Company pension scheme: Early termination of insurance contracts in the event of a change of employer

By Dr. Johannes Fiala and Thomas Keppel
Reader A. S. asks: In the July 2007 issue of BC, I read with great interest the article on occupational pension provision and the employer’s obligation to offset losses in the case of deferred compensation. Subsequently, I invited our insurance agent for a discussion. He informed me, among other things: In the example case of the judgement of the regional labour court (LAG) Munich of 15. 3. 2007 it concerns a support fund. However, the insurer had only concluded pension fund or direct insurance contracts with us. Here applies: If the cover capital should not have reached the amount of € 2,000.00 due to the zillmerized tariffs yet, the contract is compulsorily bought back. In this case, the employee had the right to insist on the amount paid in and not to accept the lower surrender value. Incidentally, an appeal was lodged against the ruling. This had not yet been decided. After termination of the employment relationship with the previous employer, the employee does not have the right to terminate the contract and insist on the paid-in sum in the case of pension funds/direct insurance unless the actuarial reserve is less than € 2,000.00. This means that the employee has the right to terminate the contract and insist on the paid-in sum in the case of a change of employer. This means: When changing employer, he has the choice between a dormant contract up to the pension limit or having the actuarial reserve transferred from the insurer of the former employer to the insurance of the new employer. Here the representative said that the actuarial reserve would only be taken over by the new insurer if the accumulated actuarial reserve had reached the amount of at least € 2,000. Otherwise, the contract would be bought back and repaid at the existing surrender value, which could then lead to the problems described by the team of authors. Should the same insurer be active at the new employer, there would be no problem anyway – the “old contract” would simply be continued at the new employer. Thus, for my employer, only those contracts would contain risks for which the coverage capital of € 2,000.00 has not yet been reached. Can you confirm the statements of the insurance agent? Your contribution reads very alarming from the employer’s point of view. If the representative’s statement is accurate, this again has a very mitigating effect. What did the authors intend by this? I am a bit confused. Responses from the expert authors Thank you for your question, to which we comment as follows: Affected implementation channels According to the reasoning of the Munich Regional Labour Court, the ruling concerns all implementation channels in occupational pension schemes – not only the support fund, to which the dispute referred in the narrower sense. The court literally stated: “The chosen implementation channel cannot play a role in the question of the establishment of a pension expectancy “equal in value” to the converted remuneration components.” In particular, the inadmissibility of Zillmerisation established by the court required a greater effort of substantiation, especially in the case of the provident fund, than in the case of the classic implementation channels of direct insurance, pension funds and Pensionskasse, since the employer provides the employee with pension benefits directly in the case of the latter. In addition, the support fund is not even provided for by the Occupational Pensions Act as a means of implementing deferred compensation (Section 1a (1) sentence 3 BetrAVG). As can also be read in BC 7/2007, p. 209, it is true that an appeal has been lodged with the Federal Labour Court against the above-mentioned ruling – however, according to the authors’ assessment, with little prospect of a radical change to the previous ruling of the Munich Higher Labour Court. Rather, there are further arguments against Zillmerisation in the case of deferred compensation. For example, the employee can (pursuant to § 1a, Subsection 1, Sentence 5, BetrAVG) decide each year whether and how much salary he wishes to convert into a company pension. The only restriction is that if he makes use of the deferred compensation entitlement, he must use an annual amount of at least one hundred and sixtieth of the reference amount pursuant to § 18 (1) SGB IV for his occupational pension. This statutory flexibility is taken away from him by the use of zillmerized tariffs. The permissibility of zillmerised tariffs would also counteract the intention of the legislator pursued with the introduction of the deferred compensation entitlement. This is to be seen in the context of the demographic development of the population structure and the associated reduction in the benefit level of the statutory pension insurance. In order to close the resulting gaps in provision, the legislature wanted to promote the autonomous establishment of funded private and occupational pension provision, which it regarded as indispensable. According to the Federal Labour Court, this promotional purpose requires that it be ensured that the employee does not ultimately incur any risk by participating in deferred compensation. With zillmerised contracts, however, there is always a risk for employees in the event of changes to the remuneration conversion modalities (reduction in contributions or exemption from contributions). If such models were nevertheless to receive tax incentives, this would not be compatible with the objectives of occupational pension law. Moreover, because of the resulting losses in the event of a change of employer after a few years, zillmerisation would at least partially reintroduce the “vesting” of occupational pensions in the case of deferred compensation, although the legislator has expressly provided for vesting here. In an information brochure on deferred compensation published in May 2002, the Federal Ministry of Labour and Social Affairs stated, inter alia: “Contributions that employees invest in occupational pension schemes through deferred compensation cannot be forfeited. Every euro paid in is either converted into an entitlement that is retained even if the employee changes companies, or can be recovered later through severance pay …”. Since it also states that “there are no acquisition commissions as in the case of a private pension insurance and no issue surcharge as in the case of the acquisition of investment units of a mutual fund”, the prevention of the formation of a contract value in the first contribution years due to zillmerisation is ruled out in the case of employee-financed occupational pension schemes. The Munich Regional Labor Court ruled accordingly. Premature termination of contracts for occupational pension provision The following is true: In principle, the employee cannot prematurely terminate or cancel the contract concluded within the framework of the occupational pension provision. A severance payment is only possible in exceptional cases, which is why, as a rule, only a continuation or a waiver of contributions can be considered. However, the Munich Higher Labor Court (LAG) stated: Contracts with an offsetting of acquisition costs over a period of less than ten years are null and void. Affected employees must therefore merely invoke this nullity in order to thus obtain a claim under enrichment law against their employer for repayment of the amounts converted on their part. This applies irrespective of a certain coverage capital limit. On the subject of “severance pay”, it should also be noted: The permissibility of a (high) zillmerisation would, as a rule, always open up to employers the possibility of a low (trivial) settlement of the occupational pension scheme in the event of premature termination of the employment relationship after only a few years (Section 3 (2) BetrAVG), which, in view of the legislative intention, again argues against its permissibility. Lack of surrender value Incidentally, cases are known in which there was no positive surrender value even after two years and the insurer consequently cancelled the contract after the employee refused to make further premium payments after changing jobs and, according to the insurer, a premium exemption was not possible due to a lack of sufficient actuarial reserves. Thus, in the case of zillmerised or zillmer-like contracts in the context of employee-financed occupational pension schemes, there is a risk of total loss for which the employer is then liable vis-à-vis the employee concerned.
Note: In general, you should already take note of the consequences and reaction options for employers outlined in BC 7/2007, pp. 208 and 209!
Dr. Johannes Fiala, Attorney at Law, MBA Financial Services, Master of Business Administration (Univ. of Wales), Master of Mediation (Univ.), Banker (IHK), Lecturer in Civil Law and Insurance Law (Univ. of Cooperative Education)
Thomas Keppel, Dipl.-Jur. Univ., Attorney at Law, Munich (e-mail: info@fiala.de, Internet: www.fiala.de
“Published in ‘Bilanzbuchhalter und Controller’ (BC), issue 1/2008, Betriebliche Altersversorgung: Vorzeitige Beendigung von Versicherungsverträgen beim Arbeitgeberwechsel, page 19 to 20, with the kind permission of the BC editorial office, Verlag C. H. Beck oHG, Munich (www.bc-online.de)”

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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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