Employers often pay twice for occupational pensions

The Regional Labor Court (Landesarbeitsgericht – LAG) Munich has ruled that the offsetting
of the acquisition costs in the first years – in particular through Zillmerisation – in
of the company pension scheme (bAV) with deferred compensation is inadmissible.

In the grounds for its judgment
the LAG Munich has stated,
that now also such
Agreements are void which provide,
that the acquisition costs in the occupational pension
be offset in the early years
can – even if the employee
beforehand via the acquisition cost allocation
has been explicitly cleared up. In
In its reasons, the LAG goes beyond
also assumes that other forms of
of the acquisition cost allocation –
for example, over the first five years –
due to their zillmer-like effect
are also inadmissible.
The case decided by the LAG Munich
Case: An employee had 35 months
…to forego a portion of her salary.
178 euros per month flowed through a
inter-company pension fund into a
Life Insurance.
When the employee at the employer
she had a total of 6,230 euros.
of salary into a company pension scheme
(bAV), of which, however, there is no
only 639 Euro as insurance(
repurchase) value available
were. So the employee had to state,
that about 90 percent of the converted
Salary missing. Ultimately
this is an absolutely typical
Case that in the insurance industry
is considered normal.

Clarification by the employer
irrelevantr

In the case described above, between
The parties dispute whether there was a sufficient
Educating the employee on this,
that upon termination of the contract in the first
incur substantial losses over a period of years
had taken place. The lower court
had such in an attackable manner
accepted. In any case, the employee
in insurance matters “not completely
inexperienced”, as they had already taken out life insurance policies before.
I quit. With her
the insurance broker had detailed
spoken. However, it remained unclear whether
of the employee, as stated by the employer
also claims to have handed over documents
from which the low level of
Surrender value in the amount of 639 Euro with
Termination in the third current year of the
height was recognizable. The employer
held – still legally erroneous – that the
Employee may contact the insurance company
could turn.
Ultimately, the Regional Labor Court
the question of informing the employee
on the consequences of premature
termination of the contract, since the
Zillmerization in the context of deferred compensation
is in principle inadmissible.

Incorrect forms and training:
Employer may “pay twice”

The Stuttgart Labor Court (ruling
of 17 January 2005, ref. 19 Ca 3152/04)
had an employer to pay damages
condemned. Also this employer
had to replace his former
Human Resources Manager, that is, a professional
at home, because of the zillmerization consequences
compensate. This after
Opinion of the Labour Court alone
for the reason that the employee
was not properly explained.
Numerous insurers and other carriers
of occupational pension schemes went
thereupon assumes that there are sufficient
is to inform the employee about the “Zillmerung”.
…to clear it up. More than that, the judgment
has often been misinterpreted to mean that
the admissibility of the Zillmerization according to
Enlightenment downright confirmed.
Zillmerization means that “Insurance
and acquisition costs, all
Selling and acquisition costs” with
the first commuted salary instalments paid
will be. Only then does a
“Retirement savings capital”
on. In the present case, in
the first 20 years, not even the
Sum of the premiums paid as surrender value
been present – times completely
except for the interest.
For years it has been known from the trade press,
that the employer also
continues to be liable, i.e. in the case of deferred compensation
“pay twice” even if
of the employees was cleared up. Because
The employer is liable for the damage regardless of fault.
fiduciary duty to one’s
Employees.

LAG: Employer liable for zillmerization

The Munich Regional Labor Court sentenced
now in its decision of
March 15, 2007 (Case No. 4 Sa 1152106) the
Employers who, after salary conversion
missing about 90 percent of the
salary again – this time to the person concerned.
employee and not to the
sponsor of the occupational pension scheme – to
pay. Legally, this deferred compensation
as legally invalid.
The court based its ruling on
four legal grounds – already one would have
…but it was enough.

infringement
of equal value

According to paragraph 1 II No.3 BetrAVG, the
Employers are required by law to provide,
that the employee has one to each
“equal value entitlement” is received at the time.
Especially zillmerized insurance contracts
satisfy this requirement
don’t. Calculated costs for the risk of death
do not regularly fall into the
Weight. Possible higher costs for occupational disability risk
fell in the concrete
Case not on. The deferred compensation thus violates
against the law
of equality of value, and is therefore null and void
(Section 134 of the German Civil Code).
Incidentally, this affects all
Implementation channels of the occupational
Retirement benefits: The LAG ruling puts
clear that the employer as a contractual partner
of his employee not only the
“simple forwarding” of the earned
Proportionate salary within the scope of deferred compensation
“as a messenger.”
Direct insurance is therefore affected,
pension funds, pension funds, and
Support funds. For individual suppliers
or implementation methods
there seems to be only
zillmerized contracts.

Infringement of the prohibition of unreasonable
Disadvantage

Conversion of remuneration with Zillmerisation
– and similar methods of allocating acquisition costs
in the early days
years – disadvantaged according to paragraph 307
I p.1, II no.1 BGB Employee unreasonable
and is associated with essential basic ideas
of the legal regulation does not
compatible. This follows the established case law
of the Federal Labour Court on
“unreasonable in good faith
Discrimination” (Section 307
I P.1 BGB), since abusively own interests
of the employer at the expense of
employees are affected.
The employer is liable according to section
1 II No.3 BetrAVG by law for the fulfilment
of deferred compensation. The
The employer is liable for the
Ausfallhaftung, especially if
by offsetting acquisition costs
the actuarial reserve is “substantially reduced”.
is. Also this disadvantage of the
Employee leads to ineffectiveness
of deferred compensation.

Infringement of portability

Portability means according to section 4 BetrAVG,
that the employee has not completed his or her
Retirement pension from the previous
transfer to a new employer
can. The legislature has made clear,
that employees have the “current transfer value”
their company pension scheme
when changing employers
can “take” with them. A portability
is not in fact possible, however, if
the (repurchase) value through Zillmerisation
tends towards zero. With each new
Employer would have to
“practically starting from scratch”.
For the employer, this means a mirror image of
figuratively, that the mediation of such
occupational pension contracts
contrary to the settled case-law of the
Federal Court of Justice on the “investor- and
object-appropriate advice” violates:
Because on average, employees are 4.9
Years in one company – Contracts
with 30 to over 40 years maturity and
correspondingly high commissions/contract costs
are unsuitable for employers.

Infringement of the principles of the BGH
and the Constitutional Court

Both the Federal Constitutional Court
(Judgments of 26 July 2005 and 15 February
2006) as well as the Federal Court of Justice
(BGH, judgements of 12 October 2005)
have decided that the Zillmerization
against the contractual objective of capital accumulation
violates. Thus it cannot be agreed
if the surrender value
on termination of the contract in the early years
is disproportionately low or even
tends towards zero. This applies all the more in the case of
deferred compensation agreements.
The judgment was delivered by lawyer Thomas
Keppel from the law firm of Dr. Johannes Fiala
…I fought for. The reasons for the judgment are in the
Consistency with case law of the higher courts
and prevailing opinion in the
Technical literature. The LAG has only ruled in favour of the
process fully unsuccessful employer the
Right of appeal to the Federal Labour Court
approved.

Almost all deferred compensation agreements
affected and ineffective

The LAG Munich states in its reasons for judgment
that in addition to the zillmerization
also other types of acquisition cost allocation
– for example about the first
five years – ineffective for the same reasons
are. This means that over 90 percent
to regard the conversion of remuneration as null and void
– workers can then
by their employers – also
earlier – demand the reversal.
Most employees know as a result of
the non-transparency of many deferred compensation schemes
not in what way the
Acquisition costs and whether other expenses
charged for risk protection, for example
were. In case of doubt the specialist lawyer
the contracts are therefore initially actuarially
…for an expert opinion.
Overall, the possible recoveries
plus interest and arrears
Social security contributions
to already around 65 billion euros today
estimated – a liability potential that
will continue to increase rapidly in the future.

Action option for intermediaries: in the
go on the offensive

The worst idea for affected intermediaries
such deferred compensation products
is to wait until the employer
…takes them into recourse. To do this, the employer must
…without first bringing suit…
of his employees and take a chance,
that the intermediary himself has meanwhile
is insolvent, the employer then possibly
by back pay
as well as wage tax to be paid in arrears and
Social security contributions as a consequence
also. The employer can afford to wait
if found to be ineffective
of the deferred compensation
…because otherwise he’s gonna have to answer for…
Tax evasion and non-payment
of social security contributions punishable
therefore it is best used as a
The means of self-disclosure can be used.
The intermediary is therefore advised,
to go on the offensive. With the help of
Lawyer, tax advisor and actuarial expert
Experts
the sold models are on their ineffectiveness
and shortfalls.
On statements made by product providers – for example:
“It’s not even zillmerizing!” – –
he must not rely on it. Then
the intermediary to approach the product providers,
so that they can be
contracts for damages
or oblige to reverse the transaction.
At the moment, there is still a good chance that
Product providers solely for economic reasons
reasons – without recognition of a
legal entitlement – and no
Litigation with the risk of further judgments
risk. Later, for example
one or two provident funds
perhaps insolvent himself and the intermediary
pays alone.
With this backing, we can then start
employers to develop a concept,
to reorganize the contracts. Possibly
the intermediary can thus at least
escape insolvency, possibly
also a part of the money received for his work
Commission or brokerage
and at best even
together with its customer a forward-looking
Designing occupational pension schemes. At the fee brokerage
from contract cost-free
Contracts will ultimately not be
There’s no way around it.

(versicherungsmagazin 6/2007, 46)

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About the author

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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