In a ruling of 15 March 2007 (reference number 4 Sa 1152/06), the Munich Regional Labour Court ordered an employer to reimburse a former employee for the difference between the “premium sum of converted wage contributions” and the “surrender value” at the end of the employment relationship.
After about 3.5 years of deferred compensation through a provident fund with investment with an insurance company, the employee had foregone about 6,000 euros in salary. The insurance company said the “value” of the savings ended up being less than 10% of that amount. A part-time employee had a similar experience. He saved 100 euros a month for his old age via deferred compensation – after 1.5 years, around 2,000 euros had been paid in. At the end of the employment, the insurer stated that the value was just over 30 euros.
Acquisition and administrative costs for Zillmerisation
The difference between the premiums paid in and the surrender value is used to finance the acquisition and administrative costs at the provider of the occupational pension, such as a provident fund and an insurance company. Insurance companies do not distribute the agent’s commission evenly over the entire (planned) term. Rather, it is offset against the contributions of the first months or years according to the method of the mathematician August Zillmer, hence called “Zillmerung”. Since 1 January 2008, when the amended German Insurance Contract Act (VVG) came into force, insurers have had to spread the acquisition costs of life insurance contracts at least evenly over the first five years. The principle of zillmerization itself has changed little as a result. With a 4% Zillmerisation, related to the scheduled premium sum, and a contract duration of forty years, the acquisition costs amount to 1.6 annual premiums, i.e. 32% of the first five annual premiums.
Further costs, risk premiums for death and occupational disability as well as rate surcharges can easily reach another 30% or more. This means that just under 40% of each annual contribution for the first five years remains to be invested as a savings contribution. In the case of surrender, the deductions (so-called lapse deduction) according to § 169 paragraph 5 VVG can still be made, certainly also 1 to 2% of the still outstanding premiums (i.e. perhaps 40 to 80% of an annual premium). Then there would be nothing back in the first two years, after the third year around 3 _ 40% – 80% = 40% of an annual contribution or 13% of the contributions paid in. From 6,600 euros of de facto salary sacrifice through deferred compensation, 858 euros of surrender value are thus generated – even under the new insurance contract law.
Minimum surrender value due to case law of the Federal Court of Justice
In the case decided by the Munich Regional Labour Court, the new VVG would therefore hardly have changed the fact that around 90% of the contributions converted into a company pension scheme would have been lost from the employee’s point of view. The Federal Court of Justice already assumes in the case of private old-age provision insurance that around “half of the unzillmerised actuarial reserve or the unzillmerised fund assets” is always owed by the insurer. This applies regardless of how long an insurance contract has existed. Consumer protectors estimate the damage of the insurance savers alone thereby at approximately 3.5 billion euro. In the case of deferred compensation, employers are currently probably liable for up to 65 billion euros – including all potential creditors.
Employer liability can be reduced
In order to receive a state subsidy via “capital-forming benefits”, an employee is directly advised as a customer. The employer is only a paying agent – he transfers part of the wage and has no obligation to provide advice. In the case of occupational pensions, the legislator has stipulated the opposite. The employer is the customer, the savings contracts of the company pension scheme (BAV) are in his name, which he also selects with regard to the cost amount and cost distribution. The employer is in a fiduciary role because the converted wages were worked for. However, there are also providers such as some pension funds that have calculated commission-free rates. For the employee, a “value” of 92% is available at the end of the first BAV savings year; after three years, the value may have reached the sum of the saved contributions. In the Act on the Improvement of Company Pensions, the legislator speaks of “equal value” as an imperative for employers. Every advisor must inform the employer about the risk of such undefined legal terms, according to a ruling of the Federal Court of Justice (file number IX ZR 127/04). This means an opti- on for the employer to remediate the BAV investment errors and its liability sometimes cost neutral.
Product comparison can increase the value of the supply more than tenfold
If you compare the offers of investment funds, you will notice that some providers waive “acquisition costs” – the banker refers to the premium or issue surcharge – altogether. A banker also calculates these costs only on actually acquired fund shares, which then end up in a securities account as “equivalent value”, not also according to insurer type equally on all, which the customer would still acquire according to plan up to his 67th year of life. Insurers or BAV providers already charge between 0.1 and over 4% acquisition costs in the first five years, based on the premium sum of the entire term. This does not take into account the fact that the employee has the choice each year to decide anew whether and how much deferred compensation is to be paid. This ‘system of cost allocation’ militates against its suitability in the FOT. In the case of investment funds, management costs of around 2 to 4% are charged annually – the custodian bank receives a portion back as “kick-backs”. Some bankers now also waive this and issue a credit note to the customer. According to the report of the Federal Financial Supervisory Authority, the running costs of insurance policies are also significantly higher on average.
One often hears the argument that every actuarially calculated tariff is automatically equal in value because the actuarial equivalence principle is observed. equivalent, however, the actuary calculates only the imputed benefit obligations (not the lower actual average) and the net premiums excluding costs; acquisition and administrative costs are added on top. Nevertheless, from the insurer’s point of view, the equality of value should always be given – apparently completely irrespective of the high additional costs included. On closer examination, such assertions prove to be, at best, non-binding expressions of opinion for which an insurer assumes no warranty. Of course, any insurer will be happy to confirm in writing that its rates are calculated actuarially and according to the equivalence principle. However, no one has yet confirmed in a binding manner that their tariffs in the FOT also comply with the equality of value – why, I wonder, if this is supposed to imply the same thing? Rather, insurers only point out when asked very emphatically that they cannot confirm the fulfilment of the equality of value in a binding manner because this is an undefined legal concept. So the only thing left for employers to do is to think for themselves and exercise the greatest caution with regard to offers for deferred compensation, even if they now spread the acquisition costs over five years.
by Dr. J. Fiala, Munich, and P. A. Schramm, Diethardt
by courtesy of
www.derpraktiker.de (der praktiker 6.2008, 212)
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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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