More than ever before, every German citizen is responsible for his or her own retirement provision. The benefits of the statutory pension are by far not sufficient to even come close to maintaining the accustomed standard of living at retirement age. Even the Retirement Assets Act (AVmG) passed on 11 May 2001 is only an insufficient way out of the dilemma.
And the original quote from Walter Riester does not hide this fact:
“This is the largest retirement savings program ever launched.”
In the quotation from the Münchner Merkur, the title is ” Riester’s Monster”:
“In the matter in hand, an over-bureaucratized patchwork has been created that should only last a few years. Such a freak of nature could only have come about because the political originators of the reform tend to adopt collective approaches rather than individual solutions. Pensions would not have been secure without this reform, nor will they be with it. Anyone who imposes such foolishness on the citizen as the regulation of being able to take out an interest-free loan with himself should not be surprised about a lack of confidence in the substance and durability of a reform.
These statements hit the nail on the head. While the field of occupational pension schemes has already been a rather complex and, for some, unmanageable entity, the chaos is now perfect for someone who is not constantly occupied with this matter. Even in specialist circles, this reform in the field of occupational pension schemes only reaps head shaking and lack of understanding. The whole thing involves a danger that should not be underestimated. If considerable economic damage has already been caused in the past by incorrect and/or incomplete advice to those affected, this fact is now likely to be exacerbated to an enormous extent. More than ever before, education and information are needed to make the instruments of occupational pension schemes economically viable for all those involved .
A link between private provision under the AvmG and a company pension scheme cannot be warned strongly enough. This does not bring any advantages for either the employer or the employee.
If the employee requests the subsidy according to 10 a EStG, he pays contributions from taxed and earned income. Thus, the employer also pays his social security contribution.
Since 01.01.2002 there have been five ways of implementing occupational pension schemes (operating expenditure):
Direct insurance § 4b EStG
Pension fund § 4c EStG
Support fund § 4d EStG
Pension fund § 4e EStG
Pension commitment § 6a EStG
The company pension scheme using the “Unterstützungskasse” implementation method is still the most flexible, individual and economically sensible concept and has even been improved further by the legislative reform. In principle, one thing remains to be said:
A properly designed company pension scheme is more valuable and important than ever from a business, personnel policy and social point of view.
What is a relief fund?
As a social institution, the relief fund is a tax-exempt, legally independent pension institution that grants occupational pension benefits without legal entitlement. The tax exemption is justified by the purpose of the occupational pension scheme (social security scheme). These features result in numerous advantages. The support fund has its own special assets – separated from the employer – special assets (insolvency protection), which are fed by contributions from the employer. The employer makes a commitment to the employees and pays tax-deductible contributions to the relief fund. This allocated capital is invested by the provident fund in accordance with tax regulations. Conversely, the Fund shall make payments to the employees and, upon request, also to the employer which become due at a later date. The entrepreneur can choose the most common form of provision through the insurance industry and thus set up a insurance reinsured support fund.
He can also waive the reinsurance and choose a lump-sum endowed provident fund, which is capital reinsured . This means that the company receives the annual endowment back in the form of a loan and invests this capital itself on the capital market; or it uses the loan for investments within the company. Since relief funds are not subject to insurance supervision like pension funds or pension schemes, they may make their assets available to the sponsoring undertaking in the form of loans against an appropriate interest rate. The interest to be paid is operating expenses, increases the cash assets and can be adjusted to the profit situation. The economy thus has a supply instrument at its disposal that also makes economic sense.
Occupational pension schemes financed by the employer are a voluntary decision. As an entrepreneur, you only decide on something that benefits you and your employees. No instrument of company pension schemes is as efficient for you, for your company and for your employees as the provident fund.
The advantages for the company.
- The pension capital can be funded with tax effect.
- Security for sufficient pension capital is guaranteed, biological risk is reinsured.
- In the case of lump-sum funding in the UK, the assets can be invested freely. Value creation is shifting back from the insurance groups to the sponsoring undertaking.
- No “tax savings model”, but tax-privileged asset accumulation.
- The assets are transferred to the fund, no capitalization of the assets in the balance sheet.
- Likewise, no pension obligations have to be carried as liabilities in the company balance sheet (no pension provisions, complete balance sheet neutrality).
- No risk of over-indebtedness due to unplanned benefit claims.
- The income from the assets remains tax-free in the provident fund.
- Flexible endowment payment, endowment suspension and resumption possible at any time, no backlog prohibition, even decreasing endowment possible by offsetting.
- Financing is a general weakness of German medium-sized companies. The Basel credit decisions will further exacerbate this dilemma. Funded amounts are immediately available as liquidity in the form of a loan from the UK to the sponsoring undertaking. This not only reduces the dependence on the house banks, but also the cost of the loan, because the interest rates for the UK loan can be reset each year in a range from 4% to around 10%. Depending on the profit situation, the upper limit can be as interesting as the lower limit.
- Exempt from inheritance tax on transfer of business.
Personnel policy advantages
With the provident fund, you will see how beneficial these aspects are for reducing personnel costs.
The legislative core idea of every occupational pension scheme is the personnel policy and social benefit
- Motivation of your employees.
- Qualified staff recruitment and long-term – loyalty to the company.
- Reduction of fluctuation costs.
- Reducing non-wage labor costs by issuing pension commitments instead of pending salary increases. Advantage: You save on tax and social security contributions. This otherwise lost money is preserved and saved for later pension provision.
Supply for the entrepreneur
Unique in the field of occupational pension schemes is that entrepreneurs/partners and their relatives can also be beneficiaries of the relief fund. By making a commitment to your employees, you are simultaneously building up your own pension scheme (this is done by transferring released fund assets to your fund account, e.g. when employees whose entitlement has expired due to a short period of employment leave the company). In this way, part of the tax-free assets in the fund also serve to close your private pension gap.
You always have the choice with whom you want to share!
What risks can the implementation path Unterstützungskasse entail?
A provident fund can take the form of a foundation, a limited liability company or a registered association as a corporate body. Insolvency security varies. There are providers who control all fees, costs, directly through the U-Kasse and in case of a disproportion of expenses to income, as any business enterprise may become insolvent. This means that the commitments are then transferred directly through the sponsoring undertaking in the form of a pension commitment, or are transferred as quickly as possible from the sponsoring undertaking to another pension institution. Since the reinsurance policies belong to the U-Kasse as policyholder and the beneficiary, they will then certainly be cancelled. If a U-Kasse is then no longer a U-Kasse, this naturally also has an effect on the deduction of operating expenses. A U-Kasse must be managed purely as a cost-neutral pension fund through which the endowments are paid. All funds that must be received by the U-Kasse are segmented in relation to the company and the beneficiaries. This applies to the reinsured, the lump-sum U-Kasse and the free fund assets. The institution, the administration with all costs and also the large item of personnel costs must be separated from the U-Kasse and run through a separate administration.
The deferred compensation
The advantages for the employee
From the employee’s point of view, the classic advantages of an occupational pension scheme additionally financed by the employer arise first:
- Closing the supply gap
- Secure and profitable capital accumulation
- Motivation for further employment
The better way also for deferred compensation
Irrespective of the employer-financed contributions, the employee can make use of the possibility of salary conversion, which is included in the Company Pensions Act, without flat-rate wage tax and without social security contributions via a relief fund. From 01.01.2002 exemption from social security contributions up to 4% of the income threshold (€ 4,500.-) until 2008. For the implementation methods pension fund, pension fund, tax exemption up to 4% of the contribution assessment ceiling exists. In the case of the provident fund, remuneration can also be converted tax-free above the 4% limit. If desired, it can be agreed with the employer that the employee converts a certain amount of his salary. The employer transfers this amount to the relief fund. This allows the employee to shift high taxed active wages to the low taxed retirement phase.
For contributions from wages that are converted into contributions to the company pension scheme, there are the following options for tax treatment:
For amounts resulting from the employee’s salary waiver (direct commitment, relief fund):
Unlimited tax-free according to § 11 EStG
The different taxation in the savings phase also results in different taxation in the performance phase.
Following the adoption of the Retirement Assets Act (AVmG) on May 11, 2001 and the associated introduction of an additional funded pension plan, the question arises as to whether the isher already and still possible salary conversion from gross salary by means of a relief fund or the subsidized pension plan from the taxed and earned salary is more favorable. It is therefore interesting to compare this subsidized “Riester pension” with private savings from net wages into an investment fund and with salary conversion by means of a relief fund from gross wages.
This was based on one employee, 30 years old, married, 2 children, 3,579.04 € gross per month.
For whom is the provident fund suitable?
Did any of the above points appeal to you? Now all that remains is to check whether your company is suitable for the use of a relief fund. If the following basic requirements are met, the reinsured relief fund will bring personnel policy and business management benefits to your company as the pension scheme develops.
Requirements for operation with a company-funded relief fund:
- positive profit situation
- at least 1 employee
- available cash
- balanced age structure
The above requirements do not apply to salary conversion.
by Dr. Johannes Fiala and Rudolf Becker
Our office in Munich
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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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