– How employees can lose their company pension completely from one day to the next –
In occupational pension schemes (bAV), most employees are in the position of a lender, because the employer regularly has at best a fraction of the necessary funds set aside for a specific purpose. Usually, the employer does not get rid of the promise he made for the past, because the employee has also worked for the bAV – only he leaves the money legally in the hands of the employer, for investment for old age.
Employees as lenders to the employer without sufficient credit security
While every credit institution regularly protects itself from the consequences of insolvency or underfunding by means of loan collateral, employees often blindly trust the promise of a pension that may later somehow be of value.
Since 18.10.2008, even arithmetically over-indebted companies, including those whose shares are traded on the stock exchange, can continue to operate entirely without the obligation to file for insolvency, provided there is a predominantly probable positive medium-term prognosis for continuation, § 19 II InsO. This only temporarily dampened the frequency of insolvencies following the financial market crisis.
If, for example, insurers have advertised an exaggerated surplus participation for the reinsurance of financial resources which cannot be provided later, the question arises whether this result, including later insolvency, was already foreseeable at the time of the spin-off?
Spin-off to a pension company
The Federal Labour Court (BAG, judgement of 11.03.2008, ref. 3 AZR 358/06) ruled that employees cannot object if the employer outsources the funds for the occupational pension scheme to a pension company. The previous employer is then only liable for five years alongside the pension company – in the case of pensions under the Company Pensions Act for 10 years, § 133 III UmwG. This works in the same way as with any “bad bank”, for example when an HRE is spun off and the taxpayer takes the place of the formerly jointly liable HVB after the deadline has expired. Or if the costs of the final storage of nuclear waste through spin-off according to company law in the end no longer burden the electricity industry, benefit the shareholders, and later the taxpayer may be de facto liable for millions of years.
The capital resources of the pension company are to be discounted at the average market interest rate of the past seven financial years corresponding to their remaining term, § 253 II HGB. The pension adjustment must also be taken into account in view of the development of purchasing power over the past 20 years. Hardly any employee knows that he can demand security within six months (§ 22 UmwG) and that the parties involved are only liable to him for damages for deficits in capital resources until the statute of limitations expires after five years (§ 25 UmwG). In the case of a spin-off, the employer has the advantage that he may “balance” the pension liabilities and the reinsurance assets in the balance sheet in order to embellish the balance sheet. The reverse is also conceivable, i.e. leaving the pensioners in the previous operating company (LAG Köln, judgment dated 14.01.2013, Case No. 2 Sa 818/12), with correspondingly calculated capital endowment.
The examination of the capital resources is to take place with the registration by the registration court. For reasons of simplification, the term is assumed to be 15 years and an interest rate in accordance with the Ordinance on the Discounting of Provisions (e.g. 5.16% in 11/2010) is used for present value discounting.
The Federal Labour Court (BAG, judgment dated 17.06.2014, Ref.3 AZR 298/13) ruled that a pension adjustment pursuant to Section 16 of the German Occupational Pensions Act (BetrAVG) can also be demanded by a pension company with insufficient capital. However, compensation for employees due to undercapitalisation is not available from the pension company, but only from the transferring company – and this can be time-barred, §§ 280 I 1, § 241 II, §§ 31, 278, BGB. Without expert assessment, neither employees can secure their legal rights nor can works councils fulfil their duties to protect employees.
If the pensioners’ company does not have enough funds to adjust the pensions, but is obliged to do so, then in the end this will only accelerate the already foreseeable end somewhat.
Christian model to privatize the profits and socialize the losses?
Balance sheets are not able to provide a forecast for the liquidation of the pensioner GmbH. However, scenarios can be developed, such as the following:
A great idea would be to spin off the pension provisions of the church to a pension company by selling the Cologne Cathedral at the value of the new building plus the price of the land to an investment company owned by the church, and then spin off the pension provisions (interest-bearing at 6%) with the investment shares.
The diocese would then enter into a lease agreement for the cathedral (which would give the investment company a return on the cathedral of 3%, or 1.5% after maintenance). The rental expense arises gradually, the income from the sale immediately. After two years, the pension company files for insolvency and the Pensionssicherungsverein (PSV aG) takes care of the pensions.
In many cases, the employer’s objective will be to legally equip the pension companies only in such a way that they end up with the PSV fairly quickly due to insolvency, and to withdraw everything beforehand except what is absolutely necessary within the framework of legality.
The cheapest way to get rid of (old) burdens by thousands of company pensions was practiced in the “Kaufhalle” case. The assets were simply extracted, the company was liquidated, and all company pension payments were stopped. The PSV did not even step in at first because there was no case of insolvency (Bundestag Drucksache 16/4063 dated 17.02.2007).
What is little known is that pension provision via the PSV can be expected to be less than half of what was promised by the employer, because from the time of insolvency or protection, the employees no longer receive a share of the surpluses generated. In the case of senior employees, there is often only “protection” via the PSV for a fraction of the pension anyway.
An elegant way to bury a company within up to more than one year is offered by the European Company Law by merging the domestic company with a foreign one. The files and the assets move abroad and disappear there, for example with a discreet trustee in the Alps or on an island. The insolvency of the merged company abroad would then also not be a case in which the PSV would be obliged to step in.
The direct way, the simple relocation of the registered office of a German corporation abroad with a corresponding entry in the German commercial register, is not permitted by case law (OLG Munich, decision dated October 4, 2007, file no. 31-Wx-36/07), because GmbHs and AGs require an administrative headquarters in Germany.
Capital deficits inevitable even if market interest rates fall
A dormant liquidation of the employer is also conceivable, leaving behind the financial resources for the occupational pension scheme. Everything else is distributed to the shareholders as long as no over-indebtedness occurs. Then not even the register court checks whether a minimum capital is present.
If, however, the pension provision was previously discounted at 6 % for tax purposes and the financial resources were invested at 4 %, the amount of which currently corresponds exactly to the pension provision, then the interest of 6 % required to finance the pensions cannot be generated from this. Then there is no over-indebtedness at the moment, but in 2 – 3 years it is pre-programmed.
And if the market interest rate is currently only 1.5%, then it would be a shame for the shareholders to leave the pensioner GmbH with the 4% securities, which have hidden reserves of perhaps 15% compared to their book value. One sells the 4% securities and reinvests them at 1.5%, can then also distribute the 15% realized hidden reserves to the shareholders as not required to cover the pension provision, and then confronts the pensioner GmbH with the problem of how to finance 6% interest on the pension provision with 1.5% on the opposing capital. Then it is just 1 – 2 years until insolvency.
No liability for destruction of existence due to undercapitalisation of the Cinderella GmbH
The Federal Court of Justice (BGH, judgement of 28.04.2008, file no. II ZR 264/06) ruled that the insolvency administrator has no right of recourse against the shareholders if a corporation was endowed with insufficient equity.
However, employees may have a claim for intentional immoral harm by failing to disclose inadequate insolvency protection under § 826 BGB against the management, as well as against the shareholders as participants, § 830 BGB. The tax office and the social security institutions can also refer to this – but not the insolvency administrator.
The limit of the possible withdrawal of capital was shown by the BGH in its decision of 30.08.2011 (file no. 3 StR 228/11): Even the consent of the shareholders is ineffective and thus the disposal of assets by the managing director is abusive if the economic existence of the company is endangered in violation of company law, for example by impairing the share capital contrary to § 30 GmbHG, by causing or deepening over-indebtedness or by endangering liquidity. Only this then leads to criminal liability for breach of trust and thus also to personal de facto liability of the management and shareholders.
Credit rating error and lack of understanding despite guarantee
If a bank grants a loan of EUR 500,000 for two condominiums, each with a mortgage lending value of EUR 400,000, and the borrower repays EUR 250,000 and wants to have one of the condominiums released for sale, then the bank will also be able to refuse if it is established that the condominiums together are only worth EUR 200,000 instead of EUR 800,000.
Some policyholders do not understand what it means that a life insurance policy, for example, guarantees EUR 400,000 for a bAV, on expiry. They then pay in and are surprised that the 400,000 EUR guarantee does not materialise at all. That’s like someone signing an employment contract and then thinking that he’ll get the 3,000 EUR salary for showing up, but that he’d have to get something extra for working there, too. Just like in the civil service, where there is at least an activity allowance.
In fact, life insurance clients were already submitting neatly prepared Excel sheets for over 20 years where they listed how their annual premium payment increased their guaranteed sum assured each year. But it was due to the dynamics, because the premiums increase every year, which means that every year a new insurance was added, with the respective remaining term. However, some life insurance customers had not yet understood this, but thought that it was due to the total annual premium paid. Then they stopped the dynamic, and the guaranteed sum insured no longer increased due to the annual premium that continued to be paid in constantly. Then their world of ideas collapsed for them, because not the insurance agent, but only an actuary could explain the functioning correctly for the first time, so that the life insurance customer thought of reversal – the employee, on the other hand, thought of the immediate dissolution and compensation of his previous deferred compensation.
Another point is that some policyholders think that the guaranteed sum must increase due to the interest rate, as 3.25% guaranteed interest is even guaranteed. They had not yet understood that the guaranteed sum is already calculated with the guaranteed interest rate, which is therefore included in it. So in a way: I get a sum guaranteed, and then the respective premiums paid are not added, and the interest at least in the amount of the guaranteed interest rate. Many think (or have diffuse ideas about it) that what the insurer guarantees, in the end, is already there as capital, it is all funded. So the pensions, e.g. monthly until the end of life, would be already bagged and ready on shelves for each month, marked with the name of the policyholder – and at best someone would come along every year and add the interest gains, presumably the entire interest and not what was earned over and above the guaranteed interest, i.e. zero at 3.25%. Just like at the bank, where the savings deposits are also bagged with the name of the saver on it on a shelf in the safe.
So if the employer gives the employee “lender” an insurance policy with an insured sum of “guaranteed 200,000 euros” as a countervalue via an occupational pension insurer, then he must first realise that this value only arises over 30 years through ongoing contributions and hoped-for interest, and nothing if the employer perhaps stops paying contributions after the first year. An additional guarantee of the employer about the repayment would look very nice, on slightly stained yellowed parchment paper with a red braided cord and a red wax seal of the employer on the back, as a scroll with a bamboo stick on the upper and lower edge, which can be submitted to the insolvency administrator later, together with a similarly presented certificate about a guaranteed chance of winning from the life insurance.
Deception through the use of trustees
Employees are all too seldom made aware of how payments into occupational pension schemes are used, for example for up to more than 17% acquisition costs including commissions, ongoing risk and administrative costs. When employees leave the company after an average of five years, they often find for the first time that the “return” appears negative because only a fraction of the money paid in is still available. The question of costs, risks and remaining substance, which must always be asked, is often deflected by advertising a bAV trustee as a sham security.
A comparative assessment of the tax and social security burdens, including consideration of the payout phase and the risk of insolvency losses, has already persuaded many an employee to look for alternatives and have the occupational pension scheme terminated. By agreement with the employer, this can be done at any time – sometimes as a genuine tax saving scheme, and always in the event of a sudden emergency, even if it involves a previous employer.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
published on 09.06.2015 in P.T. magazine
Published in “Der Koment, Fachzeitung für Schausteller und Marktkaufleute” 10.06.2015
published in JuraForum on 06.05.2015
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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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