There are increased liability risks for employers in around 87% of pension funds
One way of implementing the company pension scheme is the Pensionskasse (PF). Because they are monitored by the Federal Financial Supervisory Authority (BaFin), employers in this case are spared having to contribute to the Pension Protection Association (PSVaG). If the employer becomes insolvent, however, there will be no benefits from the PSVaG for the employees – whether the pension fund will pay in full, on the other hand, is uncertain.
19 out of 150 pension funds are low-risk
Only around 13% of the PFs under BaFin supervision have not recently had to undergo a “stress test”, as their investments are considered to be low-risk. After all, eight pension funds have also survived the stress test so far, but failed. In this context, the European Union (EU) had ensured that improved capitalisation and risk-bearing capacity as a result of Solvency II would not have to be implemented in the area of occupational pensions.
This meant that the risk of insolvency remained at a statistical one percent per year, instead of being halved. In the case of pension funds, for example, it must be expected that over a period of 70 years from the start of a pension commitment until the death of the company pensioner, one in two funds will become insolvent or will have to reduce the benefits already promised, instead of just under one in three.
The main problem with the non-implementation of Solvency II is that institutions do not have to assess and quantify their risks accordingly. The consequence is that it is then no longer possible to quantify any risks at all. It is therefore no longer necessary to take note of them, or one can simply dismiss them with generalities.
Statistically, three pension funds could become insolvent within two years?
Of course, pension funds can reduce their benefits in accordance with their statutes, so that they, like professional pension funds, never necessarily have to become insolvent. BaFin could also order the reduction of benefits sovereignly – of course only for the good purpose of restructuring a PF. Since then, many employers have been considering whether to take recourse against their intermediary or adviser for inadequate advice on employer liability.
BaFin only has certain possibilities of intervention, which may also have a preventive effect up to short- to medium-term periods, in order to limit the immediate risks. This does not mean, however, that institutions that are allowed to continue could do so for longer than the medium term without major intervention.
We will have to be prepared for the fact that this will increasingly include the discontinuation of new business and the winding up of facilities. Any PF can be affected – there is hardly any transparency. Especially those that advertise high performance should be the most critical, because they often also take the highest risks.
No advance warning of impending reorganisation at the expense of employers
Employers should not expect a timely warning from BaFin because it is BaFin’s policy to avoid such warnings in order not to further jeopardize the survival and ability to restructure a pension fund. A warning would later mean that the employers who had been warned in good time might no longer be available to collectively help finance the clean-up, and the remaining ones would be even more burdened.
In addition, the pension fund would then receive less fresh money, which would mean that investments would have to be liquidated for pension payments at the very time when they have fallen sharply in value, which would then require even faster and tougher restructuring measures.
Employer default liability in the event of reduced pension fund benefits
The Federal Labour Court (Bundesarbeitsgericht, BAG, ruling of 19 June 2012, ref. 3 AZR 408/10) had ruled that the employer may make up the difference in the event of a reduction in benefits under a PF. For the employer, it does not matter whether the insolvency risk leads to a reduction by BaFin or a statutory reduction – he is always liable.
The probability of employer liability increases over time, in particular due to the low interest rate level on the capital markets, which has persisted for years, and in many cases still very high average guaranteed interest obligations from given pension commitments. However, if the employer then also ceases to exist due to insolvency, the employee must cope alone with the reduced occupational pension – abroad this is the rule even without employer insolvency. In many other European countries, employer liability is not even provided for in occupational pension schemes.
Reassuring prospects for employees?
The employer’s liability makes the PF provision more secure for the employee. The reassurance to some insured persons that their institution cannot become insolvent because the pensions can be reduced at any time and, in addition, the employer is liable for the difference, is, on the other hand, a less than edifying prospect for employers.
It should give employers pause for thought when it is advertised that the employee can be more certain because he or she is liable. As an employer, it should not be taken lightly when overly high benefits have been predicted by intermediaries and advisers, and these then prove to be unrealistically too high and associated with increased risk-taking by the PF.
This is because employers – who can choose the provider even if they are forced by law to offer deferred compensation – advertise precisely those offers that promise the highest pension at the lowest price. With such “yield comparisons” the employer perhaps thinks to have chosen the best for his employees, still without realizing that he has exposed himself to the maximum risk of employer liability in case of doubt. Such sales tricks of some advisors or mediators catch up the involved ones then like a boomerang – at the earliest if back completion is demanded, at the latest if the Ausfallhaftung comes to the effect.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
http://www.experten.de (Expert Report 04/2014)
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About the author
PhD, MBA, MM
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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