A judgement with nasty consequences for many entrepreneurs: They have to answer for the coverage gaps if the contracts of their employees for the company pension scheme are void. Company bosses should ensure legal certainty as soon as possible.
It all started quite unspectacularly – with a change of job, as happens for most employees every three to five years these days. Anna Haber* quit her job at a car dealership in Rosenheim, Bavaria, in the summer of 2006 after three years of service. At the beginning of her employment, the company boss had taken out a life insurance policy for the 29-year-old with an inter-company provident fund. With this deferred compensation, the entrepreneur thought, he would have fulfilled his obligation to offer a company pension scheme (bAV).
“If my client had been informed about the consequences of Zillmerung, she would never have concluded the contract,” recalls attorney Thomas Keppel of the Munich law firm Dr. Johannes Fiala. When Haber inquired about the cash surrender value of her policy, she couldn’t believe it. For almost three years, 178 euros of her salary had flowed into the life insurance policy each month, and she had converted a total of 6230 euros into contributions to the occupational pension scheme.
Of this sum, 639 euros were still available. Her boss had no explanation for the shortfall. But the insurance. She mentioned the terms zillmerization and acquisition costs, it all had its place. Anna Haber was not satisfied with that. She sued her boss at the Rosenheim labor court, lost, and appealed.
On 15 March of this year, the verdict came: the Munich Regional Labour Court sentenced the owner of the car dealership to pay the shortfall of 5591 euros. The reason: an occupational pension scheme based on deferred compensation with so-called zillmerisation is legally ineffective and thus void. The employer, not the insurance company, is liable to the employee for gaps in coverage. The appeal of the case is now pending before the Federal Labor Court in Erfurt, so the Munich ruling is not yet legally binding. But it is already causing a great deal of uncertainty.
The current decision is by no means surprising for lawyers. “After all, the Federal Constitutional Court in Karlsruhe has already decided at the beginning of 2006 that Zillmerung is unconstitutional for private life insurance policies,” explains attorney Johannes Fiala. This groundbreaking ruling was used by the LAG Munich for its decision. Zillmerization – named after the German actuary August Zillmer – is the most common method of calculating the actuarial reserve of life insurance policies. In this case, the administrative costs of the insurance company and the agent’s commission are offset in full against the premiums paid in during the first years of the contract. In the case of deferred compensation, therefore, with salary components. This initially results in a deficit, and only later does the actuarial reserve build up.
“In the present case, not even the amount paid would have been available as a surrender value in the first 20 years,” Fiala said. Not to mention interest income. Employees who want to buy back their pension after only a few years because they are leaving the company are left with very small sums. The Federal Constitutional Court (BVG) ruled that such a calculation method was not compatible with the objective of asset accumulation. Insurers have so far paid little attention to this decision. Instead, most continued to offer zillmerised tariffs for occupational pension schemes. After all, the BVG judges had “only” ruled in favour of private life insurance policies.
In addition, the insurance companies considered a ruling of the Stuttgart labour court as a carte blanche for zillmerisation in occupational pension schemes. Admittedly, at the beginning of 2005 the Stuttgart judges had sentenced an employer to pay damages on the basis of a zillmerised insurance contract. However, the reasoning stated that the head of the company had not informed his employee about the risks of zillmerisation. “Since then, we have heard from the insurance companies that those who fulfilled this obligation would not have to worry about liability issues,” Fiala reports. Thus, trusting entrepreneurs entered into contracts that could now be their undoing. After all, legal experts assume that the presiding judge of the Federal Labor Court will follow the decision of the Munich Higher Labor Court.
In this case, many company bosses would be faced with horrendous payments. Experts estimate that 90 percent of all occupational pension tariffs are zillmerised. If all these contracts are classified as null and void in the future, affected employees can demand that their employers rescind them. “The possible clawbacks, plus interest, social security contributions to be paid in arrears, legal and expert costs, amount to about 65 billion euros nationwide,” estimates actuary Peter Schramm.
The Munich ruling leaves no doubt that the employer and not the insurance company is liable. Finally, the judges said, the head of the company is subject to a “duty of care regardless of fault.” This means that he must ensure that the converted salary components are available at all times in equal value. It is still unclear what exactly is meant by equal value.
However, according to the Munich ruling, zillmerized contracts cannot create equal value. Worse still: “Company bosses affected are by no means alone in getting away with repaying the missing amount of cover”, explains Richard Hempe, Managing Director of the auditing and tax consultancy firm Schwarz Hempe & Collegen GmbH, Munich. “Salary shares paid into company pension schemes are exempt from social security contributions for employees and employers.” If a contract becomes void, the social security contributions must be paid in arrears.
This hits the entrepreneur doubly hard. “Because the employee wrongfully failed to pay Social Security, he took too much pay,” expert Fiala said. Due to the overpayment, the employee now receives new pay slips. However, in the case of new pay slips, the employee is only liable for unpaid social security contributions for three months. For the rest of the time, the employer is again responsible. That’s not all.
Anyone who illegally withholds social security contributions will pay interest of one percent per month – even on the employee contributions. “In addition, there are damages for the interest income that the employee has lost,” adds expert Schramm. And he sums it up: “The 20 percent or so that a company CEO wanted to save on social security contributions quickly turns into 200 to 300 percent that he has to pay back.”
Company bosses can avoid such a harsh setback if they make their occupational pension contracts legally secure as quickly as possible. “To do that, they should have all existing policies reviewed immediately,” Hempe says. For zillmerized tariffs, the head of the company can request a release from liability from the corresponding insurance company, which releases him from payments in the event of an emergency. It is also possible to talk to the insurance company about changing the rates. For example, on contracts where the acquisition costs are spread over the term. Sometimes the insurers also agree to a reversal. Fiala, who was himself affected as an employer some time ago, has achieved this in all cases. Those who dare to go to court also have good cards. Business owners can rely on the Bond ruling. This means that insurance intermediaries are also obliged to advise their customers in a way that is appropriate for the investor and the property. “An intermediary offering zillmerized contracts for their employees these days that run over 30 years is hardly fulfilling that obligation,” Fiala said. After all, if you change jobs every three to five years, you want to take the value of your insurance with you. Not just a fraction of it – like Anna Haber.
from Andrea Martens
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About the author
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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