Company pension scheme: Increase in risk due to maximum advertising promises by providers

– Employer liability for defined benefit plans, defined contribution plans, defined contribution plans with minimum benefit –


Using sample calculations for illustration, employers and employees are usually promised exaggerated pensions and increases in the value of occupational pensions (bAV). The external providers of occupational pensions (insurers, Pensionskassen, pension funds) are the most closely monitored and regulated, because they are among the most dangerous institutions. “If something goes wrong, it’s not our fault, it’s the fault of the supervisory authorities,” comments a lobbying association, without revealing that the employer is liable for the occupational pension promises.


The scope of the employer’s liability follows the content of the occupational pension commitments

No one who is not regulated and supervised in an area actually has to take advantage of it. And the one who is being monitored may have ways of legally evading it. If insurers calculate with a much lower actuarial interest rate than the permitted 1.75% on the savings portion, the pension prospects are more cautious, so that the employer liability is lower. Swiss insurers in particular have been exercising such caution for decades. They are also considered to be safer providers of occupational pensions because their financial stability (solvency) is up to more than twice as high due to better equity capitalisation.


If the occupational pension provider has miscalculated or overspent

Using such an external carrier to outsource all occupational pension risks may, depending on the carrier’s business policy, be more dangerous than bearing and managing the risks yourself.

Employers can review their occupational pension commitments in two ways. On the one hand, to what extent has the employer undertaken to provide benefits according to the chosen wording of its occupational pension commitment? Which counter-financing with which already occurred and future possible risk of a gap with obligation to pay exists for the employer?

There is no obligation on employers to select the highest possible occupational pension benefit for the same contribution, for which they are then most likely to be liable in the event of non-achievement.


Federal Labour Court (BAG) sentences employer to liability for default risks

When brokering occupational pension solutions, employers are not made aware of the fact that there are more than half a dozen legally permissible ways for external sponsors of occupational pensions to, in effect, retroactively correct advertised prospects for benefits and asset growth.

The BAG (ruling dated 19 June 2012, ref. 3 AZR 408/10) orders employers to be liable for their occupational pension commitment even if the external occupational pension provider reduces its benefits. The reduction of benefits seems increasingly likely in view of the low interest rates announced as permanent on the capital markets.

Will the return on occupational pensions after deduction of administrative costs and levies not be permanently negative in real terms? It is precisely the high guarantees that force external providers to invest their capital in the safest possible way and thus with the lowest possible returns.


Where the most is guaranteed, the highest is the risk that the employer will be liable for it

Each type of occupational pension commitment and each outsourcing to external pension providers can offer higher or lower guarantees, be calculated more prudently or less prudently.

Where there is the most guarantee, there is also the highest risk that the employer will be liable. Employers who want to minimise their liability must above all ensure that, as far as possible, only those things are bindingly promised to the employee that will also be adhered to with the greatest possible certainty over decades.

However, the current solvency requirements for insurers in Germany do not even ensure that from the start of premium payments until death over 50 years, at least 4 out of 5 insurers are able to meet their obligations. To this end, it should also be required that it does not have to pay premiums in arrears (in the system comparison), because such an obligation (in the case of pension funds or pension funds) could cause the institution concerned to operate more riskily. The idea of promising as much coverage as possible with as little effort as possible is counterproductive from a liability point of view.


In the case of insurers and insurance-like sponsors of occupational pension schemes, those are preferable for liability reasons which do not allocate their surpluses to a large extent on an ongoing basis and with a binding guarantee from then on, but first guarantee as little of them as possible and put as much as possible into the final surpluses which can be revoked until the end.

The entire advertising strategy of the intermediaries, which is aimed at maximum benefit commitments and high current interest surpluses, is thus reduced to absurdity. Even if an insurer is caught by the “Protektor” protection scheme, benefits that have already been “guaranteed” can also be reduced.


Decision of the legislator in favour of employer liability

The German Company Pensions Act (BetrAVG) obliges the employer, if it accepts the legally non-mandatory typified types of commitment, to be liable for differences between the content of its commitment and the investment performance at the sponsor of the occupational pension scheme.

The employer always makes a binding promise of the benefit guaranteed by the insurer himself, although the insurer can reduce it at the latest if BaFin intervenes. In other countries, such as Switzerland, there is no such liability, for example, in the case of pension provision via pension funds.


Multiplication of insolvency risks through off-the-shelf occupational pension solutions

An insolvency or total default risk exists first of all in the chosen investment product, for example in the case of a capital cut of government bonds or a bank bailout, but also in the case of reinsurance in closed participations, i.e. investment funds with entrepreneurial risk.

In addition, there is the insolvency risk of the external occupational pension provider, i.e. if life insurance companies, pension funds or pension schemes become insolvent – of course then usually associated with restructuring at the expense of savers or investors.


Furthermore, the risk of employer insolvency “adds up” – at each of these three levels one can assume a risk of up to more than 1% per annum, i.e. over 40 years of pension provision up to a total of more than 30% %.

The widespread reassurance of employees ends at the latest when it is realised that after an employer insolvency the Pension Protection Association will pay up to less than 50% of what the sample calculations from the bAV sales department predicted. In retrospect, perhaps it would have been better to invest a net salary paid out as a fixed deposit?


Exit strategies for employees and employers

André Kostolany said, “The safest thing about the state pension is the pension gap.” The starting point for opting out of occupational pension provision is the question of the risks for employers and employees – such as the prospect of disputes.

Increasingly, employees, works councils and employers are checking whether pension assets have been invested “for equal value” and, after appraisal, discovering that they could have invested the money at least as well themselves. Together, employers and employees can limit losses, at least for the future, and seek alternatives.

Ways outside of insurance investments and highly regulated occupational pension schemes – such as employee capital participations or foundations, which have also been possible since 2010 with tax-free deferred compensation of up to EUR 360 per year – can represent more flexible pension solutions with a stronger commitment on the part of the employee.



by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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