Immense liability potential for intermediaries: Zillmerung in bAV impermissible!

24.04.2007 A recent ruling by the Regional Labor Court (Landesarbeitsgericht – LAG) in Munich confirms that the offsetting of acquisition costs in the first few years – in particular by means of zillmerization – is not permissible in occupational pension schemes with deferred compensation. Such agreements are null and void – even if the employee was expressly informed about the acquisition costs beforehand. In its reasons, the LAG also assumes that other forms of accounting for acquisition costs – for example over the first five years – are also inadmissible due to their zillmer-like effect. Background: An employee 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 EUR 6,230 of her salary into a company pension scheme (bAV), of which only EUR 639 was still available as insurance (surrender) value. The employee noted that she was thus missing about 90 percent of the commuted pay. Ultimately, an absolutely typical case that is considered normal in the insurance industry.
Clarification by the employer
The insurance broker, as the employer’s vicarious agent, had expressly informed the employee that the termination of the contract could lead to considerable losses in the first few years. Nor was the employee “completely inexperienced.” The insurance broker had spoken to her in detail – the employee had also been given documents from which the low surrender value of 639 euros could be seen in the third current year when the policy was terminated. The employer was still wrong in law in saying that the employee could at best turn to the insurance company.
Faulty forms and training: Employer may ‘pay twice’
The Stuttgart Labor Court (judgment of January 17, 2005, Case No. 19 Ca 3152/04) had already ordered an employer to pay damages. This employer also had to compensate its former personnel manager who had left the company, i.e. a specialist in its own company, because of the Zillmer successes. In the opinion of the labor court, this was due to the fact that the employee was not properly informed. 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 was often wrongly interpreted as virtually confirming the admissibility of informed zillmerization. Zillmerization means that “insurance and acquisition costs, all distribution and acquisition costs” are paid with the first converted pay rates. Only then does a “cover capital for the old-age pension scheme” build up. In the present case, not even the sum of the premiums paid would have been available as a surrender value in the first 20 years – not to mention the interest. For years it has been known from the trade press that the employer continues to be liable, i.e. may “pay twice” in the case of deferred compensation, even if the employee has been informed. This is because employers owe a duty of loyalty to their employees regardless of fault.
LAG Munich: Employer liable to employees for zillmerization
The Regional Labor Court (judgment of March 15, 2007, Case No. 4 Sa 1152106) ordered the employer to pay the approximately 90 percent of the salary that was missing after the salary conversion – this time to the employee and not to the company pension fund. Legally, this deferred compensation was found to be legally invalid.
Four reasons why zillmerization leads to nullity
The court based its ruling on four legal grounds – even one would have been sufficient.
1. infringement of the legal requirement of equality of value
According to paragraph 1 II No.3 BetrAVG, the employer is required by law to ensure that the employee receives a pension entitlement of “equal value” at all times. In particular, zillmerised insurance contracts do not meet this requirement. Calculated costs for the risk of death are generally not taken into account here (possible higher costs for occupational disability risk were not incurred in the specific case). Thus, the deferred compensation violates the statutory requirement of equal value and is therefore null and void, section 134 of the German Civil Code (BGB).
All implementation channels of occupational pension schemes affected
The ruling clarifies that the employer, as the contractual partner of its employee, does not merely owe the “simple forwarding” of the earned pro rata wage within the framework of deferred compensation “as a messenger”. This means that direct insurance, Pensionskassen, pension funds and support funds are affected. In the case of individual providers or implementation channels, there are apparently only zillmerised contracts.
2. infringement of the prohibition of unreasonable discrimination
Conversion of remuneration with Zillmerisation – and similar methods of charging acquisition costs in the first few years – puts employees at an unreasonable disadvantage, and is not compatible with essential basic ideas of the statutory regulation, Paragraph 307 I S.1, II Nr.1 BGB. This follows the established case law of the Federal Labour Court on “inappropriate discrimination contrary to good faith”, section 307 I p.1. BGB, since abusively own interests of the employer at the expense of the employees are affected. The employer is legally liable for the fulfilment of the deferred compensation, Paragraph 1 II No.3 BetrAVG. The employer is liable for default regardless of fault, especially if the actuarial reserve is “substantially reduced” as a result of the acquisition costs being offset. This disadvantage to the employee also leads to the invalidity of the deferred compensation.
3. breach of portability, section 4 of the BetrAVG
Portability means that the employee can take his or her occupational pension with him or her from the previous employer to the new employer. The legislator has clarified that employees can “take with them” the “current transfer value” of their occupational pension when changing employer. However, portability is de facto not possible if the (repurchase) value tends towards zero due to Zillmerisation. With any new employer, the employee would have to “practically start from scratch.” For the employer, this means in a mirror image that the brokerage of such company pension contracts violates the established case law of the Federal Court of Justice on “advice appropriate to the investor and the object”: Because on average employees are in a company for 4.9 years – contractual arrangements with a term of 30 to over 40 years and correspondingly high commissions/contracting costs are unsuitable for employers.
4. infringement of the principles of the Federal Court of Justice and the Constitutional Court
The Federal Constitutional Court (rulings of 26 July 2005 and 15 February 2006) and the Federal Court of Justice (rulings of 12 October 2005) have ruled that Zillmerisation violates the contractual objective of capital formation. This means that it cannot be agreed if the (repurchase) value on termination of the contract is disproportionately low or even tends towards zero in the first few years. This applies all the more in the case of deferred compensation agreements. Attorney Thomas Keppel of the Munich law firm Dr. Johannes Fiala obtained the ruling. According to Keppel, the reasons for the judgment are in line with the case law of the higher courts and the prevailing opinion in the specialist literature. The LAG only allowed the employer who was completely defeated in the proceedings to appeal to the Federal Labor Court.
Almost all deferred compensation agreements affected and ineffective
In its reasons for the ruling, the LAG Munich states that, in addition to Zillmerisation, other types of settlement of acquisition costs – for example over the first five years – are also invalid for the same reasons. This means that more than 90 percent of deferred compensation is to be regarded as null and void – employees can then demand reversal from their employers, including earlier ones. Due to the lack of transparency of many deferred compensation schemes, most employees do not know how the acquisition costs and whether other expenses, for example for risk protection, have been charged. In case of doubt, the specialist lawyer will therefore first have the contracts examined actuarially. In total, the possible reclaims plus interest and social security contributions to be paid in arrears are already estimated at around 65 billion euros today – a liability potential that will also increase rapidly in the future. (hh)
( (24.04.2007))

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Dr. Johannes Fiala Dr. Johannes Fiala

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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