Company pension scheme: Paying twice

The Federal Minister of Finance announced the future treatment of incorrectly structured company pension schemes (bAV): According to this, special payments made by the employer for employees are subject to wage tax if the provider makes calculation errors. Employers and employees are thus doubly liable for this “tax savings model”.

First of all, subsequent claims for payments are made to the employer

The BMF deals with the case that the pension institution is no longer able to meet its benefits for various reasons, including calculation errors, misinvestments and insolvency risks, and therefore also demands special payments from the employer. The explicit mention makes it clear that these risks already exist more frequently or on a massive scale and are expected to increase in the future and are therefore already a topic for the tax authorities with an increasing need for regulation.

If the cause lies in calculation errors, the special payment is subject to income tax.

So if, for example, an employee (AN) has only 100,000 EUR in actuarial reserves and 25,000 EUR must be financed once only, he (the AN) must pay tax on this amount and probably also pay social security contributions on it. He may not receive a net salary for a few months, or as a pensioner he may not receive a pension for a few years. The occupational pension scheme becomes a source of additional risks for the Contractor.

Walter Riester had recommended additional private pension provision on a funded basis, while the statutory pension continues to decline. It is astonishing that the trade unions were only tentatively opposed here – and that works councils were hardly interested in such consequential risks: Do they abolish themselves? Even the “Verdi Company” does not dare to talk about the “halving of the pension” within 30 years in all details; as if they had fed the wolf with chalk?

Unrealistic occupational pension advice (also) leads to (tax) liability

If the calculation interest rate was initially correct and the interest rate fell unexpectedly, or if life expectancy was correctly calculated and then increased, no income tax is due. If, however, the interest rate was unrealistically high from the outset or life expectancy was already recognisably underestimated, a later adjustment is not due to the low interest rate environment, the slump on the capital market or the extension of life expectancy, but was foreseeable from the outset.

Failure of employees and works councils to review the occupational pension scheme leads to the risk of insolvency

Thus, if an employer does not check how the pension fund has calculated, he not only exposes himself to the risk of back payments, but may also be allowed to pay wage tax and possibly social security contributions on them and may also expose his employees and company pensioners to considerable financial risks of high one-off payments of wage tax and social security contributions. Everyone who wants to count on the occupational pension scheme as a reliable form of provision should be aware of this. As a result of these risks, the occupational pension scheme itself can lead to poverty in old age, over-indebtedness and insolvency.

Alternative of release from liability for employer, works council and employees

As an employer, you will consider whether your own tax advisor has done his job correctly here over the past decades, including the reference to underfunding, i.e. financial liability, including the risk of insolvency.

In addition, employers will increasingly try to absolve themselves by means of severance pay – hopefully without this leading to recourse liability of up to 30 years under §§ 18 ff. BetrAVG, or to the liability case of a double payment at the bAV: Because experience shows that employees who leave later are sometimes more unrestrained in suing former works council members and employers.

How could it have come to the point where employers were also liable for the occupational pension scheme as a social benefit?

The first cause is the convenience of the employer, employees and works councils. Or the belief that intermediaries in the occupational pension scheme knew what they were doing. In case of doubt, they only know the (potential) advantages of an occupational pension scheme through training – but they have not been trained with regard to the (liability) risks. The critical jurist suspects a fraud in indirect perpetration, i.e. through a mediator who unsuspectingly successfully implements the best deals, painlessly. Independent experts should have been called in from the outset – back then, when such models were concluded, and today they could have been successfully rehabilitated and de-liberated.

The second reason is due to the legislator: the company pension law made the employer liable in accordance with his duty of care and his obligation to assume responsibility, for example if a member of the occupational pension scheme has to reduce his benefits – and the employer is allowed to “top up”. Now the BMF opens the tax liability “as a punishment” if the employer tries to reorganize this by its subsequent financing. Employee severance pay – or better still, complete reversal of the transaction – would, on the other hand, often be a model for saving social security and income tax, provided that one could master it. The normal agent scents a commission and therefore offers the additional financing.

BAG: Liability is constitutional

The Federal Labour Court states in its judgment of 12.062007 – Ref.: 3 ZR 14/06

“Constitutional law does not preclude the defendant’s obligation to conclude an agreement on deferred compensation and the obligation to implement it. …

In addition, it is in principle the employer’s right to choose the insurance institution … It therefore has the power to take further measures to reduce the risk. If the employer decides to process the deferred compensation via a direct insurance policy, there is now a protection via the security fund for life insurers… Another way for the employer to limit his risk is to cover only the employees’ old-age risk, rather than all risks – old-age, invalidity or survivors’ pensions – when deferred compensation is paid”.

So anyone who, as an employer, takes on increased risks – for the supposed additional benefit of the employees – is thus doing more than he would have to risk.

Employers who want to be absolutely certain do not make any commitments themselves, but leave this to a group foundation which, in its own name, issues company pension commitments completely outside the scope of the Company Pensions Act and thus without its restrictions, for which the employer may, if need be, make voluntary supplementary payments.

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

by courtesy of

www.network-karriere.com (published in issue 2/2018, page 30)

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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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