Sales traps with U-cash registers

The collapse of the Adkura support fund shows how vulnerable occupational pensions remain today. There are large gaps in the safety net, which ultimately have to be covered by employers – who, in case of doubt, take the blame for the sales force.
Once upon a time there was a U-Kasse in Ratingen, today you can only find the insolvency administrator on the Internet who handles this U-Kasse. The Adkura case has been all over the press because the last official act of the owners was to transfer the cash assets to the Cayman Islands. The members of the UKasse, i.e. the employers, were not at all happy about this. “They bear the so-called Ausfallhaftung – a decidedly expensive joke,” says Johannes Fiala, a lawyer at the law firm Fiala, Freiesleben & Weber. The Pensionssicherungsverein (PSV), the insolvency protection organisation of the employers, does not step in in such cases (see box): Neither in the case of insolvency of the UKasse nor in the case of embezzlement by the administrators does the PSV pay for the damage. In such cases, the employer who has been defrauded has to assume liability and pay for the current and future occupational pension claims of the employees. “Clearly, affected company directors will look to the intermediary or management consultant who recommended such a UKasse to them,” says Fiala. “If the intermediary has not pointed out the total loss risk here, the recourse trap snaps shut,” he warns. In any case, a reinsurance worthy of the name seems to be expedient, advises lawyer Fiala. The occupational pension advice should not be left to dilettantes, because in the end the employer will be left with nothing if the intermediary is not successful: “The employer determines the implementation method, the product partner and the tariff”, Fiala sums it up. Another trap: The Occupational Pensions Act stipulates that employees’ money must be invested “in equal value”. Anyone who converts remuneration from wages into a company pension must not suffer any unnecessary losses. Conversion of remuneration agreements must therefore comply with the requirement of equal value in accordance with section 1(2)(3) of the BetrAVG. “Otherwise, the agreement is invalid,” explains Dr. Gerhard Reinecke, presiding judge at the Federal Labor Court. The consequence: in case of violations, the employee is entitled to correspondingly higher company pensions. “However, this makes any reinsured pension scheme impossible”, fears broker Jürgen Beiler from Freiburg. How else could the product provider cover administrative and other costs? The fact is that, in principle, wages saved for old age should not be burdened by unnecessary administrative costs. In the magazine “Betriebliche Altersversorgung” one could read: U-Kassen cause “unnecessary” costs if, in addition to the administrative costs of the reinsurance, employees are also deducted administrative fees of the U-Kasse (often 0.2 percent of the promised company pension). This double burden is not justified and leads to inequality of value. As a result, if deferred compensation is directly or indirectly charged with the administrative costs of the U-Kasse, the contracts are (partially) invalid and thus void. “The invalidity of such agreements with employees is reflected in the contracts with the product providers or the external sponsors of the occupational pension scheme,” Reinecke remarked at the Handelsblatt Forum 2006 on occupational pension schemes. “This will then be about unwinding contracts,” Fiala points out as the core problem. In practice, this means that the employer reclaims from the intermediary or external provider all contributions paid and the usual capital market interest. In addition, there are potential losses from additional burdens on taxes and social security contributions. The way out: The administrative costs of the U-Kasse should in any case be borne by the employer. They are tax deductible. However, once the child has fallen into the well, the typical letter from the employer to the U-Kasse then states that both the deferred compensation agreement with the employee and the agreement with the U-Kasse referring to it are null and void (Section 134 of the German Civil Code), in particular due to a lack of equal value – additional administrative costs of the U-Kasse – and also due to zillmerisation of the reinsurance at the U-Kasse’s premises. The latter is also a ground for invalidity on the grounds of breach of a statutory prohibition under the Occupational Pensions Act. The liable intermediary is often horrified in view of this development, because as a rule no information is provided about it. Fiala does not see this as a marginal problem, but that large consortia are also affected: “Weren’t there commissions involved, paid out of the converted money of the employees?”, he formulates smugly. “Didn’t anyone know what equal value means and that all deferred compensation transactions are void for violations of this principle?”
Supply of the managing directors threatened
Fiala names a third problem in connection with U-Kassen: the insolvency of a GmbH and the consequences for the boss’s pension provision. In a specific case, the managing partner (GGF) and his ten employees had opted for a U fund. In the event of insolvency, the PSV will claim all the money from the U-Kasse, i.e. also the money for the GGF’s old-age provision. If you ask the PSV, this is not a “socialisation of the GGF’s pension assets”, but simply a statutory transfer of claims. The PSV will often find that the employees’ “reinsurance” with the UKasse can be described as “underfunded”. The financial deficits identified are then effectively offset with the pension assets saved by the GGF. And if there is still some of the assets of the GGF left at the U-Kasse, then the fate of this money results from the statutes and benefit plan of the U-Kasse. So directors should read the details or put their adviser on it before signing. surprisingly often, many bylaws state that the “remaining” assets should go to charity. In contrast, there is often no provision that the remaining assets are to go to the GGF. But even if he were entitled to the rest, the insolvency administrator can hold out his hands. Since the reserves were usually far too low, the administrator can declare bankruptcy in the event of insolvency due to years of over-indebtedness and set off the GGF pension against the claims. “The only thing left for the entrepreneur is to go to the social welfare office,” Fiala knows. Fortunately, however, most insolvency administrators would have no idea about occupational pensions. Safe way out: quickly repair such “void” agreements of a deferred compensation and, for example, conclude an annuity insurance with an unseizable lump-sum option.
Detlef Pohl
(portfolio-international (10.07.2006))
Courtesy ofwww.portfolio-international.de.

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About the author

Dr. Johannes Fiala
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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