*by Johannes Fiala, lawyer (Munich), MBA Financial Services (Univ.Wales), MM (Univ.), certified financial and investment advisor (A.F.A.), EC expert (C.I.F.E.), lecturer (Univ. of Cooperative Education), banker (www.fiala.de) and graduate mathematician Peter A. Schramm, actuary DAV (Diethardt), actuarial expert (www.pkv-gutachter.de).
“The less people know how sausages and laws are made, the better they sleep.? (Otto Eduard Leopold von Bismarck-Schönhausen, called the Iron Chancellor)
As employers, managing directors and board members have been complaining about the lack of information provided by intermediaries in the area of occupational pension schemes, zillmerisation and equal value, and not just since the article on occupational pension schemes, zillmerisation and equal value in “Capital: Going all out ? For whom the complaint is worthwhile? of 22.06.2006 a deficit at clearing-up by mediators in the bAV. The following case is freely invented, according to opinion of the authors however quite typical.
Information deficit among board members and managing directors The company pension scheme in Germany is estimated to involve more than 350 billion euros in company obligations to employees. However, it is now dawning on many managing directors and board members that the funds actually available do not fully match their obligations. However, this is seldom a problem for large listed public companies, because they constantly employ experts in-house. Then it cannot happen that an intermediary earns his life’s income by setting up a single company pension scheme. In economic terms, this income often comes as a commission from the employees’ wages, which they have ‘converted’ into a company pension scheme. Initially, no one gave much thought to when what part of the money would be distributed to whom.
An almost normal change of employees Since 2003, Heinz Huber has been saving two hundred euros a month for his old age via a company pension scheme, say a total of 7,200 euros. In 2006 he changes employer and wants to take ?his? pension with him. He wants to take his pension with him. With the new employer, he should continue to save 200 euros per month for his old age into the contract.
But to the surprise of everyone involved, the managing director at the new employer is a former insurance broker who gets to the heart of the matter: “Mr Huber, of the premiums paid in of 7,200 euros, there are currently just a few hundred euros available as a surrender value. If we take over this contract, we will be jointly liable with your old employer for the difference. You will understand that we will unfortunately have to reject this? Without deferred compensation, employee Huber would have considerably more in his account today, already taxed, plus interest.
Heinz Huber asks his old employer how it could be that most of his “hard-earned money” has “disappeared” at the insurance company. The enquiry with the intermediary, who had started the establishment of the company pension scheme in 2002 with the words ‘my work is of course free of charge for you’, leads to no result.
Clarification from the actuary It is only the actuary who is involved who clarifies to the old employer that insurance contracts are subject to costs for advice and set-up. Typical balance sheet acquisition costs for direct insurances are in the range of 0.3%, in the main probably 6-7% of the paid premiums, but it can also be 12.6% ? depending on the insurance company (source: ?Score-Cards-2004 of Fitch-Rating?). The broker receives the majority of this as brokerage or commission. However, this is an average value, because in the case of policies terminated in the first few years, the acquisition costs can also account for the largest part of the premiums paid.
The acquisition costs usually lead to “negative capital formed” (in the insurance contract) and “outstanding claims of the insurer against the employer or policyholder” at the beginning of the contract. (in the insurance contract) and “open claims of the insurer against the employer or policyholder”.
In the case at hand, it was a company with a good 200 employees. The agent’s commission for the deal was over 600,000 euros. As the intermediary only receives a part of the costs as commission, the ?difference? in the present case amounts to over 1,000,000 euros. In the case of Heinz Huber’s contract, too, there is a difference between the premiums paid in and the existing (surrender) value.
In the first year – as the actuary explains – the insurer was allowed to charge a maximum of 4% of the total scheduled premium sum in costs to the insurance contracts by means of the so-called Zillmerung, according to § 4 DeckRückV. With an entry age of 30 and an annuity starting at 65, the premium sum for Heinz Huber is EUR 84,000, so the contract is charged EUR 3,360 in the first year. This is equivalent to almost 17 months of contributions ? but as there are also administration costs, instalment surcharges and costs for the risk of death or occupational disability, it takes up to more than two years for these initial costs to be paid off from the premium. Prior to this, no capital at all is accumulated from the converted remuneration.
The insurer distributes the remainder of the acquisition costs (the so-called over-accounting costs – because they exceed the 4 % zillmerisation permitted under the German Reinsurance Premium Ordinance (DeckRückV)) over the further term of the contract; there is no upper limit for this. This system of charging the acquisition costs mainly at the beginning of the contract is called zillmerisation. The DeckRückV sets a limit with regard to the accounting of these costs within the framework of Zillmerisation ? On the other hand, there is no general limit for acquisition costs.
Delicate questions to the tax advisor: The old employer knew nothing of all this until now. The employer finds the 1 million in acquisition costs a bit high, as well as the 600,000 commission, because his annual salary is still a bit lower.
The personnel manager is called in and allowed to prepare a list of questions for the tax consultant (StB). Was there not a liability judgment of the OLG Düsseldorf , according to which the StB may not advise in employment law ? but has to check everything legally in the accounting process? Where are these debts of 1 million in the balance sheet, for which the company as employer is liable according to the ruling of the Stuttgart Labor Court of January 17, 2005? Why was the company also not informed by the StB about the further ruling of the Regional Court of Stuttgart in the bAV case of March 2005? What are the consequences of the new IFRS accounting standards that will be mandatory from 2007? How did the StB treat the (partially) ineffective deferred compensation for income tax and social security purposes? And finally, the question of whether the StB has been adequately insured since 2003? The StB is at a loss ? but promises to file a report with his professional insurance company.
Professional liability does not pay a cent: The agent also reports the damage. The answer of his professional liability is not long in coming. The question of equal value is a legal requirement. A conceivable breach ? is assessed by us as a so-called knowing breach of duty. We cannot provide you with cover for such cases? A colleague then gives him the tip to already look around for a good criminal defense lawyer, because here it can go around embezzlement and/or withholding of remuneration. The colleague had just learned this at a current training course of a credit institute. The agent naturally wonders why he was not taught all this at his training courses. At the insurer, he first has to ask his way up to the group leader ? only there are the Stuttgart judgements known. Yes, we have recently changed our forms, which took about a year ? but for the employer we cannot eliminate the liability, they say laconically.
Attempts at explanation by the insurer: The old employer receives a visit from the insurer’s sales department. Ms. Lustig appears, ?lawyer, corporate client sales? it says revealingly on her business card. The employer’s own in-house lawyer knows that lawyers are not allowed to work in sales ? before he applies for her licence to be withdrawn (BGH ruling of 15.05.2006) he decides to let his ?colleague? finish. Mrs. Lustig presents a ?factual company information?, according to which Zillmerung is favorable for the employees, and by Verbraucherschützern is evaluated hastily negatively. The managing director thinks of the million liability; he is obviously not a consumer protectionist. But Mrs. Lustig puts after ?at the end, with pension beginning the coworker has more money for the old age pension at the disposal. Equality of value is defined by each company itself. Employer liability is completely ruled out with our zillmerized tariff.?
The in-house lawyer finds it strange how Ms. Lustig can sit between two chairs ? on the one hand she is employed by the insurance company, on the other hand she blithely advises the employer. Since when are professional lawyers allowed to serve two (potential) opponents in the same matter? Mrs. Lustig doesn?t seem to know the ?safest way? prescribed for lawyers ? also not the liability for immoral damage?
The actuary’s analysis The insurer’s “unzillmerised” tariff is not, after all, a tariff without included acquisition costs, but rather exactly the same acquisition costs – which are paid to the intermediary at the beginning – are financed from it as with zillmerisation, the actuary explains. The acquisition costs are only spread over the term during which they are amortised (with interest) ? The insurer adds interest to the acquisition costs. The intermediary therefore receives exactly the same payments – and is not liable for cancellations in any other way – as with the zillmerised tariff. The premium is also supposed to be the same. This means that the person terminating the policy prematurely receives a higher surrender value (and also the person making the policy non-contributory receives more non-contributory benefits), because he is only charged the amount of the acquisition costs included and already repaid up to the time of termination or premium exemption.
So if everyone gets at least as much as before, but the early cancellers get considerably more, that can’t go well, because there’s no more money. So someone – to compensate for this – has to get less. And after that, those contracts that are not terminated prematurely or made non-contributory will have to be charged additionally. The maturity benefits and the benefits on termination in the years before maturity must therefore be lower for the longer-term contracts.
However, this result is only due to the model, because commissions could just as easily be reduced or commission liability periods extended. It would also be possible to pay out the commission in a different way than before, i.e. in instalments. In any case, not all (customers/brokers/companies) can get at least the previous one and in addition many much more. Finally, more than 70 % of policies running for 30 years or more are terminated prematurely or made non-contributory, most of them in the first 5 years. The result is therefore (with these premises) plausible and inevitable.
But does the actuary explain about these premises ? to be on the safe side, he asks for the opinion of other experts ? that these are completely impracticable, because an insurer can hardly bear the risk of not being able to amortise its commission paid out once because of too many terminations in practice. In short: acquisition costs spread over the term can also only be paid out in instalments. In addition, other modalities are conceivable that lead to higher maturity benefits ? the sales department will make it clear to the actuary where the journey can go so that the tariffs are still sold.
Not at all meant by the term “unzillmerised” are tariffs which not only do not zillmerise but do not include any acquisition costs because they are brokered on a fee basis. Here, of course, the maturity benefit must be higher, roughly by 20 to 30%.
And even if the commission is not paid initially, but rather ratably as calculated over the term, the maturity benefit of the unzillmerised tariff is higher, the early cancellers also receive more surrender value, only the intermediary receives less if the customer cancels prematurely or makes the policy non-contributory.
The fact that you may have to give someone less if others get more is not something you like to hear. But it doesn’t have to be, if the cheaper rates are taken out more often.
Legal consequences of Zillmerung ? According to the decision of the Stuttgart Labour Court, the employer is liable for the acquisition costs to all employees. This follows, independently of it whether he was deceived by the mediator by the statement ?the activity is in vain?, because the adhesion of the employer is not dependent on the personal being to blame for. The lawyer calls this a “breach of duty of care”.
Can employer liability be eliminated through education? This seems to be a pious hope of the insurance industry. Liability of insurance companies for their intermediaries follows legally from vicarious liability, as can be seen from any textbook on insurance law. No employee would have agreed to deferred compensation if he had known that statistically the average time employees stay in the company is only 4.9 years. Because the sum of the deposited contributions (without interest) is available as surrender value usually only after 9 or more years. Which understandably ?enlightened? employee already buys ?safe losses? Isn’t there a constant jurisdiction, according to which the employer (and if necessary the intermediary acting for him) has to prove what and how advice was given?
Zillmerung is no consumer protection: And how would the case be to judge, if employers or employees feel deceived ? for example the public prosecutor comes on the idea to refer to the numerous cases of an ?exploitation of inexperience? by advisors?
It would be a mistake to believe that the employer is not responsible for how the employees’ money is invested in the occupational pension scheme. The BGB knows a whole series of trustees (e.g. guardians, guardians, executors) who manage and invest other people’s money ? all are liable for negligent errors. And all of them have the duty to increase assets, as well as to call in experts if they themselves professionally do not have the sufficient experience or knowledge of the market. The employer as trustee (cf. OLG Düsseldorf, 17 U 201/91) in the baV is not a legal exception here.
Warning from experts: On the Internet, a pension fund writes aptly: In our opinion, however, the employer is liable even if he has informed the employee about the circumstance of zillmerized rates, because by law he is liable for the value of the originally promised benefit. In an essay, the presiding judge in the competent senate at the Federal Labour Court (Bundesarbeitsgericht – BAG) writes on this subject: “The better reasons speak in favour of the fact that such contractual arrangements (i.e. zillmerised tariffs), at least in the context of occupational pension schemes, are not permitted under § 307 (1). 1 BGB (transparency requirement) are inadmissible.”
Remediation as a solution approach: Delicate questions arise for those involved. In any case, the employer has a duty not to watch the damage continue to grow ? because otherwise he could be accused of contributory negligence. And the accusation of breach of trust (§ 266 StGB) could also apply at the latest when the employer becomes aware of the resulting damage and fails to take remedial action. The reorganisation of such cases means only secondarily a reappraisal of the past; first of all, from the point of view of advisors, it is a matter of following the requirements of case law and choosing the safest or best possible way to present the baV without zillmerisation while observing the requirement of equal value for the employees.
Please also read the following: A. Kutschera “Stornabzüge in der Lebensversicherung – Rechtmäßigkeit – Auseinandersetzung mit der Begründung der Versicherungsindustrie”: click here Peter A. Schramm “Wie Abschlusskosten des Guthaben schmälern!”: click here OLG Düsseldorf, 6.3.1992, 17 U 201/91: click here OLG Duesseldorf, 18.02.1999, 13 U 60/98: click here AG-Stuttgart, 17.01.2005, 19 Ca 3152/04: click here LG Stuttgart, 22.03.2005, 20 O 541/04: click here BGH-resolution, 15.5.2006, AnwZ (B) 41/05 : click here
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About the author
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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