Occupational pension schemes do not prevent poverty in old age

– How will the severance pay for company pension schemes (bAV) be subsidised from 01.07.2016? –

As of July 1, 2016, the severance payment of pension commitments on occupational pension schemes will be classified as pension benefits by the umbrella organisations of the social security system, Section 229 SGB V. This means that neither unemployment insurance nor pension insurance contributions will be due. The liability risk of the so-called obligation to pay compensation is increasingly motivating employers to compensate their employees.

 

Legislator promotes the compensation of the bAV in income tax

In the case of remuneration or severance pay for several years’ work, Sections 19, 34 EStG provide for a reduced tax rate (so-called fifth rule) in income tax. The severance payment can be made during current employment, after leaving the company, as well as when a pension is already being drawn. According to § 3 of the Company Pensions Act, however, it may not be agreed in connection with the employee’s departure from the company – otherwise the employer is in danger of (re)owing the promised occupational pension benefits at a later date despite the current severance payment.

 

Umbrella organisations submit to more than 10 years of case law

Until now, employers who had not treated severance pay as normal pay in all branches of social security before the start of retirement had to agree with the auditing service of the German Pension Insurance Association (DRV) – or, if necessary, go to court if they did not want to pay unemployment and pension insurance contributions.

Case law has often proved the thrifty employer right (Judgment of the Federal Social Court of 25.08.2004, Az. B 12 KR 30/03 R; BSG judgment of 25 April 2012, Ref. B 12 KR 26/10 R; Landessozialgericht Baden-Württemberg Judgment of 24.032015, Az. L 11 R 1130/14).

 

Statutory health insurance (GKV) only up to the contribution assessment ceiling

Contributions to statutory health insurance and compulsory long-term care insurance are only owed up to the income threshold (2016: € 50,850 p.a.). Those who earn more anyway, or have a higher income through severance pay, can save up to 100% of their SHI contribution.

Those who receive the occupational pension benefits as a pension only later may pay the SHI contribution in full on their own – i.e. without being reduced by the so-called employer’s contribution to social insurance. If the pensioner is a member of the occupational pension scheme, the SHI contribution is spread over 120 months.

Until 1983, pensioners were insured in the statutory health insurance system without contributions. In 1984, 3% SHI contributions were levied – today the figure is about 15.7%. Over the last 36 years, the total social security contribution has risen from 32.4% to 39.8%; up to the respective contribution assessment ceiling (BBG).

Occupational pension schemes promote poverty in old age

The occupational pension scheme is a secure “tax-saving model” for the employer, because it saves him or her social security contributions, for example in the case of deferred compensation. For the average employee, this temptation to save on taxes turns out to be a boomerang in old age, illness and unemployment. This is because deferred compensation not only results in lower contributions to the DRV, the SHI system and unemployment insurance, but also in a corresponding permanent reduction in benefits.

In old age, when every cent is needed, there is a double burden (since 2004) of a SHI amount on the occupational pension scheme payment, as it were, as well as full tax liability on retirement income. Downstream taxation, together with the other effects, often proves to be a nominal disadvantage when drawing pensions, although it is sold as a tax-saving model at present.

Those who do not follow the hypothesis that the impoverishment of pensioners was politically intended, can assume an advisor liability with the mediator, because there were and are alternatives: Anyone who does not want to take out a pension scheme but nevertheless wants to invest in a life insurance policy can do so himself instead of his employer. Then 82% of the annuity is completely tax-free for such private annuity insurance policies, as is the case with life annuities, for example with a life annuity beginning at the age of 65.

Bhile the statistically average length of stay with the same employer is around five years, up to more than half of the occupational pension contributions may not have been used for capital formation in the first place due to acquisition and administration costs. A new employer is not forced to continue the contract chosen by the previous employer for liability reasons alone. The employee then has a closed-down occupational pension scheme – and the good prospect as a pensioner of asking the former employer for an additional payment if not even the contributions paid in are returned at the end. If the low interest rates persist, this appears to be a virtually certain event. For the insurers, it is then considered as breach of contract or as a malfunction.

Double insolvency risk through occupational pension schemes

A further reason for not taking out occupational pension schemes is the insolvency risk, which is around one percent p.a. – cumulated over the lifetime of an employee and pensioner, it can then be as high as 50%. This risk for the employee can be as much as doubled, because both the insolvency of an insurer and the insolvency of the employer affect the employee. In a specific individual case, the Pensionssicherungsverein (PSVaG) proves to be only a partial compensation of benefits in the event of employer insolvency.

The occupational pension scheme is more often a de facto loan to the employer, who is allowed to pay part of the wage for his own work only in old age. If the employer goes bankrupt, the insolvency administrator will also look to see whether he has access to these savings, because employees hardly ever protect themselves in the occupational pension scheme as well as credit institutions. Those who are particularly unlucky may watch as a financial locust buys up the employer, eviscerates, moves abroad and liquidates there. Then even the PSVaG won’t step in. This also applies if the contributions to the relief fund (UK) land on the Cayman Islands and mail for the UK cannot be delivered to the Timmendorf beach house.

 

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

 

by courtesy of

www.innovationundtechnik.de (published in issue 9/2018)

and

www.experten.de (published on 24.08.2018)

Link: https://www.experten.de/2018/08/24/betriebliche-altersversorgung-verhindert-keine-altersarmut/

and

www.pt-magazin.de (published on 26.06.2018)

Link: https://www.pt-magazin.de/de/wirtschaft/finanzen/betriebliche-altersversorgung-verhindert-keine-alt_jiu3df6m.html

and

http://ap-verlag.de (published on 24.06.2018)

Link: http://ap-verlag.de/betriebliche-altersversorgung-verhindert-keine-altersarmut/45111/

 

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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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