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. Past and foreseeable pension cuts challenge the system. The Higher Administrative Court of Lüneburg ruled that no compulsory member may stop paying contributions “because of an allegedly erroneous investment strategy of the pension fund that did not take into account the effects of the financial crisis” (OVG Lüneburg, decision of 03.02.2012, Ref.8 LA 156/11).
Responsibility of professional chambers and boards of directors
It should not be overlooked that professional chambers regularly delegate board members from among their board members to supervise the management of pension chambers. The high level of responsibility of these authority bearers is underlined by the fact that they are considered to be public officials under criminal law. This responsibility is unlikely to be met if, for example, a meeting fee of 150 euros is paid, if there is no risk-adequate liability insurance, or if the board members do not secure independent actuarial advice?
Questionable risk management
Some pension funds have already had to admit that all hidden reserves have been used up. Investment losses alone during the subprime crisis, the Greek and Cyprus crises, but also the additional tax burden of the Retirement Income Act are already expected to lead to pension cuts of up to more than 30%. The risk to pensions is already reflected in the fact that pension boards 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 Munich Administrative Court ruled that the individual member of the pension fund was not entitled to detailed information. Capital magazine then ran the headline “The Cartel of Silence” in 2012. In fact, one will have to assume that the market interest rates alone, which have fallen sharply since the mid-90s, as well as the extension of life expectancy will have more than halved the pensions in the end, but no risk management will help against this sure development.
Judicial incompetence of management of Boards of Supply?
It is reported from informed circles that pension chambers, as “institutional investors”, are perhaps also being advised by private initiators on investment decisions for lack of their own competence. For example, the model of investment in food speculation, with presumed deaths abroad in the millions, became famous among such “advisory” financial houses, via mediations at “pleasant dinners as commodity investment”.
Initiators are presumably large private banks or large primary insurers, as documented by a documentary, distributed by the association “Foodwatch”, on the Internet. Is it any wonder then that a nasty rumour has it that at least one pension chamber is suing for misadvice and investment losses after a financial house presented its product as outwardly risk-free – but in terms of content this was never the case? Such state secrets are embarrassingly kept to themselves. Insiders call this “management by mushrooms”: Keep everything in the dark, sprinkle a lot of crap on it, and if one sticks its head out, cut it off. Brave contributors would formulate that such suppositions must be pure phantasmagoria, i.e. mere fictions of querulous people?
Non-transparent costs and questionable kick-backs
Annual reports of the pension funds often only show their own costs. However, these could be up to more than twice as high, because in the case of open-end and closed-end investment funds and “alternative investments”, ongoing management costs are regularly charged by the financial houses, usually with freely negotiable kickbacks to the custodian bank. Such “double costs” are strongly reminiscent of the model of support funds in occupational pension schemes, which have often proved unsuitable for deferred compensation.
Every normal investor would be entitled to information on kickbacks (Nuremberg Regional Court, judgment of 01.02.2013, Case No. 9 O 1021/11; BGH judgment of 19.12.2006, Case No. XI ZR 56/06), in order to leave it up to the judiciary to decide whether this is a case of breach of trust or fraud. When the managing director of a pension chamber is asked about premiums and issue surcharges, for example, he refers to “secret special conditions”. But already with investments of 100 TEUR and less, private investors can even negotiate away such distribution costs completely when purchasing – including the settlement of kickbacks. After all, we are talking about assets of the pension chambers totalling around 143 billion euros.
Questionable generational justice due to foreseeable capital depletion
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. DER SPIEGEL headlined “ECB – inflation watchdogs demand inflation protection for themselves” after an ECB retiree sued the ECJ over the ongoing 2012 inflation in purchasing power. The low market interest rate, as well as the investment risk associated with foreign government bonds and alternative investments, mean that in the long term hardly any pension fund will be able to 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 4 %, with the hope of earning 4 % interest and compound interest on it in the pension fund for 35 years. However, if only 3 % per year is earned, 30 % less capital will be available for withdrawal after 35 years. If the money then has to suffice for 30 years of pension payments instead of the calculated 22 years, given the current annual extension of life expectancy by three months, it is inevitable that pensions will be halved compared with earlier prospects.
Pension funds not eligible for insolvency – pension recipients 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 company pension schemes in the various implementation channels, who have seen nominal reductions of up to more than 50% in their own pension provision. 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 dynamisations are protected as long as not all pension recipients experience a system-compatible reduction, whereby a redistribution to the detriment of the young pensioners and in favour of the pension recipients takes place de facto (BVerwG, judgement of 21.09.2005, 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 exacerbated if frequent outdated mortality tables are used as a basis – because as long as this is the case, actuarially too high pensions are paid. Be that as it may – the inexorable financial and actuarial effects alone will hardly be manageable without interventions also in the existing pensions, including a successive devaluation through the leanest pension adjustments.
Withdrawal from the pension scheme
In many cases, chamber professionals have obtained a professional license solely for the purpose of being able to pay into a supposedly more profitable pension scheme. However, if you are employed full-time somewhere, and perhaps do not need a professional license for that, instead of refusing to pay, you can simply choose the path of returning the license. 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 scheme (DRV) voluntarily to spread the risk, with the DRV describing such payments as currently leading to an annual pension of over 5%. Voluntary contributions can be made not only by the self-employed at any time and up to one year in arrears, but also by those who only have a mini-job.
In the first five years of self-employment, there is the option to apply for compulsory insurance with the DRV for the rest of your 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 for the design that with every change of profession, even with the same employer, even with continued chamber membership, the question of the statutory insurance obligation with the DRV arises anew according to the activity then exercised. A status determination procedure at the pension insurance institution creates clear conditions. Some pension schemes also provide for the possibility of a lump-sum settlement at the start of the pension, or of drawing the pension early despite continuing to work.
Then the saved contribution as well as the pension or lump-sum settlement received can be paid into other pension schemes, including the statutory pension insurance, in order to spread the risk, or invested in capital investments, including real estate, for example.
by Dr. Johannes Fiala and Peter A. Schramm
by courtesy of
and
www.innovationundtechnik.de (published in October 2013 under the headline: Up to more than 50% less pension for chamber professionals).
and
www.hm-infinity.de (published in Infinity magazine, October 2013)
and
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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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