Company pension scheme (bAV) through deferred compensation: 10 billion social security as liability potential for employers

Company pension scheme (bAV) through deferred compensation: 10 billion social security as liability potential for employers
*by Dr. Johannes Fiala, Attorney at Law (Munich), MBA Financial Services (Univ.), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Lecturer for Civil and Insurance Law (BA Heidenheim, Univ. of Cooperative Education), (www.fiala.de) and Dipl.-.Math. Peter A. Schramm, expert for actuarial mathematics (Diethardt), actuary DAV, publicly appointed and sworn by the IHK Frankfurt am Main for actuarial mathematics in private health insurance (www.pkvgutachter. de)
When the social security inspection service rings 3 times
Employers are often unknowingly caught in a liability trap, because the majority of deferred compensation is void according to a new ruling by the LAG Munich dated 15.03.2007 (Case No. 4 Sa 1152/06). An employee had around 6,000 euros converted into a company pension by the employer – after 3 years she left the employer and only 10% (around 600 euros) was still available as value. Even if another life insurer would offer better conditions, the employee cannot choose the company. This has been clarified by the Federal Labor Court (BAG 3 AZR 502/04). When taking out a policy, it is also important to consider what happens to the occupational pension if the employee changes jobs or becomes unemployed. The employer is in the situation of a disinterested trustee who invests the money of his employees (OLG Düsseldorf, judgement of 06.03.1992, Az. 17 UI 201/91). For the employer a catastrophe, he must pay not only the 90% missing here (conclusion and administrative costs) again. In addition, the social security contributions must be paid in arrears: Around 40% employer and employee contribution (based on the amount of void deferred compensation) plus 0.5% interest per month for the delay. In addition, there are the costs of the tax advisor for the accompaniment of the audit and/or a correction of the previous declarations.
Phantom wages also lead to social security liability
The tax expert calls this the “phantom wage” – it is sufficient that an entitlement of the employee exists under labour law: social security must be paid even if the salary is not paid to the employee. The ineffectiveness of the deferred compensation thus also leads to the obligation to pay social security contributions in arrears if the ineffective deferred compensation is continued, i.e. if initially no salary is paid at all. Any employee would have preferred to have the money paid out in order to save it privately. In its ruling of September 13, 2007 (Case No. VI R 54/03), the Federal Fiscal Court (Bundesfinanzhof, BFH) decided that the subsequent payment by the employer of the employee’s social security contributions constitutes a pecuniary advantage (subject to additional tax). If the payroll was correct from the outset on the basis of effective contracts, the employer could save itself these costs. Incidentally, it would be a mistake to trust that the auditors of the Deutsche Rentenversicherung Bund and the tax authorities are not yet aware of this tax problem. The Stuttgart Labour Court (judgement of 17 January 2005, AZ: 19 Ca 3152/04) had already decided: “Labour law breaks insurance law”: “With regard to the damage possibly arising for the employee in this respect, the employer’s duty of care under the employment contract requires that the employee be informed of the risk associated with the insurance tariff selected by him, at least in the case of deferred compensation, before the deferred compensation agreement is concluded, so that the employee can calculate the damage possibly arising and, if necessary, refrain from deferred compensation”. The employer’s liability risk consisted not only in the fact that he had not provided any information at all, but above all in the fact that the employee should have understood in full that (as in the Munich Higher Labor Court case) 90% of the benefits accrue to the insurer, the U-Kasse and the intermediary, and that only 10% remain for the employee. Such clear information is lacking in most of the usual explanations of zillmerization. Any employee would have preferred to have the money paid out in order to save it privately.
Not the first case of this kind
In the past, the social security auditors already focused on the conversion of remuneration for employers bound by collective agreements: after 29.06.2001, the admissibility requirement for the conversion of collectively agreed wages was that the collective agreement had provided for or permitted this. Without such a provision in the collective agreement, the deferred compensation was unlawful, i.e. null and void. The employer had to unwind it in relation to the employee. Some company pension providers have left the employer out in the cold.
Consultant liability
It is not only advisors in the service of the sponsors of occupational pension schemes who are regularly personally liable. The liability can affect insurers behind it as well as insurance intermediaries. The situation of the tax advisor is particularly delicate – because he can only be expected to provide tax advice and no other legal advice. However, in the case of all implementation methods of occupational pension schemes, the tax advisor must generally check the effectiveness of the contracts before the accounting or bookkeeping approach, or refer the client to legal counsel. In the event of insolvency, the managing director will have to ask himself why he has not shown the obligation to pay social security contributions in arrears in the case of objectively ineffective deferred compensation in the balance sheet. Experts believe that this could even constitute objective breach of trust under criminal law.
Legislative intentions
From informed circles it is said that deferred compensation (an obligation of the employer since 1 January 2002) was not an “economic promotion programme” for insurers and other sponsors of occupational pension schemes. On the contrary, the legislator had not thought of “conclusion or mediation costs”, and certainly not of the pension provider retaining, for example, 90% of the salary earned. The legislator had intended to strengthen private and occupational pension schemes through the Retirement Income Act in order to counteract the threat of old-age poverty. The Munich Higher Labor Court (LAG) has now ruled that, among other things, due to the lack of “equal value” of the salary conversion, such contracts are null and void. It is important to note that there are also pension models in which around 100% of the converted salary components are available after three years instead of around 10%. The employer can often only ascertain this by calling in an independent actuary or independent fee consultants.
Recalculation protects against misleading
The employer can in no way rely on statements made by the insurer or intermediary. After an actuarial review, employers were not infrequently surprised to find that the maximum permissible acquisition cost rate had been used – the intermediary had claimed special conditions with a particularly low zillm rate. Parts of the costs were completely concealed or, when asked about the costs, low actual administrative costs from the insurer’s annual report were mentioned – but then almost five times that amount was included in the premiums – in addition to the already high acquisition costs. In order to explain what the premiums were used for, the risk costs for death cover are sometimes quoted as being 10 times higher than they should have been. And instead of telling the customer, who asks about the value of the contract, the actual surrender value or the actuarial reserve without lapse deductions, he is told the value of the premium-free sum. This then often amounts to more than double the surrender value actually available at the time, as it will only have to be available in perhaps around 30 years at the start of the annuity as a result of compound interest. If the customer asks about lapse deductions, he is told, for example, that no lapse deductions are made in the case of premium exemption, but is not told that they are of course made in the case of surrender. A look at the insurance terms and conditions then often shows that the insurer has not really waived it even if the premium is waived. They are also not afraid to play with words: at the front of the conditions it says that no “deduction” is made from the actuarial reserve in the last five years before the start of the pension, but further down the line you read how high the “deduction” from the actuarial reserve is in these years. Information deficits also lie in the numerical examples of the advisors: there the tax and social security savings are extensively represented – and concealed, how thereby also the social pension decreases. If one were to do the math carefully, the employee would often be left with less net income in old age than if he had built up a private pension from taxed income subject to social insurance. Users of advisory software should ensure that it also compares deferred compensation with a similar private pension in terms of total net retirement income.
(experten.de (17.12.2007))
Courtesy ofwww.experten.de.

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About the author

Dr. Johannes Fiala
PhD, 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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