– Opportunities for employers and employees to optimize pension provision –
Due to the low interest rates on the capital markets, it will in many cases no longer be possible to achieve positive real returns in the traditional external implementation channels of occupational pension schemes in accordance with the German Company Pensions Act (BetrAVG). Acquisition costs, actual higher inflation rate after personal private consumption, and administrative costs are then higher than the investment income. Even in the case of employment relationships that have already ended, the question arises as to how the accumulated assets can be withdrawn in order, for example, to repay debts or to invest them privately in other ways.
Old-age provision is first and foremost not a question of hedging biometric risks
In the case of tax-subsidised or allowance-subsidised capital investments for old-age provision in the company or private sector (e.g. occupational pension scheme, Riester, basic pension), everything is taxable at the end – only in the case of the basic pension is this achieved in full only by the start of the pension in 2040.
In the case of a corresponding private pension insurance from taxed income, the income up to the start of the pension is tax-free and the income from the start of the pension (because the consumption of capital itself must remain tax-free) is only taxable with the small income share. Male policyholders will be disadvantaged by the EU-wide unisex tariffs from 2013 – but they can expect up to more than 20% higher pension benefits if they choose an insurer outside the EU, for example by taking out an annuity policy directly in Switzerland, in euros or in safe Swiss francs, without an intermediary.
Annuities are generally not investments
In principle, annuities are not investments but hedges of longevity risk. Until you have to hedge this, you don’t need them, you can invest capital elsewhere for a higher return. To cover the longevity risk, assets amounting to about 20 times an annual pension are sufficient at the age of 80, and 15 times at the age of 85 – i.e. in the case of cover via capital with consumption.
The background to this is the experience that, from the age of 80, it is no longer possible to ride out a bear market in equities very well, which means that most of the assets have to be invested very securely and therefore at low interest rates. Without capital depletion, one would even earn up to more than 50 times an annual pension, because one would then only have to earn this through the low interest rate. With an annuity insurance at this retirement age, by collective protection, but without relying on non-binding forecasts, about 17 times or 13 times an annual pension is sufficient.
Why life insurers are chronically low-yielding
As investors, German life insurers are at a disadvantage compared to any private investor. This is because they borrow the money against the guaranteed interest rate (which is still a good 3% on average, so very expensive) and have to make a balance sheet every year. The hundreds of billions of euros in actuarial reserves are in fact oppressive debts – which is why they are on the liabilities side.
Therefore, they can hardly risk anything and cannot simply sit out a bear market like a private investor – rather, they could simply become insolvent due to their debts. As a result, they can only invest to a very limited extent in higher-yielding but riskier investments such as equities or real estate, but instead rely on the low interest from fixed-interest securities. However, even if insurers invest the assets created by policyholders’ premium payments predominantly in fixed-interest securities, this is not without risk, even in the case of German government bonds.
Another alternative to annuity insurance – also with coverage of the biometric longevity risk – is the life annuity according to the German Civil Code, e.g. as consideration of a sale of a business, a sale of real estate or any other transfer of assets – but it can also simply be purchased for money from private individuals, companies or foundations. It is only taxable at the low rate of return and is not usually subject to social security contributions.
Retirement provision is therefore primarily not a question of covering biometric risks through insurance – this should therefore not be confused with investment considerations.
Private sale of direct insurance (DV) can lead to exemption from social security contributions
In its decision of 27 January 2012 (Ref. S 5 KR 2943/08), the Landessozialgericht Baden-Württemberg ruled that no statutory health insurance contributions pursuant to Section 229 I 3 SGB V were due after the sale of the IR because the former occupational pensioner was neither the beneficiary nor the contracting party after the assignment of the claims. In the commercial secondary market, such insurance policies are hardly bought up any more, so that a private sale is the obvious choice.
Whether the purchase price would then be subject to contributions is an open question. However, actuarial discounts due to e.g. credit risks and deferred maturity may be taken into account when determining the purchase price. However, in the event of a collateral assignment or pledge of the DP, the full contribution obligation would remain.
Avoidance of the GKV notification according to § 202 SGB V?
If you want to avoid the GKV obligation, you can ensure that there is no GKV membership, for example by moving abroad, or by switching to private health insurance. If the assets of the DP are invested with a Swiss insurer, for example, there is no obligation to notify this insurer. If a German lives in Austria but works in Liechtenstein, there is also no statutory health insurance obligation – in many cases there is even the option for a considerably reduced taxation of the income.
Compensation of the occupational pension by the employer
In addition, employees have the option of simply cancelling the occupational pension commitment – with retroactive effect – in agreement with the employer. In return, an agreement can be reached on a severance payment for the loss of the job – it would only be detrimental if this were structured as a severance payment for the occupational pension scheme. For the design of whether and the amount of social security and wage tax, it is important to optimally design the time of the inflow – in individual cases, for example, the income tax will be reduced by the so-called one-fifth rule and social security contributions will not be incurred at all.
Of course, the parties could also seek the “gift” of a capital investment with a pecuniary benefit. The so-called “prohibition of severance payments” of the BetrAVG does not stand in the way of this in many cases – because one can always waive an occupational pension and severance payments for other reasons are not prohibited.
Employee share ownership and BGB annuities as an alternative to occupational pension schemes
Subsidised employee capital participation is often more favourable than occupational pension schemes, and not only from the point of view of returns. Retirement assets can be built up by committing the capital over the long term. At the start of the pension, this capital can then be transferred, for example, to the employer or to a foundation set up specifically for this purpose, for which a BGB annuity is promised. Since this is not an occupational pension, it is only taxable at the low rate of return and is generally not subject to social security contributions. Of course, an amount received from a severance payment can also be converted in this way into such an annuity outside the occupational pension scheme.
Design pitfalls for the managing partner
In the case of managing directors who are also shareholders, reference was often made to the BetrAVG in the form text of the occupational pension commitment. This means that in the event of a severance payment, the managing director is threatened with a tax loss due to hidden profit distribution (vGA). The creator and the supplier of such forms can thus be threatened with recourse. Even the mere transfer of the subscription right from the employer to such managing directors does not eliminate the vGA.
In such cases, it may be advisable to transfer the reinsurance to a new employer and then, when the employer is liquidated, to switch to direct liquidation insurance in Germany or abroad. However, only domestic insurers are then obliged to subject the subsequent pension payment to income tax – in the case of foreign insurers, the taxpayer himself is responsible for the tax declaration. If the pension of the managing director is transferred to a pension fund, this transaction can be made tax-free – otherwise the later pension would only be taxed with the share of earnings. The transfer of reinsurance to a new employer can also be enforced without the consent of the managing director by means of a spin-off or spin-off under the German Reorganisation Act, in which case a hidden contribution would have to be examined for tax purposes.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
http://www.innovationundtechnik.de (Issue 12, December 2013)
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About the author
Dr. Johannes FialaPhD, 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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