*by Johannes Fiala, lawyer (Munich), M.B.A. (Univ.Wales), M.M. (Univ.), certified financial and investment advisor (A.F.A.), banker (www.fiala.de)
Financial service providers with experience in advising on occupational pension schemes report that most occupational pension schemes are designed or implemented incorrectly. When the child has fallen into the well, the question of responsibility arises. Liability for incorrect training or sales advice: Financial service providers are allowed to give legal and tax advice. According to the German Legal Advice Act (RBerG), this is a legal so-called auxiliary business for product brokerage ? but: Insurers are just as liable for the correctness of training courses as agents are for correct tax and legal information. That should go without saying.
In principle, no isolated occupational pension advice: For the financial services provider, the decisive question is whether his VSH applies in the event of an error ? there is no coverage in the event of a breach of the RBerG: a typical example is a tax law assessment in the context of a financial planning ? In this case, a southern German chamber of tax advisors recently succeeded in obtaining a cease-and-desist declaration against a major bank.
Liability delegation asked: Especially in the case of complex models and (partially) implemented occupational pension schemes, it is advisable to consult an expert and licensed legal counsel. Above all, a concrete expert opinion from a recognised and independent actuary/expert and expert for occupational pensions is helpful. Examining existing contracts from a legal and tax point of view, i.e. this type of “fee-based advice”, is reserved not only for tax and legal advisors, but also for insurance advisors and – according to a decision of the Stuttgart Higher Regional Court – for (genuine!) insurance brokers.
Risk of commercial consultants: In the case of commercial providers, consulting contracts under the guiding principle “We advise employers, insurers, distributors, etc. on the restructuring of the occupational pension system” can violate the RBerG ? with the fatal consequence of contract invalidity. Whoever is advised in this field should clarify whether the appropriate VSH protection exists. In case of doubt, a proven transparent VSH individual cover is recommended, especially in the case of offers from management consultants and consulting firms. The client should have the VSH insurer explicitly confirm the insurance of the concrete contract content with the “independent bAV consulting company” as insured: Because otherwise the VSH insurer can refer in the case of loss to the fact that after the VSH conditions no insurance protection for void contracts exists: In practice, this reaction is as certain as the Amen in the church.
Risk fiscal advisor: Furthermore, the liability of the tax advisor (StB) is usually overlooked. While the advice given when taking out a reinsurance policy is usually still acceptable, in the savings phase, however, hardly any advice is given. In this context, the advisor has to keep an eye on the necessary tax requirements “on his own initiative” (BGH ruling of 09.11.1995). Important changes in the legislative process are insufficiently observed and the congruence of a reinsurance policy is criminally neglected or hardly checked. At the StB highly explosive mines are stored in the cellar, the business consultant Bosl knows from practice. After all, the addition of a pension commitment to an employment contract is essentially an activity under labour law ? i.e. not for the accountant.
Typical liability approach, also for insurer liability: A larger insurer writes to a GmbH: ?? for your pension commitment a shareholder resolution is necessary ? talk about it with your tax advisor ??. However, the tax advisor is usually neither trained as a legal advisor nor insured. In addition it comes that often a single partner resolution is not sufficient at all, so that the pension promise becomes effective.
In case of doubt, the insurer will also be liable for such unprofessional recommendations (cf. BGH judgement of 8 February 1978, BGHZ 70, 356, 365 on liability even in the case of printed works). Such claims are also regularly not time-barred, because according to the new law of obligations a limitation period applies temporally from 01.01.2002, which can still last ten years.
Ineffective bAV consultancy contract: The Federal Court of Justice (BGH) (judgement of 30. 9. 1999 – IX ZR 139/98) judged a tax consultancy contract to be already ineffective according to § 134 BGB because the StB – even in the case of a permanent mandate – may only take on activities within the scope of § 1 StBerG: The BGH reproached the StB for not having referred the client to a lawyer and would have been obliged to inform that he was not allowed to draft contracts under company law.
The special feature of the BGH decision was that the StB is liable according to contractual principles, although the mandate given to him to draft the contracts under company law was ineffective. The StB is not entitled to remuneration although he is liable: This fate can also affect many an ‘independent’ bAV consultancy contract. The pension commitment requires a shareholder resolution, i.e. a corporate law arrangement; again nothing for the accountant. The StB is not even insured for damages.
Delegation does not always help the tax advisor: This is shown by a judgement of the OLG Düsseldorf (file no. 13 U 60/98), in which the tax consultant had referred his client to a pension expert. Unfortunately, this did not help the tax advisor when he subsequently prepared the balance sheet incorrectly ? the auditor later objected that the pension provision was invalid. For example, there was no timely written commitment. Unfortunately, the managing partner was then no longer young enough (when the written form was made up) so that he could still “earn” the commitment for tax purposes. Although the tax advisor had explained to the client that the occupational pension scheme was a complicated matter that would overtax him and had correctly referred him to an expert, he was held liable: it is not enough for the tax advisor to draw up a balance sheet “only on the basis of the asset values and actuarial expert opinions provided to him” ? the annual financial statements must also be correct. The tax auditor at the latest brings it to light.
Financial service provider liability for reinsurance coverage? The majority of pension commitments are incongruently reinsured, because the commitment to the employee usually falls short of the reinsurance. In many cases, the commitments include occupational disability pensions without corresponding insurance cover: if the benefits fall due, the uninsured employer is often faced with insolvency.
The present value of old-age pensions – calculated according to the now unrealistic 6 % of the 1998 Heubeck tables – is no longer up to date in the opinion of the occupational pension consultant Edmund J. Ranosch due to the considerably reduced returns on the capital markets: “The interest effects on the present value of old-age pensions are already enormous with a constant pension amount. However, if the pension/commitment is designed dynamically, there is a further acceleration in the level of the capital stock. If the vesting phase were also dynamic, this would result in a further acceleration in the growth of the present value of the old-age pension?
The interest rate of 6 % p.a. is based on the assumption that the capital stock within the pension provider (usually a limited liability company) earns interest if it receives the capital amount in the 65th year of life of the pension recipient. From this capital stock, the GmbH pays out the old-age pension, the value of which is zero after 16.5 years according to the old 1998 Heubeck tables, provided that interest is always paid on the remaining capital at the rate of 6 % p.a.. If the capital stock is invested externally, a lower return per year is more likely. Today, insurers are calculating with a guaranteed interest rate of 2.75% in the long-term sector and are already aiming for a guaranteed interest rate of 2.25% p.a. following the latest BVG ruling on the fairer distribution of hidden reserves among future insurance contracts. The lower the interest rate below 6% p.a. in the future, the higher the capital stock must be at the start of the pension.
If today for an advance annual pension of 12,000 ? to a 65 year old still approx. 118,000 ? according to Heubeck tables 1998, must be already built up now a higher capital stock. The increase in life expectancy has less of an effect here than the reduction in the long-term interest level.
Example: With an interest rate of 6 % according to the old 1998 Heubeck tables, is approx. 118,000 ? in order to pay the above old-age pension for 16.5 years, at 4% interest on the capital stock already approx. 140,000 ? and with only 2,75 % p.a. interest even to 152,000 ? can be saved in the reinsurance. These are reinsurance gaps of over 20 % to 30 % for the old-age pension alone from the outdated mortality tables. In the more recent DAV mortality tables 2004 R, the comparable cash value is approx. 146,000 ? at 4% interest and about 158,000 ? at 2.75% interest. This widens the reinsurance gap to between 30% and 40%.
Financial service provider liability for reinsurance products: Particularly problematic is the fact that in the case of direct commitments, the employer is often free to choose the products in which it invests in order to accumulate the reinsurance. Insurance products have the advantage that the entrepreneur can protect himself financially in the event of death or disability.
However, resourceful initiators are also trying to sell ship investments (advertised as a secure asset value, despite the fact that steel prices have become expensive) or closed real estate investments (despite the fact that the market value has fallen sharply in some cases) as reinsurance products via the occupational pension system. The coverage gap and insolvency risks are increasing.
In some concepts, equity funds are added for supposed diversification.
The investment advisor is subject to increased advisory duties, because the price risk of shares – as well as the total loss risk of closed investments – are, according to case law, regularly incompatible with the objective of “building up old-age provision”, cf. judgements of the OLG Jena – 5U693/04 in the case of shares, OLG Frankfurt/M. – 13 U 24/03 in the case of investment funds.
Bundle of risks: Advice on occupational pension schemes is demanding and involves above-average risk. The consultant can hope for limitation of damages liability only after 10 years; however, he should be insured.
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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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