Managing directors and senior executives give away the insolvency protection of their pension scheme

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

Insofar as reinsurance – e.g. as life insurance or investment funds – are available, employers think that these assets can initially be used up at least proportionally for the pension payment. However, it is not only managing directors and senior executives who should make sure that they do not waive the reinsurance – which is usually only partial security for financing the payouts of their occupational pension scheme – too early. If the employer were to become insolvent at a later date, the employee would often be left empty-handed.


Employees can request the deposit of baV reinsurance for their benefits

Many employees, even normal employees, are not aware that they have a say in the matter when the assets saved as reinsurance and pledged as security to the company become due for investment. Because then the financial house (e.g. bank or 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, IX ZR 176/11), often at best with the same financial house for a continuing capital investment with the prospect of an increase in value. If the capital investment is changed, for example because the baV assets are reinvested, no new pledge is required because the pledge once granted also relates 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 to a large extent, because even the payment of the existing reinsurance into a “special account” of the employer can lead to the total loss of the lien with the employee, as it were as a reorganisation contribution.


Employer owes full payment of baV – without 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 from the (ex-)employee or managing director that he release the reinsurance funds, even only partially or successively, e.g. in the case of a pension fund. by waiving the lien or assigning it, or by accepting payments from the reinsurer instead of the employer.


Only if the reinsurance funds – possibly after many years of pension payments by the employer – are so high that there is a so-called over-insurance, the employer will have a legal claim to often only partial or ratable release (BGH(decision of 06.03.1997, ref.: IX ZR 74/95). In economic terms, this is generally only the case if the reinsurance funds amount to more than 110% 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 usually insufficient in any case, because this would reduce the asset protection in the event of insolvency.

The employee’s right of lien with regard to the reinsurance only expires, quite automatically – by law, when the claim has been fully satisfied (§ 1252 BGB).

Nevertheless, employers naturally try to mitigate these obligations for themselves retrospectively. To this end, banks then offer a payout plan, and insurance companies a new contract for a lifelong pension – and this using the only partially available reinsurance funds. The employer then simply promises to make up the monthly difference, while the employee unnecessarily forfeits part of his occupational pension security each month. With proper legal clarification, former employees and directors need not engage in such risky premature collateral release.


Underprotection is the rule at the start of baV pension payments for pension commitments

Example case to illustrate: A bAV commitment is made to fund the pension at the time the pension begins.

200 TEUR is needed. If, however, only EUR 100 thousand is then available, assuming annual occupational pension benefits of EUR 10 thousand on average, there is 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 completely from current earnings for the time being, with his employer liability and payment obligations in accordance with his occupational pension promise. For the time being, he cannot access the money from the pledged reinsurance policy.


In the same way, almost all occupational pension commitments lack full asset protection to fund future pension entitlements. Senior executives and managing directors thus give their employer a ‘blank credit’ in this respect – after all, they have also worked for these employer benefits, i.e. they have only postponed the payment of this part of the remuneration into the future by agreeing an occupational pension scheme. Employees and works councils have so far regularly failed to provide for a legal entitlement to reinforcement of collateral through economically complete funding of future benefits on the basis of occupational pension commitments in their general terms and conditions, as is customary with banks and savings banks.


Old-age poverty deliberately accepted

The Pension Security Association does not kick in if reinsurance funds were not legally secured, and the employer was simply able to extract these assets from the company without hindrance, similar to the actions of a financial locust. One member of the Bundestag commented, “This regulatory gap became apparent” after the former Metro group of companies ‘Kaufhalle’ was sold to an investor who moved the company’s approximately €30 million in company pension reserves abroad and stopped making payments to company pensioners.

That it could come to this, the employees owe to too much carelessness, perhaps also the confidence in an overtaxed works council? The securing of the occupational pension assets for the time of the pension commencement can only be successful if their accumulation is controlled by the employee to a sufficient extent and the securities such as a pledge of reinsurance funds had been legally effective. If company pension reserves were nevertheless plundered or disappeared, the financial institution involved would have to pay again – only if legally effective agreements were in place, at best with each employee personally, but not just with the employer.


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 occupational pension assets in the event of an occupational pension under-security, it is sometimes said that the lien as security for the employee ceases to exist as soon as a reinsurance policy is paid out after maturity (but before the occupational pension starts).


In many cases, this merely conceals the fact that the reinsurance funds had never been pledged to the employee as security and effectively. 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. It is crucial that friendly contracts and/or promises made by the employer alone, e.g. the employee had been granted a subscription right or the reinsurance had been pledged to the employee, are initially absolutely ineffective.


Normal employees, executives and managing directors – as far as they would be ‘protected’ by the Pensionssicherungsverein (PSVaG) – should be aware that the benefits of the PSVaG could be up to less than 50% of what was originally promised – managing directors are often not protected at all in this way. 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.


Uninformed pensioners and retirees then also give up, in whole or in part, the already insufficient securities pledged to them from the start of their pension, because they think it has to work the way the employer or even the reinsurer wants them to believe. This is to be informed simply to refuse, and to insist on the full receipt of the pledged collateral by, for example, giving the pledged collateral to a third party. remain deposited with the insurer without being reduced, while the employer pays the occupational pensions alone for the time being.

Some employers may be surprised to learn that their prefinancing of the occupational pension scheme by means of reinsurance in this way does not at all mean that they will later also participate in the pension payments, at least on a pro rata basis from the start of the pension. But he would simply have to listen to his reinsurer and save up enough funds so that they would be fully sufficient as collateral later on.



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


by courtesy of (published in Innovation and Technology, issue 9, September 2015

und (published by kapital-markt intern Verlag GmbH (issue 37/15)

and (Issue 10/2015)

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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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