Pension funds give cause for concern

Risks for doctors, notaries, tax consultants, lawyers, dentists, architects and auditors

Around 90 pension funds, also known as pension chambers, are public corporations that collect funds from their “compulsory members” for the au au of a funded pension scheme. Past and foreseeable pension cuts challenge the system.

No exit by refusal to pay

The Higher Administrative Court of Lüneburg ruled that no compulsory member may stop paying contributions “because of an allegedly erroneous investment strategy of the pension fund that did not take into account the effects of the financial crisis” (OVG Lüneburg, decision of 03.02.2012, Ref.8 LA 156/11).

Some pension funds have already had to admit that all hidden reserves have been used up. The investment losses alone during the subprime crisis, the Greek and Cyprus crises, but also due to the additional tax burden of the Retirement Income Act are already expected to lead to pension cuts of up to more than 30 percent. The risk to pensions is already reflected in the fact that pension boards also invest in “equities, private equity, hedge funds, commodities, structured interest rate products” and similar “toxic assets”. However, members will not know where risk management has failed in recent years. The Administrative Court of Munich ruled that the individual member of the pension fund is not entitled to detailed information (VG München, judgement of 21.10.2010, ref. M 12 K 10.2643). Capital magazine wrote of “the cartel of silence”.

Non-transparent costs and questionable kick-backs

Annual reports of the pension funds often only show their own costs. However, these could be up to more than twice as high, because in the case of open-ended and closed-end investment funds as well as “alternative investments”, ongoing management costs are regularly charged by the financial houses, usually with freely negotiable kickbacks to the custodian bank. Such “double costs” are strongly reminiscent of the model of support funds in occupational pension schemes, which have often proved unsuitable for deferred compensation.

After all, we are talking about assets of the pension chambers totalling around 143 billion euros.

Foreseeable depletion of capital

The low market interest rate, as well as the investment risk associated with foreign government bonds and alternative investments, mean that in the long term hardly any pension fund will be able to calculate at three to four percent for pensions. Experts have already calculated when the assets of individual pension funds are likely to be exhausted if the previous increases and pension levels are extrapolated.

Nevertheless, insolvency will not occur in the case of pension funds, because the statutes of the pension funds regularly allow benefits to be reduced. This has already been experienced by numerous customers of private and company pension schemes in the various implementation channels, who have had to accept nominal reductions of up to more than 50 percent.

Anyone who becomes insolvent as a result will at least be able to free themselves of all residual debts within three years in future.

Withdrawal from the pension scheme

In many cases, chamber professionals have obtained a professional license for the sole purpose of being able to pay into a supposedly more profitable pension scheme. However, if you are employed full-time somewhere and perhaps do not need a professional license for that, instead of refusing to pay, you can simply choose the path of returning the license. This is because compulsory membership in the pension scheme follows membership in the professional chamber.

An alternative for chamber professionals would be to pay into the statutory pension insurance (DRV) on a voluntary basis in order to spread the risk.

Chamber members could in many cases, on application, minimise the statutory compulsory contribution to the pension scheme by taking out compulsory pension insurance with the DRV. Occasionally, the statutes of the regionally responsible pension chambers allow a reduction in contributions on application for various reasons, or even complete exemption from contributions for reasons of age.

In addition, it can be decisive for the design that with every change of profession, even with the same employer, even with continued chamber membership, the question of the statutory insurance obligation with the DRV arises anew according to the activity then exercised. A status determination procedure at the pension insurance institution creates clear conditions.

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

by courtesy of

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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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