Risk for doctors: Significantly lower pensions from pension funds

Around 90 pension funds, also known as pension chambers, are public corporations that collect funds from their “compulsory members” to build up a funded pension scheme. But the pension cuts that have already been decided, as well as those that are foreseeable in the future, call the system into question. However, “withdrawal” is not an option: the Higher Administrative Court of Lüneburg recently ruled that no member may stop paying contributions “because of an allegedly erroneous investment strategy of the pension fund that does not take into account the effects of the financial crisis” (OVG Lüneburg, decision dated 3 February 2012, ref. no. 8 LA 156/11). The professional chambers regularly delegate board members from among their board members to supervise the management. The high level of responsibility of these persons in charge is underlined by the fact that they are considered to be public officials under criminal law (LG Hamburg, judgement of 23.11.2007, file no. 608 KLs 3/07). However, this responsibility is unlikely to be met by the fact that only around 150 euros is paid for meetings, that there is no risk-adequate liability insurance and that the board members do not secure independent actuarial advice. Critical legal experts believe that the practiced duty of confidentiality of board members to the members of their professional chambers is no longer appropriate.

 

Some pension funds have already had to admit that all hidden reserves have been used up.

Only the investment losses during the subprime crises in Greece and Cyprus as well as the additional tax burden due to the Retirement Income Act are already expected to lead to a pension cut of more than 30 percent. The risk to pensions is illustrated by the fact that pension funds also invest in “equities, private equity, hedge funds, commodities, structured interest rate products” and similar “toxic assets”.

Where risk management has failed in recent years, members will not know. The Administrative Court of Munich has 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). In fact, it must be assumed that the sharp fall in market interest rates since the mid-1990s and the increase in life expectancy alone will more than halve pensions in the end – but no risk management will help against this certain development.

It is reported from informed circles that pension chambers as “institutional investors” are also being advised by private initiators on investment decisions. For example, the model of investing in food speculation with presumed deaths abroad in the millions, conveyed as “commodity investment with pleasant dinners”, became famous among such “advisory” financial houses.

 

Non-transparent costs, questionable kick-backs and permanently falling interest rates

Annual reports of the pension funds often only show their own costs. However, these could be more than double because open-ended and closed-end mutual funds and “alternative investments” regularly have ongoing management fees charged by financial houses, usually with freely negotiable kick-backs to the custodian. Every normal investor would be entitled to information on kick-backs (LG Nürnberg Az: 9 O 1021/11 and BGH Az: XI ZR 56/06), in order to have it clarified in court whether it is a case of breach of trust or fraud.
Since the end of the Cold War in the early 1990s, the introduction of the ECU and the announcement of the euro in 1998 with stability and sovereign debt limits, interest rates on the capital markets have fallen. The low market interest rate and the investment risk associated with foreign government bonds and alternative investments mean that, in the long term, hardly any pension fund can 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.

Naïve contemporaries believe that with capital cover the money for their pensions is already available in accounts somewhere. In fact, however, only a quarter of the capital is available for a pension payment in 35 years at an actuarial interest rate of four percent, with the hope of earning four percent interest and compound interest on it in the pension fund for 35 years. However, if only three percent is earned per year, 30 percent less capital will be available for payout after 35 years. If the money then has to suffice for 30 years of pension payments instead of the calculated 22 years, given the continuing increase in life expectancy by three months, pensions will inevitably be halved compared with earlier prospects.

 

Pension funds are not eligible for insolvency – pension recipients will find it all the easier in future

Nevertheless, insolvency will not occur in the case of pension funds, because the statutes of the pension funds regularly allow the benefits to be reduced. This has already been experienced by numerous customers of private and occupational pension schemes, who have seen their own pensions nominally reduced by more than 50 percent in some cases. Anyone who becomes insolvent as a result will at least be able to free themselves of all residual debts within three years in future.

After the occurrence of the pension case, pensions including value-preserving dynamizations are protected as long as not all pension recipients experience a system-compatible reduction, whereby a redistribution takes place de facto at the expense of the young pensioners and in favour of the pension recipients (BVerwG Az: 6 C 3.05). The question is whether this will hold up in the federal and state constitutional courts? This effect of targeted redistribution is reinforced by the fact that pension benefits are often calculated on the basis of outdated mortality tables – as long as this is the case, pensions are paid that are actuarially too high.

 

Voluntary contributions can be made to the statutory pension insurance scheme to spread the risk


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, anyone who is employed full-time somewhere on a permanent basis, and may not require a professional license to do so, can simply choose the route of returning the license instead of refusing to pay. 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 – according to the DRV, this should currently lead to an annual pension of over five percent. Voluntary contributions can be made not only by the self-employed at any time and up to one year in arrears, but also by mini-jobbers.

In this context, during the first five years of self-employment, there is an option to apply for compulsory insurance with the DRV for the rest of one’s life. 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 to re-ask the question of the statutory insurance obligation with the DRV for the then exercised activity with every change of profession, even with continued chamber membership. A status determination procedure at the pension insurance institution creates clear conditions here.
Some pension schemes also provide for the possibility of a lump-sum settlement at the start of the pension, or the early withdrawal of the pension despite continuing to work. Then the saved contribution as well as the pension received or the lump-sum settlement can be paid into other pension schemes, including the statutory pension insurance, in order to spread the risk, or invested in capital investments/real estate in an asset-oriented manner.

 

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

by courtesy of

www.kaden-verlag.de (article in Chirurgische Allgemeine, September 2013, 9th issue).

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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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