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

Reader A. S. asks:

In the BC July 2007 issue, I read with great interest the article on occupational pensions and the employer’s obligation to offset losses in the case of deferred compensation. Following this, I invited our insurance agent to come in for a chat. He informed me inter alia: In the example case of the judgement of the Regional Labour Court (LAG) Munich of 15 March 2007, it is a question of a relief fund. However, the insurer had only concluded pension funds or direct insurance contracts with us.

In this regard:

If the actuarial reserve has not yet reached the amount of € 2,000.00 due to the zillmerized tariffs, the contract will be compulsorily repurchased. In this case, the employee had the right to insist on the amount paid in and not to accept the lower surrender value. For the rest, an appeal has been lodged against the judgment. This had not yet been decided. After termination of the employment relationship with the previous employer, the employee has no right to terminate the contract and insist on the paid-in sum in the case of pension funds/direct insurance policies, unless the actuarial reserve is less than €2,000.00.

That is:

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 new insurer would only take over the actuarial reserve if the accumulated actuarial reserve had reached the amount of at least € 2,000. Otherwise, the contract would be repurchased and repaid at the existing surrender value, which could then lead to the problems described by the team of authors. If the new employer has the same insurer, there would be no problem anyway – the “old contract” is simply continued with the new employer. Thus, for my employer, only those contracts would involve risks for which the actuarial reserve of € 2,000.00 has not yet been reached. Can you confirm what the insurance agent said? Your post reads very alarming from an employer’s perspective.

If the representative’s statement is accurate, this again has a very mitigating effect. What did the authors intend by this? I’m a little rattled.

Answers from the authors

Thank you for your enquiry, to which we comment as follows: According to the reasoning of the Munich Regional Labour Court, the ruling relates to all implementation channels in occupational pension provision – not only the support fund, to which the dispute related 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 correct 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 decision of the LAG Munich.

Rather, there are further arguments against Zillmerisation in the case of deferred compensation. Thus, the employee can (in accordance with § 1a para. 1 sentence 5 BetrAVG) determine each year whether and how much salary he or she wishes to convert into a company pension. The only restriction: If he/she asserts the claim for deferred compensation, he/she must pay an annual amount of at least one hundred sixtieth of the reference value pursuant to § 18, Subsection 1, of the German Income Tax Act. 1 SGB IV for his company pension scheme. This statutory flexibility is taken away by the use of zillmerised tariffs. The admissibility 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 connection with the demographic development of the population structure and the associated reduction in the level of benefits provided by the statutory pension insurance. In order to close the resulting gaps in provision, the legislator wanted to promote the autonomous development of funded private and occupational pension schemes, which it considered indispensable.

According to the Federal Labour Court, this funding purpose requires that it be ensured that the employee does not ultimately incur any risk by participating in deferred compensation. However, with zillmerised contracts 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. Due to the resulting losses in the event of a change of employer after a few years, Zillmerisation would also reintroduce, at least in part, the “vesting” of occupational pensions in the case of deferred compensation, although the legislator has expressly provided for vesting here. The Federal Ministry of Labour and Social Affairs stated in an information brochure on deferred compensation of May 2002, among other things: “Contributions that employees invest in company pension schemes through deferred compensation cannot lapse. 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 “no acquisition commissions are incurred as with a private pension insurance and no issue surcharge as with the acquisition of investment units of an investment 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 provision. The Munich Regional Labor Court ruled accordingly.

Early termination of occupational pension contracts The following is true: In principle, the employee cannot prematurely terminate or cancel the contract concluded within the framework of the occupational pension scheme. A settlement 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 LAG Munich ruled: Contracts with an offsetting of acquisition costs over a period of less than ten years are void. The employees concerned must therefore merely invoke this nullity in order to obtain a claim under enrichment law against their employer for repayment of the amounts they have converted. This applies irrespective of a specific actuarial reserve 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 (petty) severance payment of the occupational pension scheme in the event of premature termination of the employment relationship already after a few years (Section 3 (2) BetrAVG), which, in view of the legislative intention, again speaks against its permissibility. 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 pay further premiums after changing jobs and, according to the insurer, a premium waiver was not possible due to a lack of sufficient actuarial reserves. In the case of zillmerised or zillmer-like contracts in the context of employee-financed occupational pension schemes, there is therefore 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!

by Dr. Johannes Fiala and Thomas Keppel
“Published in ‘Bilanzbuchhalter und Controller’ (BC), issue 1/2008, Betriebliche Altersversorgung: Early termination of insurance contracts when changing employer, 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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