The liability trap of occupational pension schemes

Employers do not save the 20 percent social security promised by the intermediary in the context of the company pension scheme (bAV): They have a doubling of wage costs.

What is the current liability ruling of the Munich Regional Labour Court (LAG): 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 6230 euros of salary into a company pension scheme (bAV) – but only 639 euros of this was still available as insurance (surrender) value. So there was a shortfall of about 90 percent of the commuted salary. This is a quite typical case, which is considered normal in the insurance industry and with other sponsors of occupational pension schemes.

Clarification by the employer irrelevant

In the case decided by the Munich Regional Labor Court, it was disputed between the parties whether the employee had been adequately informed of the fact that the termination of the contract could lead to considerable losses in the first few years. The lower court had assumed such in an attackable manner. In any event, the employee was “not completely inexperienced” in insurance matters, having previously cancelled life insurance policies. The insurance broker had spoken with her in detail, but it remained unclear whether the employee, as claimed by the employer, had also been given documents from which the low surrender value of 639 euros was recognisable in terms of amount in the event of termination in the third current year. The employer was still wrong in law in saying that the employee could at best turn to the insurance company. Ultimately, the Regional Labor Court did not consider the question of informing the employee about the consequences of a premature termination of the contract, since Zillmerisation (a method of offsetting the costs of concluding the contract) was generally impermissible in the context of deferred compensation. THE ZILLMERUNG Zillmerung 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 twenty 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. has to “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.


The reasons for the judgment

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 again – this time to the employee and not to the provider of the occupational pension plan. The deferred compensation was found to be legally invalid. However, the employer is not only liable for this additional payment, but also for the sole liability for social security contributions not yet paid, together with a late payment surcharge (0.5 percent p.m.) and the lawyer’s and court costs. 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 employer will therefore first have the contracts actuarially assessed (cf. There are few occupational pension schemes in which around 100 per cent of the contributions paid in are actually available for the pension after three years – others, however, offer ten or even zero per cent, as in the case of the LAG Munich. In total, the possible reclaims plus interest and social security contributions to be paid in arrears are estimated at around 65 billion euros already today – a liability potential that will increase rapidly in the future.


Liability of institutions for occupational retirement provision

The drama of the new decision lies first of all in the fact that presumably well over 90 percent of all deferred compensation is affected. In addition, the court stated that the reasons for the judgment apply to each of the five ways of implementing occupational pension schemes (direct insurance, support fund, pension fund, pension commitment, pension fund). In its ruling of 15 March 2007, the Munich Regional Labour Court (Landesarbeitsgericht – LAG) decided that zillmerised tariffs are inadmissible in the context of employee-financed occupational pension schemes and that corresponding remuneration conversion agreements are invalid. The LAG based its decision on the one hand on the requirement of equal value contained in the Occupational Pensions Act (BetrAVG) (§ 1, Subsection 2, No. 3 BetrAVG). The Zillmerisation in the case of deferred compensation also constitutes a violation of the prohibition of unreasonable disadvantage (Section 307 of the German Civil Code) as well as the basic idea of portability (Section 4 of the German Occupational Pensions Act). Moreover, tariffs for employee-financed occupational pension schemes with a split rate are not in line with the principles of the recent case law of the Federal Court of Justice (BGH) and the Federal Constitutional Court (BVerfG), according to which the acquisition costs have to be proportionate and must not frustrate the objective of capital accumulation. This means that many employers will want to reverse the transaction: An actuarial expert will calculate the damage for them – sooner or later the affected intermediaries will also be confronted with recourse claims. Only a small proportion of the sponsors of occupational pension schemes will survive numerous reversals in economic terms – thus beginning a race for compensation for the losses.


Loss of confidence among employers

The real scandal, however, can be seen in the fact that occupational pension providers often provide their intermediaries with half-truths – so that the mediation of the factually unprofitable contracts works well. The Federal Statistical Office has published that on average an employee is not employed in the same company for five years. This means that the contracts usually brokered with terms of twenty or forty years are simply unsuitable. In seeking recourse, the employer will cite the Insurance Regulatory Act and the – time-honored principles of “investor- and object-appropriate” advice to support the agents’ blatant misadvice.

Dr. Johannes Fiala, RA, De-la-Paz-Straße 37, 80639 Munich Tel. 089/17 90 90-0, Fax 089/17 90 90-53,

by courtesy of (published in! 3/2007, 120)

Our office in Munich

You will find our office at Fasolt-Strasse 7 in Munich, very close to Schloss Nymphenburg. Our team consists of highly motivated attorneys who are available for all the needs of our clients. In special cases, our law firm cooperates with selected experts to represent your interests in the best possible way.

About the author

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.
»More about Dr. Johannes Fiala

On these pages, Dr. Fiala provides information on current legal and economic topics as well as on current political changes that are of social and/or corporate relevance.

Arrange your personal appointment with us.

Make an appointment / call back service

You are already receiving legal advice and would like a second opinion? In this case please contact Dr. Fiala directly via the following link.

Obtain a second legal opinion

(The first phone call is a free get-to-know-you conversation; without consulting. You will learn what we can do for you & what we need from you in terms of information, documents for a qualified consultation.)