Company pension scheme: Valuation of pension provisions ? Auditors sound the alarm

by Johannes Fiala, Lawyer (Munich), M.B.A. (Univ.Wales), M.M. (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Banker (
IDW criticises unrealistic balance sheet approach The renowned Institute of Auditors (IDW) puts it in a nutshell in its press release of 16.01.2006: ?deficits in the current regulations ? The fiscal default of 6% leads thus to a too small provision beginning. In the same way it affects itself that ? 6a EStG prohibits the consideration of future salary and pension increases even with pension payments, which are dynamisiert. For the valuation of provisions, a pension amount is thus assumed that is generally significantly below the level that can actually be expected.
Old-age poverty also affects tradespeople and the self-employed In 2005, the author of the work “Zukunftsmarkt bAV in der Versicherungswirtschaft? (Verlag C.F.Müller) describes the situation in such a way that on a national average of all commitments made under labour law, only about one third of the necessary assets/provisions are available for their financing. Estimate proceed from the fact that with it only approximately 1,000 euro would be financeable in the age. If one subtracts the usual costs of private health insurance from this, then the rest ? casually formulated ? is enough for the proverbial sleeping place under an Isar bridge.
Incorrect balance sheet test certificates Put simply, the IDW is concerned with the problem of balance sheets with pension provisions being approved by the balance sheet auditor, which are valued according to the usual partial value method (§ 6 a EStG), because the balance sheets are actually all incorrect, as they fail to take into account in particular the following – not entirely insignificant – details: realistic interest rate level salary increases pension increases
An example: under labour law, a minimum pension adjustment of 1% is generally prescribed (§ 16 BetrAVG). However, this minimum adjustment is only assessed if it has been firmly committed, which is usually not the case. The pension cash value at age 65 would be around 7-10% higher if the minimum adjustment is factored in – and that is still the least important of the 3 points mentioned, because the real problem is the actuarial interest rate of 6%. In many cases, the true value of the provision is likely to be twice the value shown in the balance sheet. Many medium-sized companies are now aware of this problem, but only large corporations seem to be actively addressing the issue. The initiative would usually have to come from the consultant. However, this would lead to having to listen to unpleasant truths, because the consultants’ guild in particular has often recommended internal financing via pension commitments as a tax-saving model in the past, without giving any thought to the financing of the promised benefits.
Formally correct auditor’s certificates Even if the so-called “unqualified auditor’s certificate” at the end of the auditor’s certificate for annual financial statements with §6a provision is formally correct, objectively it is simply a bare lie. Possibly the IDW fears liability risks for the WP`s. Given the number of accounting scandals that have come to light recently, one can understand why.
Criminal liability of tax advisors and auditors Tax advisors and auditors are regularly instructed extensively. As a result, they acquire, often without being aware of it, a position of guarantor under criminal law. This means in fact a responsibility from the comprehensive expert knowledge and personal comprehensive knowledge advantage over the client. The trade press of the tax advisor associations have been pointing out this risk for years.
Liability and extent of damage in the case of insolvency delay First of all, the board of directors or managing director is liable for the so-called quota damage. Furthermore, in the case of the GmbH managing director from §§ 823 para. 2 BGB, 64 para. 1 GmbHG, liability also extends to the loss of confidence incurred by a new creditor as a result of granting credit to the GmbH which is currently ready for insolvency or making any other advance payment to it (cf. BGHZ 126, 181). Tax advisors and auditors come thereby as participants of the criminal offences into consideration, which also numerous preliminary proceedings show.
Often, restructuring is the order of the day In many cases of company pension schemes, it becomes apparent that company bosses rely on a tax advisor or auditor who, as the de facto tax man, does not make the risk of imminent demise transparent. Many companies are already over-indebted as a result of the occupational pension scheme when viewed from an economic perspective and valued in accordance with insolvency law. For another group, commitments (e.g. to widow’s pensions, disability) are not reinsured ? there is therefore a considerable risk of overindebtedness. On the other hand, only a few selected occupational pension consultants are up to such tasks.

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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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