An elegant way to legally bury a company within up to more than one year is offered by the European Company Law by merging the domestic company with a foreign one. The files and the assets move abroad and disappear there, for example with a discreet trustee in the Alps or on an island. The insolvency of the merged company abroad would then also not be a case in which the PSV would be obliged to step in, as the PSV only steps in in the event of insolvency under German law.
offshoring
However, the direct way, the simple relocation of the registered office of a German corporation abroad with a corresponding entry in the German commercial register, is not permitted by case law (OLG Munich, decision dated October 4, 2007, file no. 31-Wx-36/07), because GmbHs and AGs require an administrative headquarters in Germany. However, the merger with the subsequent cessation of operations in Germany leads to the desired result.
A dormant liquidation of the employer is also conceivable, leaving behind the financial resources for the occupational pension scheme. Everything else is distributed to the shareholders as long as no over-indebtedness occurs. Then not even the register court checks whether a minimum capital is present.
If, however, the pension provision was previously discounted at 6 % for tax purposes and the financial resources were invested at 4 %, which currently correspond exactly to the pension provision, then the interest of 6 % required to finance the pensions cannot be generated from this. Then there is no over-indebtedness at the moment, but in a few years it is bound to happen.
And if the market interest rate is currently only 1.5%, then it would be a shame for the shareholders to leave the pensioner GmbH equipped with the 4% securities, which have hidden reserves of perhaps 15% compared to their book value, which are not even shown in the balance sheet. One sells the 4% securities and reinvests them at 1.5%, can then also distribute the 15% realized hidden reserves to the shareholders as not required to cover the pension provision, and then confronts the pensioner GmbH with the problem of how to finance 6% interest on the pension provision with 1.5% on the opposing capital. Then it is still a few years until insolvency, unless interest rates continue to fall and the pensioner GmbH can therefore realise hidden reserves again and show them in the balance sheet. In 2014, even with falling interest rates, German Bunds were still able to generate a return of 12% in this way.
The Federal Court of Justice (BGH, judgement of 28.04.2008, file no. II ZR 264/06) decided that there is no recourse of the insolvency administrator to the shareholders if a capital company was provided with too little capital for its intended economic activity.
However, employees may have a claim for intentional immoral harm by failing to disclose inadequate insolvency protection under § 826 BGB against the management, as well as against the shareholders as participants, § 830 BGB. The tax office and the social security institutions can also refer to this – but not the insolvency administrator. However, insofar as the PSV steps in for the company pensions in the insolvency, the employees generally do not yet have any insolvency damage and thus no claims for damages.
The limit of the possible withdrawal of capital was shown by the BGH in its decision of 30.08.2011 (file no. 3 StR 228/11): Even the consent of the shareholders is ineffective and thus the disposal of assets by the managing director is abusive if the economic existence of the company is endangered in violation of company law, for example by impairing the share capital contrary to § 30 GmbHG, by causing or deepening over-indebtedness or by endangering liquidity. Only this then leads to criminal liability for breach of trust and thus also to personal de facto liability of the management and shareholders. In the case of the pensioner society, however, this will be easy to avoid initially in the first few years.
A comparative assessment of the tax and social security burdens, including consideration of the payout phase and the risk of insolvency losses, has already persuaded many an employee to look for alternatives and have the occupational pension scheme terminated. By agreement with the employer, this can be done at any time – sometimes as a genuine tax saving scheme, and always in the event of a sudden emergency, even if it involves a previous employer.
On the grounds of misrepresentation, the pension commitment can even be eliminated from the outset, as void, and compensation paid instead. An employer can usually reach a more cost-effective agreement with the employee on such payments in the form of cash straight to the hand as a replacement for the destroyed company pension commitment.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
published in Versicherungswirtschaft, issue 06/2015
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About the author
Dr. Johannes FialaPhD, 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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