Company pension scheme: Dr. Johannes Fiala and Peter Schramm explain how a higher level of provision can be achieved with less effort in a guest article for procontra-online.de.
With regard to pension equalisation, there is currently (still) the possibility of “external splitting” of company pension schemes (bAV), for example in the event of divorce, Section 17 of the German Pension Equalisation Act (VersAusglG). Affected are direct commitments (also known as pension commitments) as well as rights against a relief fund. The beneficiary spouse then receives a right in the amount of the settlement value from the same, and optionally with priority from another pension provider, § 15 VersAusglG. The settlement value is to be paid as a capital sum, Section 14 VersAusglG. An opposition party in the Bundestag wants to abolish this legal option.
External division by transfer of a capital value
In the case of external splitting, a capital value is transferred, from which, however, in some cases considerably lower pensions (at current conditions) can be financed than half of the pension paid to the equalisation undertaking.
The German Association of Actuaries (DAV) has calculated
A calculation example, published under 17.03.2015, shows as of 30.11.2015 (see below) that the transfer to a funded provider only provides a monthly pension of EUR 170, while the transfer to the German Pension Insurance Association (DRV) provides a monthly pension of EUR 220 (which in the example already corresponds to half the pension with internal division). Decision errors and wrong advice cost those affected up to more than 100,000 euros in the end – just as some divorced people are not aware of the option of having the current legal situation recalculated in order to obtain a subsequent improvement.
Statutory pension beats private pension
The amount of the pension from the Deutsche Rentenversicherung Bund (DRV) is therefore better than any new capital cover. Of course, this applies not only to the transfer of pension capital, but to any capital for which one wants to have a pension. Compensation beneficiaries should currently choose the DRV as the target provider for pension compensation instead of a funded institution and others should seriously consider doing so.
Other insurance providers pay far lower pensions for the same capital. It is better to buy a higher life annuity from e.g. infrastructure companies, public corporations, foundations or from private and other building owners, possibly secured by land registry or bank guarantee.
Association of Actuaries calculates the transfer capital
The DAV then calculates that the capital relevant for the external transfer claim is based on a discount rate of 4.43% as of 28 February 2015 in accordance with Section 253 (2) of the German Commercial Code (HGB). However, this interest rate will very soon fall sharply, to below 4% by the end of 2015 (example above), to below 3% by the end of 2016 and later to below 2%. However, this means that the capital for the transfer entitlement increases significantly.
Since the announcement of the euro in the 1990s until today, the capital market interest rate of German government bonds has fallen to around “zero” and below. This means that more and more money is needed to build up an equally high pension. This is because during the savings phase, interest and compound interest no longer have an effect – on the contrary: due to ongoing administrative costs of the life insurers and company pension schemes, a negative return is foreseeable in the medium to long term. Employers will also receive less than the average amount paid in.
For years now, this has also been noticed by customers of life insurance companies whose private pension is already less than half of what they were promised when they took out their pension insurance based on sample calculations years ago. Occupational pensioners sometimes recognise the employer’s obligation to pay if there is the frequent case that the employer’s promise included a much higher pension than is actually paid.
Increasing expenses due to higher transfer capital
Actuaries can roughly calculate that the capital to be transferred is already up to more than twice as high at 3 % instead of 4,43 %, and even up to more than three times as high at 2 %. Of course, this also shows what is in store for the economy. The favourable (absolute amount of the capital and the pension that can be financed from it) results in the example at the end of 2015 are based on the discount rate, which has already fallen to below 4%, which compared with 4.43% interest already provides up to more than 30% more pension equalisation capital. An amendment to the law for the end of 2015 halted this decline, but ultimately only postponed it into the future.
Subsequent divorce results in higher pension capital
Therefore, divorce candidates should wait until the discount rate according to § 253 (2) HGB has further decreased very soon. At the moment it is still very high temporarily, because average interest rates over the last 7 years and after the change in the law over 10 years are being received, where the interest rate was initially much higher than today. This is now quite independent of whether one hopes, perhaps by waiting (for the divorce petition) for the change in the law that abolishes the external division and prescribes a more advantageous internal one.
The employers have to pay this, but they do not make a loss, because they have to set up these strongly increasing reserves according to § 253 (2) HGB anyway, which they can then (half) dissolve. This even has the advantage that they no longer have to pay tax on the difference to the much lower (discounted at 5.5 %) taxable pension provision, and that they are also relieved of the burden of future expenses by the division and payment of pension obligations. So far, only a few employers have made use of the earliest possible settlement of current pensions and occupational pension entitlements to restructure their finances or improve their rating.
Typical calculation errors in the employer’s personnel office
One more tip: those entitled to pension equalization should make sure that the employer has not used the much lower taxable pension provision for the calculation of the equalization capital. Furthermore, that it also takes into account the dynamisation of pensions.
By Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.procontra-online.de (published on 20.05.2016)
www.network-karriere.de (published in Network-Karriere 07/2016, page 30 under the heading: Optimizing pension equalization – even during an ongoing marriage)
www.experten.de (published on 24.05.2016 under the heading: Optimisation of pension equalisation – even during a current marriage)
www.pt-magazin.de (published on 23.05.2016 under the heading: Optimisation of pension equalisation – even during a current marriage)
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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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