Falsification and concealment of balance sheets are punishable under § 331 No. of the German Commercial Code (HGB). Famous examples of such manipulations would be the Olympus and Enron companies, or more recently P&R. The “Heubeck mortality tables RT 2018 G” (dated 20.07.2018) were allegedly erroneously prepared and later withdrawn – this was the responsibility of only one private consulting firm.
There was thus the risk that companies in Germany might initially overstate their pension obligations in balance sheets in accordance with Section 6a of the German Income Tax Act (EStG) and the German Commercial Code (HGB). A complete qualified review by a neutral body not burdened by conflicts of interest, such as the German Association of Actuaries or BaFin, is unlikely to be available for an expected subsequent improvement.
Life expectancy about 10 percent too high
The manufacturer of these “mortality tables” – a private company – admitted on 25.09.2018 that “inconsistent data bases” were the cause of the error. At the end of the Federal Finance Minister (BMF) on October 19, 2018, the improved version with downward adjusted life expectancies was “accepted” as the applicable method for the representation of pension provisions.
For life insurance (LV) customers, excessive life expectancy means premiums that are too high or pensions that are too low when calculated.
Why does a private company decide on actuarial mortality tables?
In order to avoid conflicts of interest, the German Association of Actuaries (DAV), as a recognised qualified professional association of actuaries, would have to draw up such tables; as is done, for example, in England and worldwide, and also in Germany when it comes to probabilities of disability, mortality and life expectancy, including for pension funds and deferred compensation in life insurance policies, with the exception of the “mortality tables” in question.
Finally, biometric calculation bases are also otherwise developed under the umbrella of the DAV in high-quality working groups, which already ensures intensive examination. However, these elaborations are then examined by the relevant specialist group before the results, including all statistics and derivations, are made available to all members for discussion. Their feedback is then carefully considered and incorporated into the final version before it is approved by the DAV’s Executive Board.
It is obvious that such a procedure for the creation of biometric calculation bases can ensure a far better quality and acceptance than if only some private company creates them.
It is incomprehensible why the DAV does not make itself heard by politicians, such as the Ministry of Finance, so that it is recognised as the right institution to produce mortality tables and other calculation bases for all areas of the occupational pension scheme instead of a private company. After all, the influence of the private sector will not inappropriately extend to the DAV board, more than perhaps just a little.
Suspicion of lack of suitability or lack of risk management?
The professional code of conduct of the DAV requires: “Actuaries carry out their activities competently, honestly and carefully”. The §§ 91 f. of the German Stock Corporation Act (AktG) require risk management to avoid such errors – which also includes activities without conflicts of interest.
This also applies to employers with often high pension provisions of up to several billion euros – they cannot simply claim without examination that they consider the “mortality tables” to be mandatory. This is not the case at all – it is just one of a number of other potentially suitable procedures that are just as good or even better suited to the employer concerned.
Questionable suitability of guideline tables?
The scientist Harald Jaeger (“Kritik der Richttafeln III”) wrote about the modelling:
“Using the data of the Association of Pension Insurance Institutions, own raw frequencies are derived. This shows that the mortality of invalids and the invalidity probabilities were “projected” by Heubeck in such a way that the model of the mortality tables could be applied; the model was therefore not adapted to the data, but the data to the model”.
Over-indebtedness and insolvency due to miscalculations?
The BMF somehow checks the mortality tables, because too high pension reserves reduce tax revenues. If companies also have to prepare commercial balance sheets, the recognition of too high pension provisions can lead even more quickly to apparent over-indebtedness and a supposed obligation to file for insolvency, and can already impair creditworthiness beforehand. If auditors and actuaries detect the errors in mortality tables, this results in an obligation to correct the balance sheet at a later date – the additional expense is unavoidable due to statutory penalty periods and damages the companies concerned.
Management boards must also ask themselves why they use the “mortality tables” without checking them, when these are not “incorrect” but, on closer inspection, even more favourable tables and methods can still be considered actuarially recognised, even if they would have to be determined first.
Private sector monopoly within the DAV?
There is therefore also the possibility for individuals, including competitors, to independently search for errors and criticize, and to develop their own boards. The DAV itself does not officially comment on the mortality tables in any way. However, there is reason to fear that the several hundred members of the Institut der Versicherungsmathematischen Sachverständigen (IVS), a branch within the DAV, who are active in the occupational pension scheme, may even be prosecuted under professional law if they question the Heubeck mortality tables or use others.
In principle, any recognised actuarial method can be used
If the BMF recognises a Heubeck AG guideline table in accordance with § 6a III 3 EStG, this does not exclude the possibility of guideline tables from other suppliers, which could also be generally recognised by the BMF. Each enterprise could apply as safest way for it even in advance for a binding information, § 89 II AO. In individual cases, the question of whether a recognized actuarial method was used can be clarified later with the tax office or via the tax court.
However, a procedure based on recognised actuarial methods does not have to undergo any kind of recognition procedure, not even at the Federal Ministry of Finance. Ultimately, it is the responsibility of the individual qualified actuary – also preferably a tax consultant or lawyer/employee lawyer with sufficient basic knowledge of mathematics and statistics – to remain within the framework of methods that can be recognised and that objectively do not result in anything else later. If he wants, he can also call himself an actuary, because the designation is not protected.
No obligation to submit pension reports – but StB/WP’s duty to inform
The tax consultant (StB) and auditor (WP), as declaration consultant, must inform his entrepreneur clients about alternative arrangements, for example that by law no “pension expert opinion” is required for the recognition of the (tax) balance sheet approach – as a duty to inform (see OLG Cologne, judgement of 12.04.2017, ref. 16 U 94/15). However, the use of so-called going-concern values is no longer an option if there is a reason for insolvency (BGH, ruling of 26.01.2017, Az. IX ZR 285/14). The central issue in the declaration is whether the “Heubeck values” are not higher than absolutely necessary, for example by taking into account a “trend” of increasing life expectancy that is in no way already certain?
Finally, the tax valuation of life annuities does not take into account any trend towards longer life expectancy for future decades, any more than the ageing reserves of private health insurance or even the Heubeck mortality tables before 2005, and yet these are recognised actuarial methods.
Balance sheet design through alternative approach to the amount of pension provisions
For many employers, the “transition to generational tables with an extrapolated trend towards longer life expectancies” has resulted in higher reserves for more than 10 years – up to and including unnecessary excess. In private health insurance (PKV), a “trend” is only set when it has actually occurred – the Federal Court of Justice (BGH) has also rejected a plaintiff’s request for the inclusion of such a trend as not agreed (BGH, ruling of 22 September 2004, ref. IV ZR 97/03) – also with the indication that higher premiums would then have to be charged for it from the beginning.
Without “trend”, the BMF also calculates for lifelong uses according to § 14 of the Valuation Act (BMF letter of 04.11.2016, ref. IV C 7 – S 3104/09/10001).
Lower provisions for pension obligations can be derived from the current mortality table of the Federal Statistical Office by adjusting them to the special circumstances of the employees. Lower provisions for pension obligations only in the (commercial) balance sheet improve creditworthiness and avoid potentially premature reorganisations or insolvencies.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.experten.de (published on 11.12.2018)
www.moebelspediteuer.de (Published in issue 2/2019, pages 36 + 37 under the heading: Company pension scheme – when employers are liable)
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About the author
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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