31.05.2007 A ruling by the Munich Regional Labor Court has shocked the industry. Do we have to say goodbye to zillmerisation in occupational pension schemes for good? In Cemetery I of the Jerusalems- und Neue Kirchengemeinde in Berlin Kreuzberg there is a memorial stone in the form of a gravestone, on which is written: “In memory of the mathematician and director Dr. philos. August Zillmer, donated by 36 life insurance companies.” These days, not only the 36 memorial stone donors, but also all other insurers are probably remembering the mathematician who died in 1893, because the publication of a recent ruling by the Munich Regional Labour Court (LAG) has caused quite a stir in the industry. This is not only shown by the feedback of startled brokers to the news, which FONDS professionell was the first medium in Germany to publish on its website. An even clearer sign of the explosive nature of the decision is the prompt reaction of the German Insurance Association (GDV), which issued a statement to the boards of its member companies just two days after the news was published. When an association such as GDV comments on a recently published court decision at a speed that is sensational for it, the matter must contain explosives. But one after the other: The regional court Munich had decided on 15 March 2007 (Az. 4 Sa 1152/06) that the set-off of the conclusion costs in the first years – in particular by Zillmerung – is inadmissible in the operational old age pension with Entgeltumwandlung. Corresponding agreements are null and void, even if the employee has been expressly informed in advance about the offsetting of acquisition costs. In its reasoning, the court even stated that other forms of acquisition cost offsetting – for example over the first five years – are equally inadmissible due to their zillmer-like effect. Background: The employee of a car dealership had waived part of her salary for 35 months, 178 euros per month went into a life insurance policy via an inter-company pension fund. When the employee left the employer, she had converted 6,230 euros of her salary into a company pension plan (bAV), but only 639 euros of this was still available as a surrender value. The employee noted that she was thus missing about 90 percent of the commuted pay. “Ultimately, this is a thoroughly typical case that applies to around 90 percent of the contracts concluded for deferred compensation and is regarded as normal in the insurance industry,” notes Peter Schramm, actuary and member of the German Actuarial Association. Immense liability potential Attorney Thomas Keppel of the residents of Munich Kanzlei Dr. Johannes Fiala, which fought for the judgement, sees an immense liability potential, which could come on employers, in addition, mediators as their executing aides. “The LAG Munich states in its reasons for judgement that, in addition to Zillmerung, other types of settlement of acquisition costs – for example over the first five years – are also invalid for the same reasons,” explains Keppel. “However, as a result of the opaqueness of many deferred compensation schemes, most employees do not know the way in which the acquisition costs and whether other expenses, for example for risk protection, have been charged.” However, if this means that more than 90 percent of deferred compensation is to be regarded as null and void and employees can demand reversal from their employers – including earlier ones – then the possible reclaims plus interest and back-payments of social security contributions can already be estimated at a total of around 65 billion euros. This is a liability potential that will continue to increase rapidly in the future. According to rough estimates by actuary Peter Schramm, intermediaries alone will be faced with around 15 billion euros in additional claims (see below). The insurance industry is trying to save what can be saved. Wolf-Rüdiger Heilmann, Managing Director of Life Insurance and Pension Funds at GDV, objects to the ruling, saying that higher maturity benefits can be achieved with zillmerised tariffs and that, if the employee is sufficiently informed, a privately autonomous, voluntary (individual) agreement exists, so that sections 307 et seq. of the German Civil Code (BGB) would not apply either. BGB would not apply. In addition, the Federal Court of Justice (BGH) stated in the decision referred to by the Munich Higher Labor Court (LAG) that the Zillmer procedure did not in principle constitute an unreasonable disadvantage within the meaning of Section 307 of the German Civil Code (BGB). Furthermore, it should be taken into account that the legislator, in the context of the amendment of the Insurance Contract Act (VVG), itself assumes the admissibility of offsetting acquisition costs, according to its statement. Allianz: No comment And the GDV members are, of course, initially backing their association. A spokesman for Allianz Leben did not wish to comment further on the ruling, but merely stated that the company supported the GDV’s statement. Others point out that the ruling is not a supreme court decision. “Of course, all market participants are now excited at first,” explains Johann Prost from Condor Dienstleistungs GmbH, which looks after the topic of company pension schemes at Condor. But the industry as a whole is of the opinion that the ruling is untenable as it stands. Attorney Keppel is not the only one who sees it differently. “The arguments of the GDV put forward against the decision of the LAG Munich are not convincing,” said the lawyer. The statutory requirement of equal value could not be circumvented on the grounds of an allegedly higher maturity benefit in the case of zillmerised contracts, especially since this would not achieve the portability and flexibility required by the Occupational Pensions Act for employees who had only worked for an employer for just under five years on average. “Even an express reference to Zillmerung does not result in a general business condition becoming an individual agreement,” Keppel continued. “The LAG ruling is likely to have far-reaching consequences for future occupational pension advice and, above all, for existing deferred compensation pension schemes,” Manfred Baier, Managing Director and Partner of Dr. Rödl Penstreuhand GmbH in Nuremberg, is also convinced. Already since the ruling of the Stuttgart labour court there has been considerable pressure on the zillmerisation of occupational pension contracts. Therefore, the new ruling will provide further impetus for fee-based consulting. The Stuttgart Labor Court had ruled in its decision of 17. 1. 2005 (file no. 19 Ca 3152/04) ordered an employer to pay damages. Numerous insurers and other sponsors of occupational pension schemes then believed that it was sufficient to inform the employee about the “Zillmerung”. What’s more, the ruling has often been wrongly interpreted as virtually confirming the admissibility of informed zillmerization. At that time, however, the judges in Stuttgart had focused on a breach of the duty of care on the part of the employer, whereas the Munich Higher Labor Court (LAG) saw a violation of the Act on the Improvement of Company Pensions in the case heard there and declared the entire deferred compensation agreement to be null and void. The insurance industry is still counting on the possibility of an appeal to the Federal Labor Court, which the Munich Higher Labor Court (LAG) has allowed for the losing employer in the lawsuit. That’s a rather weak straw, though. Because Gerhard Reinecke, presiding judge at the Federal Labour Court, had already stated – almost in anticipation of the Munich LAG ruling – during a specialist lecture at the beginning of last year: “Remuneration conversion agreements that provide for zillmerised tariffs are invalid.” Four reasons why the Zillmerung leads to nullity In its decision, the LAG Munich gives four reasons why the negotiated deferred compensation is to be regarded as null and void 1. infringement of equal value pursuant to section 1 of the German Occupational Pensions Act (BetrAVG): in the opinion of the court, the use of zillmerised tariffs does not satisfy the requirement of the German Occupational Pensions Act for equal value conversion of remuneration into occupational pension benefits. 2. unreasonable disadvantage of the employee pursuant to section 307 BGB: The unilateral determination of the contractual conditions by the employer on the basis of a form (here: determination of zillmerized tariffs) constitutes an unreasonable disadvantage of the employee concerned without offering him a corresponding compensation. For this reason alone, the agreement is invalid. 3. infringement of the basic idea of portability pursuant to section 4 of the German Occupational Pensions Act (BetrAVG): in the opinion of the court, the use of zillmerised tariffs runs counter to the statutory provisions on portability. 4. infringement of the current case law of the Federal Supreme Court and the Federal Constitutional Court: In the opinion of the court, the case law on minimum surrender values for life insurance policies must apply a fortiori to insurance policies within the framework of occupational pension schemes through deferred compensation. What could be in store for employers and occupational pension intermediaries Actuary Peter Schramm has calculated what the ruling of the Munich Higher Labor Court could mean in terms of non-calculated burdens for employers and occupational pension advisors. The bill looks really bad for the employer. An example: For one employee, 100 percent of a contribution of 100 euros per month was converted into a company pension. The tax savings (until 2008) were around 20 percent for the employer. Later, the company pension scheme informs the employee that ten percent of the paid-in contributions are still left. The employer must pay the missing 90 per cent in arrears (i.e. charge it to the employee as wages). In addition, the employer alone has to pay around 40 percent in social security contributions, resulting in a further burden of around 36 percent (40 percent social security on 90 percent back pay) for the employer. Together, therefore, the employer has to bear a burden of 90 per cent plus 36 per cent = 126 per cent, about which he was not informed at the time of placement. In the end, he realizes that the agent had originally calculated a tax saving of 20 percent on the 100 euros of salary conversion selected in the example. Neither the broker nor the insurer explained to him that he would end up paying more than 100 percent on top through the company pension plan. 300,000 per capita burden for intermediaries? Schramm also has a rough estimate of what intermediaries will have to reckon with: he assumes possible additional claims for about five million employees. If these have converted an average contribution of 150 euros into an occupational pension, this results in a potential liability of around 15 billion euros (5 million contracts times 150 euros times 12 months times 30 years times 55 per mille including cancellation deduction and other costs). With an estimated 50,000 intermediaries, this results in an average per capita burden of 300,000 euros in incurred losses, and correspondingly more for larger intermediary organisations and insurers. This calculation includes all deferred compensation – not only existing deferred compensation, but also any deferred compensation that has already been terminated at a loss. 55 per mille are usual – namely 40 per mille for zillmerisation plus up to 20 per mille of so-called “over-calculated acquisition costs”, which then lead to lapse deductions in the case of early termination, after the actuarial reserve has been reduced by zillmerisation anyway.
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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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