Do not give away the insolvency protection of the pension scheme

If managing directors and executives have been promised their company pension scheme (bAV) as a pension commitment or direct commitment, in most cases the existing reinsurance assets are not sufficient to finance the retirement benefits.

To the extent that reinsurance is available – for example, in the form of life insurance or investment funds – many employers believe that these assets can be used up at least proportionately for pension payments. However, it is not only managing directors and senior executives who should make sure that they do not waive reinsurance too early. Because if the employer later becomes insolvent, the employee is often left empty-handed.


Require deposit of the occupational pension reinsurance for pension provision

Many employees are not aware that they have a say in the matter when the assets saved as reinsurance and pledged to them become due for investment. Because then the bank or the insurer can only pay to the employer and the (ex-)employee together (§ 1281 I BGB). The employee himself could demand from the insolvency administrator that the funds be deposited (BGH, Case IX ZR 176/11), at best with the same financial institution for a continuing capital investment with the prospect of an increase in value. If the capital investment is changed, for example because the occupational pension assets are reinvested, there is no need for a new pledge because the pledge once granted also applies to all surrogates – i.e. both to the amount paid out and to the capital investment newly purchased from it (§ 1247 BGB).

Nevertheless, the reallocation must also be legally secured, because even the payment of the existing reinsurance into a “special account” of the employer can lead to the total loss of the employee’s lien.


No recourse to reinsurance funds

The employer is always in the situation of having to pay the full amount of the occupational pension benefits for years when the pension starts, without recourse to the only partially sufficient pledged reinsurance assets. According to the law and case law, the employer can under no circumstances demand that the (ex-) employee or managing director release the reinsurance funds even partially, for example by waiving the lien or assigning them.


Employer cannot force employees

Only if the reinsurance funds are so high that a so-called overcollateralisation occurs, the employer will have a legal claim to often only partial or pro rata release (BGH, decision of 06.03.1997, ref. IX ZR 74/95). This is generally only the case if the reinsurance funds amount to more than 110 per cent of the assets required to fully finance the occupational pension benefits promised by the employer (old-age pension, plus disability provision and survivors’ benefits, if applicable). The employer cannot force the employee to initially access even only part of the reinsurance funds, which are in any case regularly insufficient, because this reduces the asset protection in the event of insolvency. The employee’s lien with respect to the reinsurance does not expire until the claim has been satisfied in full, § 1252 BGB.

Nevertheless, employers try to mitigate these obligations for themselves retrospectively. To this end, banks offer a payout plan and insurers a new contract for a lifelong annuity – using the only partially available reinsurance funds. The employer promises to add only the monthly difference, while the employee forfeits his part of the pension security each month.


Underprotection is the rule


200,000 is required to fund a baV commitment at the time the pension starts. If, however, only EUR 100,000 is then available, assuming annual occupational pension benefits of EUR 10,000 on average, there is an under-protection amounting to half of the necessary assets. This means that (partial) overprotection only occurs after the employer has provided the occupational pension benefits for more than ten years. This burdens the employer, who now has to finance the occupational pension benefits entirely from current earnings, with his employer liability and payment obligations in accordance with his occupational pension promise. He can’t get the money from the pledged reinsurance policy.

The Pension Protection Association does not become active if reinsurance funds were not legally secured and the employer was able to withdraw these assets from the company without hindrance.

The security of the occupational pension assets for the time of the pension commencement can only succeed if their accumulation is controlled by the employee and the securities such as a pledge of reinsurance funds had been legally effected. If company pension reserves were looted or disappeared, the financial house involved would have to pay again.


Liquidity trap for employers – legal error for employees

When the bAV pension payment is due, lien maturity occurs, § 1282 BGB. Although the employee cannot be forced to sell the pledged pension assets in the case of pension underwriting, many financial planners and insurance brokers spread a fairy tale according to which the lien as security for the employee ceases to exist as soon as a reinsurance policy is paid out after maturity (but before the start of the pension). Employees should therefore not fail to notify the insurance company or fund company personally of the pledging of the occupational pension reinsurance funds and to have the receipt of this notification confirmed in writing.

Ordinary employees, executives and managing directors – to the extent that they would be “protected” by the Pension Protection Association (PSVaG) – should be aware that the PSVaG benefits could be as much as less than 50 percent of what was originally promised. This is because once the security event occurs, any surpluses generated from the capital investment no longer benefit the employee. These surpluses are used elsewhere in the PSVaG’s solidarity system.


Insist on receipt of the pledged collateral

Uninformed pensioners and retirees give up all or part of the collateral pledged to them from the start of their pension because their employer wants them to believe they have done so. It is important to refuse this and to insist on the full receipt of the pledged collateral, for example by leaving it deposited with the insurer in full, while the employer pays the occupational pensions alone for the time being. If the employer then complains about liquidity problems, this confirms how correct the decision was to leave the pledged collateral undiminished.

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

published in “Versicherungsmagazin” on 01.09.2015



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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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