– Strategies for structuring pension assets in professional pension chambers –
The Higher Administrative Court of Rhineland-Palatinate (OVG Rheinland-Pfalz, Higher Administrative Court, judgment of 26.05.2010, Case No. 6 A 10320/10.OVG) dismissed the claim of a doctor who sought a declaration that his wife would later be entitled to a widow’s pension from the pension fund.
Professional pension chambers conduct insurance business
The (compulsory) members pay contributions to their pension chamber (Versorgungskammer, professional pension scheme), out of which cover for old age, death and invalidity is financed by assuming the corresponding risk. Alongside the member’s own retirement pension (insurance principle), there is generally a survivor’s pension (dependants’ principle) without an additional contribution – though of course not free of charge in economic terms. However, “subsequently married” widows and widowers are frequently excluded from the provision for dependants (risk-limitation principle).
Pension gaps depending on the statutes of the Versorgungskammer
Depending on the applicable statutes, widows and widowers are often not entitled to any survivor’s benefits at all from a pension chamber. Doctors, pharmacists, dentists, tax advisors, lawyers, auditors, architects and notaries can in some cases choose or arrange which pension scheme they belong to, with correspondingly different statutory provisions.
Some widows have no claim whatsoever if, for example, the marriage took place after the pension had already commenced. A claim may also arise only after a minimum duration of marriage. The professional is likewise able, by applying in good time – voluntarily for the purpose of risk diversification or by reason of compulsory insurance – to secure a future widow’s pension through the Deutsche Rentenversicherung Bund (German Federal Pension Insurance). Term life insurance with conversion of the benefit into a survivor’s annuity can also be a useful option.
Structuring through the timing of the pension application and divorce
It can therefore be worthwhile, for instance, to postpone the start of the pension where a divorce and remarriage are pending – and one’s own pension increases as a result. Postponing the onset of an occupational disability pension may likewise be advantageous in certain cases.
Conversely: if the widow would receive nothing or very little, it may be worthwhile – for example in the case of a serious terminal illness – to divorce, whether before or after the start of the pension, because a pension equalisation (Versorgungsausgleich) then takes place and the “widow” may lawfully obtain more under that mechanism than she would receive as an actual widow under the statutes.
Lump-sum settlement or capital transfer
Some pension schemes also provide for the possibility of a lump-sum settlement, which can be worthwhile where the medical prognosis is poor – possibly even more so if a pension equalisation is carried out beforehand.
Some pension funds have joined a transfer agreement under which, on relocation and a change to a new pension fund, the capital may be transferred in such a way that the classification at the new scheme is treated as if the contributions had been paid there at exactly the same time as at the old scheme – an often advantageous solution.
Where a subsequent marriage – to a Thai or Filipino wife, for example – is accompanied by a conversion to Islam, the proverbial second wife abroad can also be provided for.
Legal and actuarial differences
Pension schemes offer their members different rates of return, particularly where this also applies to certain partial benefits. This has, of course, not only been the case since the Republic of Austria announced in its Federal Law Gazette of 31 July 2014 that EUR 890 million of Hypo Alpe Adria (HETA) subordinated bonds would not be repaid. Corresponding claims of the pension chambers were thereby extinguished despite the supposed state guarantee.
Even without examining such individual investments, pension schemes can be compared – including the question of how they are treated in the event of a switch. Depending on age and other circumstances, there are different priorities, maximum limits and imputations (in terms of amount and final age), for example also in the case of occupational disability. There are, in addition, different methods of calculating entitlements – more or less fully funded, or on a pay-as-you-go basis. A change can therefore be worthwhile from a certain age, because the contributions paid from then on lead to higher pensions in one scheme than in the other as part of a blended calculation.
Example of an occupational disability pension: here, for instance, the average contribution from the point of joining the pension chamber may count, which is then projected forward up to age 55, 60 or 62 depending on the scheme and the date of joining. So if you paid in little at the outset and far more now, the low earlier years can have an adverse effect on the average figure, and a change to another federal state can be worthwhile where only the higher contributions count from the date of the change. Such a change can be arranged in a targeted manner in accordance with professional law – not infrequently without an actual relocation.
Strategic switching can pay off even at an advanced age
Most pension funds assume that they need not fear adverse selection because of compulsory membership. They tend to overlook the possibility of strategic switching. There are, however, sometimes surcharges for those joining at higher ages, which suggests that the terms are too favourable here and could be exploited (in good time, if necessary). Conversely, this also represents an option for a strategic exit from a compulsory contribution.
In the case of the pension scheme, the “non-contributory” widow’s pension is not capital-funded but is financed, so to speak, on a pay-as-you-go basis. Some pension chambers, however, offer a higher pension where the beneficiary is unmarried when the pension begins. This too may be an advantage, and a move may be worthwhile.
The pension funds do not calculate widow’s pensions on an individually funded basis, but assume, for example, that a certain proportion of members are married at 65 and that the wife is always six years younger.
If a widow’s pension were included in a private pension arrangement, an additional premium would have to be paid for it, depending on the relevant age; and if the wife were to die beforehand, the risk would cease to apply, while premiums for a remarriage would have to be paid again for the new risk. The pension chambers, by contrast, do not operate on such an individually funded basis, which is why restrictive rules in the statutes are used to counteract over-exploitation of widows’ pensions at the expense of the other members of the scheme.
An optimisation that can yield profits running to six-figure euro amounts is nevertheless – and not only in respect of the widow’s pension – often possible. The flip side is correspondingly costly mistakes, which can frequently be avoided in good time. Often only an analysis of the individual situation and of the available options across federal states, supported by an actuarial report, will reveal the most financially efficient course of action.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
