Company pension scheme: Threatening wave of insolvencies for provident funds?

New billion-dollar liability for employers and intermediaries –.


Support fund risk: Rulings prove total loss risk

Courts have repeatedly ruled that the assets of provident funds (UK), together with any reinsurance policies they may have taken out, are part of their insolvency estate: a lawsuit brought by employees and managing directors has repeatedly been unsuccessful (judgements of the Düsseldorf Higher Regional Court of 11 December 2007, ref. I-4 U 205/06 and of the Düsseldorf Regional Court of 2 July 2008, ref. 7 O 212/06). The cases show: typically, a “surprise” tax liability leads to over-indebtedness, unless the director diverted the assets by transferring them to the Cayman Islands. Often, therefore, a total loss for the employer, to which the employees are held harmless.


Unterstützungskasse: Legal error leads to insolvency

Renowned insurers and their provident funds (UK) like to instruct their distributors and intermediaries that any life insurance policy approved for sale by the Federal Financial Supervisory Authority (BaFin) is suitable as reinsurance for old-age provision. This is nonsense, because since deregulation in 1994 BaFin has not even decided whether certain life insurance policies should be licensed for sale. Since then, insurers have had to decide for themselves whether the products would be suitable. There it may not surprise then that products with sales-promoting high commissions at the expense of the employees would like to be seen gladly also still as suitable. In order to save costs, not only insurers but also provident funds regularly dispense with qualified tax and independent actuarial support. This can then lead quite abruptly to the insolvency of the UK. This means that the employees usually no longer receive a cent from this pension fund – the employer is then allowed to pay twice.


Lack of suitability of insurance solution leads to tax liability

The products of foreign life insurers also repeatedly turn out to be unsuitable for endowing a UK if it is not a tax-privileged insurance in the tax law sense. An example of this would be an annuity policy without a guaranteed annuity or a life insurance policy without the required minimum death benefit. Such products are mistakenly thought to be tax-privileged by life insurers and the provident funds: But this is precisely what can prove to be wrong. After all, the products were not checked by any supervisory authority, but were marketed under the insurer’s own responsibility. This is of course particularly true in the case of a UK established by a life insurance company, where that company – including the German one – has itself already made this mistake. Then the UK has to pay a capital gains tax and is nevertheless obliged to fulfil the full commitment. This then leads directly into the situation of over-indebtedness. It is not without reason that life insurers regularly refuse to be held liable for their own UK and do not issue letters of comfort.


Management at the level of a chip shop

It is also not uncommon for insurers to have “lawyers” who have not passed their examinations draft sample forms for clients, the technical content of which they may not even be able to comprehend. Administration can be similarly deficient – cookbook administration without any understanding of content is the order of the day. If the employer’s company falls into insolvency, the administrator will often seize these retained assets and set them off against claims for damages arising from managerial liability or because of insolvency delay. Some types of life insurance – contrary to the tax wishes of their intermediaries – are not tax-free at all. Conjectures about the interpretation of laws and speculative opinions about what indeterminate legal terms might mean are sold to the outside world as incontrovertibly established facts. While you are actually moving on shaky ground you present yourself as a rock in the surf. This also shakes confidence in the expertise and proper management and training of the administration concerned and its intermediaries. That the providers are fully aware of their deficits is what they tell the distributors and intermediaries:
We point out in detail that these statements reflect our legal opinion and are not based on consolidated case law or literature.”


Support fund with total loss risk: Imminent tax loss

Those insurance companies that are asked for a “letter of comfort” – or a “guarantee” – in light of these risks to employers and employees typically refuse. They know about the high risks due to tax traps or insolvency. Something like this can then be a signal for employers and employees that they will end up empty-handed – meaning that only one thing is certain: poverty in old age.


Advice for the middle class:

Employers and employees should assume the worst case scenario. The contracts have been drafted by a business economist – that is, copied and pieced together from other outdated texts that are not applicable at all, without really understanding the content: The result is a contract-Wolpertinger easy to recognize for the real expert. There has never been any binding municipal economy / special edition 2009 93 information from the tax office. In reality, the tariffs allegedly prescribed, released or even approved by the supervisory authority have never been examined there and no comment has ever been made on them. The often reassuringly quoted actuarial equivalence means that the insurer may include costs in the premiums as it sees fit, as long as they are not too low in order to boost sales through the correspondingly high commissions. And instead of offering transparency, one demands trust from the employer, because he is anyway incapable of understanding the actuarial calculations, which are also subject to the insurer’s business secrets. In short, any confidence is completely misplaced.


by Dr. Johannes Fiala and Peter A. Schramm

by courtesy of (published in Kommunalwirtschaft 07/2009, 92-93)


Chimney sweep trade 07/2009, 40-41

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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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