Why they are at risk from low interest rates and who is liable for them
A new ruling by the Federal Labour Court (Bundesarbeitsgericht – BAG) confirms that employers are liable if a company pension scheme (bAV) sponsor reduces its benefits in accordance with its statutes. As a result of the continuing low level of interest rates, at the latest since the introduction of the euro, virtually every employer with occupational pension commitments will soon have to reckon with this.
Legal risk of the employer
Intermediaries like to claim that outsourcing a pension commitment to external providers of occupational pension schemes (e.g. Unterstützungskasse, Pensionskasse, Pensionsfonds) relieves the employer of its responsibility. The opposite is true, as the ruling of the BAG shows. If the return on capital falls short of the approx. four per cent that is usually calculated on a large scale, or if life expectancy extends beyond the calculated estimates, this can lead to a reduction in vested rights and even current pension benefits with an occupational pension provider. Such reductions are regularly provided for in the statutes.
The vast majority of employers avoid fee-based advice and allow brokers and advisors to show them fabulous returns in sample calculations. Those employers who actually only mean well for their employees and often for themselves, aim to invest the money with an occupational pension provider who promises the highest possible – and thus more uncertain – pension. This ignoring of employer risks is further reinforced by the fact that the tax advisors or auditors engaged do not draw up balance sheets including all potential risks. Thus, more and more often employers get into the situation of over-indebtedness without noticing it.
The interest income, tax benefits and employer subsidies included in occupational pension commitments are not additional securities, but are already included in the promised pensions. They are already required in full for the commitments made and thus increase the employer’s liability. The fact that some providers of occupational pension schemes have somehow mostly done well so far, or that the real losses already incurred have so far been cleverly concealed or bridged, is no proof of the employers’ freedom from liability and the security of the investments there. This is because the low level of interest rates has a delayed effect, which is all the stronger for it.
An enormous liability potential
The cover funds available today in the occupational pension system, around 480 billion euros in the form of occupational pension capital investments, are not on top of the contributions, but are required as capital cover to finance the commitments, together with up to four to six percent interest annually on them for the future.
These are cover funds for debts (liabilities), which must bear interest for life with a high interest rate guarantee. If only two percent is earned, there is therefore a shortfall of around 10 to 20 billion euros a year, and this figure is rising, as it also includes compound interest and other contributions. The EU would like to use the Solvency II regulation to increase the equity capital or risk capital of external providers of occupational pensions, as well as of insurers. This would roughly halve the risk of insolvency, pension funds and Pensionskassen. The Confederation of German Employers’ Associations opposes this because it would cost employers additional contributions and, at the very least, future pension commitments would have to be reduced to a greater extent. The DGB is also against it.
On the other hand, it is consistent and correct to already reduce the new commitments today – and with them the liability risk of the employers. Solvency II does not require anything unreasonable, but simply that providers should address their own risks to the ability to meet their commitments at an early stage. At the DAX 30 companies, there is a coverage gap of EUR 107 billion in capital assets earmarked for this purpose for the fulfilment of pension commitments amounting to EUR 281 billion. If a company lives beyond its means, it becomes insolvent. The statistical risk of this is about one percent per year – a large proportion of employees and occupational pensioners will therefore be affected be. However, the company pensioners, i.e. normal employees, then often receive far less from the “Pensionssicherungsverein aG” than was once promised and planned by their own employer for old age – so here too there is a reduction in benefits.
Dr. Johannes Fiala
Peter A. Schramm
(P.T. Magazine for Business and Society, 11.11.2012)
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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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