Lawyer warns against occupational pension liability cases due to mini interest

In a letter dated 28 September 2017, the Federal Ministry of Finance (BMF) dealt with the future treatment of incorrectly designed contracts for occupational pension schemes (bAV). According to this, special payments by the employer in the event of calculation errors by the occupational pension scheme provider are liable to pay wage tax for employees. Employers and employees are thus doubly burdened with the costs, as attorney Johannes Fiala and actuary Peter A. Schramm think. In an article for FONDS professionell ONLINE, both explain the background and explain why employers and occupational pension consultants could thus be subject to recourse liability. (jb)

The BMF deals with the case that a pension institution is no longer able to meet its benefits for various reasons, including calculation errors, misinvestments and insolvency risks, and therefore requests special payments from the employer. An example: If an employee only has 100,000 euros in actuarial reserves and 25,000 euros must be financed once only, the employee must pay tax on this amount and probably also pay social security contributions on it. So he may not receive a net salary for a few months – or as a pensioner, no pension for a few years.

 

Unrealistic occupational pension advice leads to tax liability

Why can such a situation arise at all? Answer: If the calculation interest rate was initially correct and the interest rate fell unexpectedly, or if life expectancy was correctly calculated and then increased, no income tax is due. If, however, the interest rate was unrealistically high from the outset or life expectancy was already clearly underestimated, a later adjustment is not due to a low interest rate environment, a slump on the capital market or an increase in life expectancy. On the contrary, this was foreseeable from the beginning. It only turns out that the assumptions were wrong – these are shortfalls “caused by risks set earlier”, as the BMF says.

These risks include, for example, unrealistic calculations in the hope that this will work out and not occur otherwise. These include that the low interest rate environment will end soon, life expectancy will rise less than realistically assumed or could be financed by surpluses – or equities would rise by seven percent annually for all eternity.

Thus, if an employer does not check how the pension fund has calculated, he not only exposes himself to the risk of back payments, but may also pay wage tax and social security contributions on them.

Liability traps for the future through the draft of a BMF letter

However, according to the BMF, the employee is not liable for tax if special payments are made by the employer in addition to the current contributions and benefits. This also applies if the payments serve to restore adequate capital resources after unforeseeable losses. Or if they are needed to finance the strengthening of the calculation bases due to an unforeseeable and not only temporary change in circumstances.

The snag is that losses were often foreseeable by the provider after all, as an employer, works council, employee or trade union would have been able to convince themselves with the details in an expert manner.

Changes in circumstances, such as low interest rates on the capital market, had also been foreseeable since the 1990s. Often no change has occurred, but the conditions have remained as they were, only they have not improved as hoped. This gives the BMF the option of varying its opinion even after many years in order to demand additional taxes for almost all constellations of subsequent financing.

The Federal Ministry of Finance formed two groups of cases, which could, however, be simultaneously applicable in reality: “The above prerequisites are basically fulfilled, especially if the following facts are present: A slump in the capital market; an increase in disability cases; increased life expectancy; low interest rate environment”. The BMF letter goes on to say: “Taxable wages and salaries, on the other hand, are special payments made by the employer to an external company pension scheme due to losses from individual transactions or shortfalls caused by risks previously set (e.g. calculation errors, insolvency risks).

Why are employers liable?

How could it come to the point where employers are still liable for the occupational pension scheme? The first cause is the convenience of employers, employees and works councils. Or the belief that intermediaries in the FOT know what they are doing. In case of doubt, these people only know the advantages of an occupational pension scheme through training – but they have not been trained with regard to the (liability) risks. The critical jurist suspects a fraud in indirect perpetration, i.e. through a mediator who unsuspectingly successfully implements the best deals – painlessly. Independent experts should have been called in from the outset – back then when such models were concluded, and today so that remediation and debarment could succeed.

The second reason is due to the legislator: the company pension law made the employer liable in accordance with his duty of care and his obligation to assume responsibility, for example if a member of the occupational pension scheme has to reduce his benefits – and the employer is allowed to “top up”. Now the BMF opens the duty to pay taxes “as a punishment” if the employer tries to reorganize this by its subsequent financing. Employee severance pay – or better still, complete reversal of the transaction – would, on the other hand, often be a model for saving social security and income tax, provided that one could master it. The normal agent scents a commission and therefore offers the additional financing.

Alternative of release from liability for employers

As an employer, you will therefore consider whether your own tax advisor has done his job correctly here over the past decades. Including the reference to underfinancing, i.e. financial liability, and the risk of insolvency. In addition, employers will increasingly try to escape through severance pay.

However, it is also up to the employer to take measures to reduce the risk. If he decides to handle the deferred compensation through a direct insurance policy, there is now protection through the security fund for life insurers. Another way for the employer to limit his risk is to cover only the employees’ age risk in the case of deferred compensation, rather than all risks – old-age, disability or survivors’ pensions.

Employers who want to be absolutely certain do not make any commitments themselves, but leave this to a group foundation which, in its own name, issues company pension commitments completely outside the scope of the Company Pensions Act and thus without its restrictions, for which the employer may, if need be, make voluntary supplementary payments.

 

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

 

by courtesy of

www.fondsprofessionell.de (published on 03.01.2018)

 

Link: http://www.fondsprofessionell.de/news/recht/headline/jurist-warnt-vor-bav-haftungsfallen-wegen-minizinsen-139878/

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About the author

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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