When pension funds cut their own benefits
For years, there have been more and more reports about the reduction of benefits in pension funds, life insurance companies and pension funds. Responsible actuaries, actuaries, are increasingly worried there. And rightly so, because employers could take recourse against these experts in matters of occupational pension calculation. After all, employers have made unrealistically high promises of a company pension to employees in their old age – and are liable for it.
The authors clarify the connections, false one-sided representations and the current situation. In doing so, they also provide an insight into their views on the subject of company pension schemes (bAV).
Pension commitments are not reduced
Pension funds, life insurance companies and pension funds do not reduce their pension commitments. But the daily and trade press often fail to make the connections clear, for example when it says: “BVV Versicherungsverein des Bankgewerbes a.G. and Neue Leben Pensionskasse recently had their pension commitments cut.” However, their reduction only affects their own benefits – and these are precisely not (labour law) pension commitments. In such occupational pension schemes, the employer had parked part of the salary for investment, i.e. until it was paid out in old age.
Employers under obligation
The pension commitment and other commitments to occupational pension benefits in old age are regularly made only by the employer. The employer normally has no possibility of unilaterally cancelling, revoking or reducing its commitment with retroactive effect. Responsible actuaries suspect that they could be threatened with recourse, as is already the case in the USA, for example. For this reason, they are also advocating a change in the law which would release employers from their obligation to pay contributions in order to be able to reduce the occupational pension benefits of their employees in a similar way to expropriation. Legally, this is hardly possible at present.
Low interest rates not a novelty
The prospects of low interest rates had been known to the public since 1998. In the European Monetary System, from 1979-1998, there was the ecu, which was a unit of account made up of percentages of different currencies with flexible exchange rates. In 1998 it was politically decided to fix the exchange rates and then to call this ecu the euro from 01.01.1999. Euro notes and coins were introduced in 2002 – and it had already been observed since 1998 that interest rates in the euro countries were falling. If journalists write to the present day: “ECB introduces negative interest rate”, they are confusing cause and effect.
Sin of omission
If a lobbying association of responsible actuaries believes that Pensionskassen will soon no longer be able to provide their benefits in full on their own, this is simply perpetuating the sin of omission of occupational pension sales to deceive employers: Because in reality, such sponsors of the bAV, i.e. the capital collection agencies of employers such as Pensionskassen, life insurance companies, pension funds, can always already reduce their benefits in accordance with the articles of association and benefit plan or with the approval of the financial supervisory authority (BaFin). Employers are only now realising their risk because of their obligation to pay after there has been an increase in reductions. Some employers rightly feel they have been hoodwinked, and want out of liability.
Employees rely on employers
The employees’ trust in the occupational pension scheme is based on the employer’s liability. It was well known that even “guaranteed” benefits could be reduced for regulated pension funds by statute and for non-regulated and life insurance companies via the Insurance Regulatory Act. The occupational pension scheme was therefore advertised precisely with a view to the obligation of the employer – and, in the event of the employer’s insolvency, of the Pension Protection Association – to assume responsibility in this case. Millions of employees put their trust in occupational pension schemes for precisely this reason. Employers have also already been ordered by labour courts to make up for reductions made to pension funds (ep-Tip – two selected relevant court decisions). Anyone who questions this security destroys this trust and does lasting damage to the occupational pension system. This can only be understood if the problems are really serious.
Employers who have been given a false pension promise by their advisors may be able to claim compensation from them. Should it have been an unauthorized legal service, it is not even necessary to prove fault. Ultimately, therefore, in the event of a change in the law, which is also being called for by actuaries (cf. the point on the Company Pension Strengthening Act), the pension funds, which may provide incorrect pension commitments, as well as the employers’ advisors, possibly including some actuaries in addition to agents and brokers, could actually – instead of the employer – be protected from this liability in future.
Consciously organized non-accountability?
As the actuarial association points out, you can’t yet tell directly from the balance sheets how the problem is emerging – you can’t see it there. Increasingly, employers are already asking themselves about the responsibility of such actuaries for managing the business of occupational pension funds. Shouldn’t they speak out through their professional association because they have to keep quiet about the real situation of the pension funds entrusted to them? The annual reports of pension funds, but also of life insurers, can show spectacular profits – often a one-off effect that naive observers describe as sustainability. When life insurers have to sell their silverware out of necessity, handsome (extraordinary) capital gains and a high net interest rate appear. When life insurance collapses, it shines really brightly again, like a supernova, before ending up as a black hole. The question then arises for the employer as to whether they want to fatefully follow this example or how they can perhaps survive this?
Solution option for employers
One option is for employers to cancel the labour law commitment by agreement with the employees. This can be structured like a “tax saving scheme” for employees. What the employee is entitled to according to the content of the commitment will have to be calculated actuarially.
What the employer gets back from the sponsor of the occupational pension scheme, i.e. from the capital invested with life insurers, Pensionskassen and pension funds, is another matter. More often, employers only then notice that it is not even the sum of the contributions previously paid in for investment that is refunded. In the case of reinsured provident funds, the situation is often even worse because double administrative costs are incurred, as it were.
Commitment by company foundation
New pension commitments could be offered by a company foundation/social welfare institution – as conceived, for example, as a model by Carta Mensch Stiftung Deutschland. As this is not a commitment by the employer, it does not fall under the provisions of the German Company Pensions Act (BetrAVG), but nevertheless constitutes a company pension scheme – according to the authors.
No liability. This eliminates any balance sheet contact and also liability with the employer. Likewise, all contributions to the Pension Protection Association are waived, because the foundation is not affected by the insolvency of the employer. Pure contribution commitments are thus permissible. Vesting can be freely arranged without regard to the Occupational Pensions Act. Moreover, foundations do not have to comply with any capital investment requirements and are not restricted by Solvency II to safe fixed-interest investments. The foundation can also provide other benefits, for example in emergency situations or in the event of employee illness – such as loans to employees or scholarships for children, possibly with interest subsidies from the employer. The employees’ retirement capital can be used for this purpose, with the employer and employees/works council having a say in the foundation’s advisory board.
Make it more cost effective. But then they can, for example, employ their own fund managers (possibly on a part-time basis) and thus organise the occupational pension management themselves much more cost-effectively. There are lower administrative and transaction costs. Managing accumulated assets would cost perhaps 1-2% annually at a financial house. In addition, it is no longer necessary, for example, to calculate the acquisition costs of up to more than 18% that arise when purchasing a life insurance policy through a structured sales force.
Exclude insurance business. A foundation for occupational retirement provision must be designed in such a way that it is not a so-called insurance business. Otherwise, the foundation would fall under the supervision of BaFin – just like any other insurance business. Of course, the employer would prefer to save this expense – as well as the contribution to the pension insurance association. However, taking the occupational pension management of one’s foundation into one’s own hands is likely to be the preserve of larger companies. For a small business or a business with very few employees, it might then be more attractive to think about a severance package with the employees, the candidates and the company pensioners.
Current ruling of the BFH
In this context, a recent ruling by the Federal Fiscal Court (Bundesfinanzhof, BFH) regarding the taxation of one-off capital payments from a pension fund should also be mentioned (ep-Tipp – ruling). On the one hand, intermediaries, insurers and other occupational pension providers have often provided employers with free occupational pension commitment forms. If this then includes an option for the employee to have these assets accumulated for retirement paid out in one go, the employee must be aware that he or she will not gain any tax advantage by doing so.
Checking severance pay and structuring it correctly
Some employers will try to deliberately move outside the scope of this ruling by terminating the occupational pension commitment when the pension is already in effect or even earlier – for example, while the employees are still employed by the employer. This severance payment can then have the consequence that the contributions to the statutory health insurance (GKV) are omitted at retirement age because the employee receives the money in one go and, for example, the contributions to the GKV might not be due or only due to a reduced amount in working life because the income threshold for contributions to the GKV has been reached. Moreover, in the case of a severance payment for this amount, no contributions to pension insurance and unemployment insurance will have to be declared and paid. This then saves employers and employees social security contributions together. A severance payment by the employer can also be worthwhile from a tax perspective: In contrast to the lump-sum option with capital choice – in accordance with the BFH ruling – the tax advantage according to § 34 EStG is certainly applicable here. Finally, the employee can then decide for himself when and how to invest the money. He also has the assets in his own hands, so he can bequeath what may be left over one day. A monthly company pension payment, on the other hand, would cease upon his death.
What the Company Pension Strengthening Act will bring
This is a new sixth way of implementing the occupational pension scheme, which is currently in the legislative process – also often referred to as the social partner model (ep-Tip: On the Company Pension Strengthening Act). The main aim of this law is to achieve a further spread of occupational pension schemes in small and medium-sized enterprises, also including low-wage earners. However, the term social partner model is already misleading – according to the authors: “From the point of view of the employees, it can hardly be described as additional social responsibility if the employer is completely released from his liability and thus from his social responsibility for the employees, as it were, by this model. Since this legislative plan has not yet been fully discussed in the political arena, it also remains to be seen whether, for example, the reduction of the 100 percent contribution obligation to the statutory health insurance scheme will only be introduced for this one new implementation path or perhaps for all occupational pensions.
Since 2004, there has been a full obligation to pay contributions – and the Federal Constitutional Court has described this as a permissible exercise of broad legislative discretion. A contribution to the occupational pension scheme by low-income earners is likely to be an option for only a tiny proportion of these employees:
It is much more common in this case that the workers concerned must continue to be supported by the state.
Expert advice can be useful
Once the employer has become aware of his liability (Einstandspflicht), he looks for alternatives. Thus, he could quickly and unthinkingly choose the option of severance pay. However, the structuring of severance pay is not without its legal pitfalls. It may therefore be advantageous for the employer to seek the assistance of an independent actuary with regard to the economic side. Legal expert advice is also advisable in order not to have to pay twice in the end as an employer – because if the severance payment is not structured properly, the employee could perhaps still claim the company pension in old age?
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
Courtesy of www.Elektropraktiker.de (published in issue 03/2017, pages 218-221)
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About the author
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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