– Why reinsured relief funds lead to employer liability –
The Hamburg-based OVG provides in its Urt. v. 14.1.2010 (Az. 4 Bf 22/08), it is clear that even with reinsured support funds (UK) there is a higher risk of insolvency for employees compared to pension funds and direct insurance. This is because the reinsurance policies of a UK company do not offer any protection against insolvency, but are merely a financing instrument.
Consequences of employer insolvency for the UK
If the employer in insolvency ceases its premium payments to the UK, the UK will regularly be forced to reduce its benefit even below the promised pension benefits. Then the employer is solely liable for the difference, and in the event of insolvency the Pensionssicherungsverein must step in.
The defendant PSVaG also points out the possibility that the employer could even obtain the repurchase of the reinsurance policies through the bodies of the UK, with the result that this cover capital of the UK is lost for the employees and the claims now directed exclusively against the employer must be borne by the PSVaG in the event of the latter’s insolvency. The insolvency administrator can also demand that the UK surrender the reinsurance policies if, for example, the pension commitments to the employees are revoked if restructuring is planned (BAG, judgement dated 29 September 2010, file no. 3 AZR 107/08).
Zillmerung burdens the employer’s pension commitments
If the employer suddenly becomes insolvent, or employees leave the employer after a few years, employees regularly find that only a small fraction of the contributions paid into the UK are still available as capital for retirement. This is not bad in itself, because the pension entitlements are based on the pension commitment and not on what is actually available in a financing instrument of the provident fund – the reinsurance.
The employer is liable for the remainder and only in the event of insolvency of the employer of the PSVaG, precisely because of the employer’s liability which always exists.
80 %, 90 % or more for acquisition and administration costs
The reinsurance contracts of insurers are usually designed in such a way that in the first 12 to 24 months no actuarial reserves are formed for the UK at all, and the surrender value is “zero” or less than half of the paid-in premiums. Insurers and intermediaries feed on these contributions. Nevertheless, the employer is liable for the promised pension benefits. From the employer’s liability perspective, deferred compensation via the UK is particularly problematic, because the law requires that the value of the deferred compensation be equal to the converted compensation.
No congruence between actuarial reserve and pension commitment
The fact that the assets accumulated in the UK will almost never be sufficient to fully finance the promised pensions is regularly concealed from employees and employers. This is because the pension commitments are matched to the reinsurance in such a way that they presuppose an undisturbed course until the start of the pension, which in practice is a rare exception. The pretty sample calculations offered by the agent to illustrate the returns and increases in value of the reinsurance policy only apply if the premiums are paid as planned by the end of the policy – on closer examination, however, they must be seen as fantasy figures based on the principle of hope, because overly optimistic forecasts are often made.
Insolvency of the UK is not covered by the PSVaG protection
The OVG Hamburg makes it clear that the insolvency or illiquidity of the UK or other pension providers in BAV is not covered by the Works Pensions Act. In all these cases, the employer is liable for his commitment. If, on the other hand, the employer becomes insolvent, the employee’s claim against the employer is economically worthless, and the UK may at any time discontinue the benefits promised merely without legal entitlement – for example, if the far too little actuarial reserve has been used up as a result of a lack of further contributions. The UK has no more to counter the objection of the lack of legal entitlement than that it has no practical significance, since there is a legally binding promise by the employer.
Hardly any protection for managing partners (GGF) and top managers
The PSVaG only protects the supply of genuine employees, so that in case of doubt the GGF literally “looks into the mountains with the stovepipe” in the event of insolvency, i.e. goes away empty-handed. If these are top managers, as real employees, only a relatively small proportion of the retirement pension will usually be paid via the PSVaG in the event of insolvency, because the PSVaG does not pay any amount.
UK as a financing instrument with deferred insolvency of the employer
In sales practice, employees and employers are offered numerous advantages, particularly in terms of taxes. However, the fact that pension commitments will then unfortunately also have to be honoured in about 25 years’ time is often regarded as a secondary problem at present. The rude awakening comes late for the masses of small and medium-sized businesses because there is no obligation for tax consultants to (co-)show the debts already piled up in real terms from pension commitments in the tax balance sheet.
Maximising liability for employers by maximising costs for the UK
UK operators are concerned to achieve high brokerage fees, which is why in many cases a broker is also involved in the distribution. However, the high brokerage fees financed by the latter at the expense of the employees’ pensions and, in the case of deferred compensation, by the employees, are put into perspective when one considers the findings of several public prosecutors’ offices that works councils or managing directors are often also liable to bribery.
For example, the UK could come up with the idea that the original reinsurance policies are no longer optimal, terminate them and take out new ones with new commission. The majority of employers, even DAX-listed companies, have rarely taken any precautions to ensure that the UK does not maximise employer liability on an ongoing basis through unnecessary acquisition and administrative costs. However, an emergency brake is emerging here, as many a free sample contract off the peg from insurance sales, designed by business economists in violation of, for example, the Legal Advice Act, is becoming a practicable approach for complete reversal as soon as the employer recognises its previously little-noticed liability diversity.
No obligation of the UK to provide information on costs of reinsurance
It is explained to both employees and the employer that 100% of the contributions benefit the UK and that 100% of these contributions are paid into the reinsurance policies. The fact that the latter then pays the broker a large part of the first 5 annual premiums of each individual deferred compensation as a brokerage fee, at the expense of the accumulated pension assets, is, however, concealed. This is quite rightly so, as there is no regulated insurance mediation in relation to the employer, and certainly not in relation to the employee, when a UK pension is arranged. This means that all obligations of the broker as well as the insurer to provide information on the included cost allocations are no longer applicable. Even the insurer only has to inform the UK about the current surrender value of each policy – what the UK then reports to the employer is up to them. Only actuarial reports have often led to increased transparency and to employees and employers becoming aware of their mistakes about the actual circumstances.
By Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
Published in AE Arbeitsrechtliche Entscheidungen, issue 02/2013, pages 47-48
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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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