The Federal Labour Court (BAG, ruling dated 11 November 2014, ref. 3 AZR 404/13) decided when a pension commitment does not fall under the protection of insolvency insurance by the Pensionssicherungsverein aG (PSVaG) as a company pension scheme (bAV) because it is based on a position as a shareholder – and was therefore not issued on the occasion of an employment relationship. The mere notification by the PSVaG that a pension commitment was eligible for insolvency protection and that contributions would then be paid to the PSVaG did not constitute protection of legitimate expectations if reference was made to leaflets on the statutory requirements.
Total loss of occupational pension provision in the event of employer insolvency
Constant changes in case law require that commitments and the implementation of company pension schemes or pension promises are subject to regular maintenance. Thus, for example, the PSVaG’s statement that it ‘considers the pension commitment granted to be fully eligible for insolvency protection’ would then also have been recognised as virtually meaningless – including the need to make provision for the event of insolvency in some other way.
Do not confuse worthless declarations of knowledge with declarations of intent
If the employer writes to an employee ‘we have made provision and consider your pension commitment to be insolvency-proof as described in the addendum to the employment contract’, then it is a mere statement of knowledge. This in no way offers legal certainty, just as legal opinions of the PSVaG are at best a pretty trap – even if experts such as insurance brokers or tax advisors take such statements at face value in order to be liable for them afterwards. Declarations of knowledge do not contain any intention to be legally binding and can therefore also be false without liability consequences.
What courses of action are available in the event of employer insolvency?
Even if the occupational pension scheme is protected by the PSVaG in the event of insolvency, there is a risk that the PSVaG will ultimately pay out less than half of what was promised. The PSVaG does not offer ‘comprehensive cover in the event of the employer’s insolvency’. If the occupational pension scheme is not protected against insolvency by the PSVaG at all, i.e. in the case of direct insurance and pension funds, but also in the case of managing directors with any kind of capital participation in their employer, valuable collateral must be available in good time.
Regular ‘maintenance’ includes checking the value and complying with the necessary regulations for asset protection so that the occupational pension collateral cannot ultimately be realised by the insolvency administrator. In almost all occupational pension commitments, the legal right of employees to sufficient legal and economic rectification as well as ongoing monitoring is missing. Anyone who loses their occupational pension benefits because the PSVaG does not step in and no other provisions have been made can register their legal claims with the insolvency administrator – and may end up with more than 1% of what they would have been entitled to under their employment contract. In fact, this ends in a total loss.
Every credit institution asks for sufficient collateral – and, according to its general terms and conditions, requires regular self-disclosures from the borrower, as well as a subsequent strengthening of the collateral depending on the situation of the case. If an ordinary employee, a (minority) shareholder or already a pensioner notices the lack of or inadequate protection via the PSVaG, it will be difficult to enforce an increase in loan collateral. In many cases, it will be easier to hold the supplier of such inadequate model agreements or the specialist occupational pension intermediary liable by means of a declaratory action. The bAV company consultant or bAV expert broker or
whose liability insurer thus becomes the guarantor for the further occupational pension benefits, insofar as these may still fail at a later date. Even the vast majority of those familiar with the subject are overwhelmed when it comes to the question of how to bridge the gap between an occupational pension commitment and the only pro rata subsequent PSVaG deficiency payment.
calculated, and then closes.
Avoid early disposal of collateral
It is not uncommon for there to be some form of security at the start of the pension, e.g. in the form of a pledged claim to benefits from a reinsurance policy, usually completely insufficient to actually pay the occupational pension on a permanent basis in the event of insolvency. Nevertheless, many pensioners are also gradually giving up this inadequate security by allowing it to melt away at the same time as they pay their occupational pension.
But the pensioner would not be obliged to do so: in fact, he could insist on the full receipt of the capital by the insurer – and its further interest – as security and demand that the employer alone pay the occupational pension. Only when, after many years of full occupational pension payments, the undiminished capital accumulated by the insurer is sufficient as security for the occupational pension payments still to be expected until the end of life – and possibly also for survivors’ pensions – is the pensioner obliged to release this security successively.
Out of ignorance, however, many give up their already inadequate securities unnecessarily prematurely.
No legal claim to binding information from the PSVaG
In general, there is no legal entitlement to a binding declaration from the PSVaG that a commitment is treated as a partially covered occupational pension – either before the start of the pension or afterwards. The PSVaG will always decide only after the security case has occurred, which is popularly described as bankruptcy. There is no legal claim to binding information here.
In this respect, employees at all levels are themselves required, including the managing directors and the works council, to ensure legal and economic security on a regular basis. It is a hint when the press writes that in some groups up to more than 50% of the financial means are missing in order to pay the bAV commitments, or when specialist brokers observe that up to more than 90% of own cases in medium-sized companies are not even sufficiently secured economically and legally.
Instead of ongoing maintenance, however, you may already be familiar with the forms for the basic pension – just as a car that hasn’t been maintained for decades will eventually be dipped for a certificate of scrappage, for deregistration.
Waiver of occupational pension benefits for restructuring instead of insolvency?
As a rule, employees, including managing directors – but only if properly designed – have worked for the later pension benefits. Part of the remuneration is paid later as a company pension payment. The employee effectively leaves this money with the employer – like a loan. As a rule, the employee cannot be deprived of this legal entitlement by revocation, even for a necessary rehabilitation, unless this has been reserved. The insolvency administrator will pick up on this error in the design and revoke the occupational pension – also a total loss.
The only way to reorganise the situation is to revoke the unearned pension commitment for the future if it is structured correctly. This, but also the voluntary waiver of already earned occupational pension benefits, can lead to double taxation, i.e. a hidden profit distribution. The tax auditor would be pleased later if the restructuring measures had exactly the opposite effect – namely additional exorbitant unnecessary tax liabilities due to design errors.
PSVaG benefits due to pension reduction for restructuring?
If the pensions (in the case of a pension scheme recognised by the PSV by means of a binding declaration, but which may not be a pension scheme at all) can be reduced in the event of restructuring without insolvency, is this a case for the PSV at all?
For the PSVaG to step in, there must be a security case, i.e. an insolvency in Germany.
Reorganisations or liquidations are regularly not cases in which the PSVaG steps in.
Also in the case of company succession, as well as in the case of company sale, the question often arises as to how to reorganise bAV burdens beforehand. This usually requires a lead time of more than one year for the design with implementation, in order to achieve above all a de-liability of the company.
Then, in the best case, occupational pension entitlements can be waived or a severance payment with tax advantages can be considered.
The PSV also does not pay if, as a result of the sale of a company, the claims are at some point directed against a foreign company and the latter becomes insolvent – because a foreign insolvency is not a security case for the PSV.
Refund of contributions paid to the PSVaG in error
The legislator does not like it at all if contributions already paid for more than a few years could be reclaimed. Such levies may be recoverable for the current year, and up to four further years – much as with family members who are mistakenly treated as employees but are in fact not liable for insurance. In the past, financial service providers demanded refunds up to 30 years in arrears – today, tax advisors may still be liable for up to 10 years for the fact that no proper appraisal was carried out. To think of public liability would hardly be promising – because as long as there are other advisers involved who are partly to blame, like the tax adviser who is mandated on an ongoing basis, they are liable and not the state.”
by Dr. Johannes Fiala and Peter A. Schramm
published in Funds Online. 10.02.2015
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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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