Liability potential in the billions for employers, as they are often allowed to “pay twice” for occupational pensions!*
*by Dr. Johannes Fiala, Lawyer (Munich), Mediator (Univ.), MBA Financial Services (Univ.Wales), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Lecturer in Civil Law and Insurance Law (Univ. of Cooperative Education), Banker (www.fiala.de), Dipl.-Math. Peter A. Schramm, actuary DAV, expert for actuarial mathematics, publicly appointed and sworn by the IHK Frankfurt am Main for actuarial mathematics in private health insurance (www.pkv-gutachter.de) and Dipl.-Jur. Univ. Thomas Keppel, lawyer (Kanzlei Dr. Johannes Fiala)
In its ruling of March 2007, the Regional Labour Court of Munich clarified that the offsetting of acquisition costs in the first contribution years – in particular by zillmerisation – is not permissible in the case of occupational pension schemes by way of deferred compensation. Corresponding agreements are therefore invalid. Whether the employees were informed of this is irrelevant in this respect. According to the Munich court, even a settlement of acquisition costs over, for example, the first five years is ineffective. Salary conversion
An employee had made contributions to an inter-company provident fund via her employer for almost three years, waiving part of the salary to which she was entitled. 178 was paid into a life insurance policy taken out for reinsurance purposes. When the employment relationship then ended prematurely, a total of 6,230 euros had been converted into a company pension scheme (bAV). However, the surrender value of the insurance was only 639 euros. Almost 90 % of the money converted had thus been charged to acquisition costs in particular. This is considered common practice among insurers.
Clarification about zillmerization irrelevant
In the case decided by the Munich Regional Labor Court, it was unclear whether the employee had been sufficiently informed of the possibility of significant losses in the event of premature termination of the contract. The trial court had imputed this in an attackable manner. In any event, the employee had previously cancelled life insurance policies and suffered losses. An in-depth discussion took place with an insurance broker, but it remained open as to whether the employee was given documentation that included the initially low cash surrender values. At the trial, the employer was still wrong in law in taking the view that its former employee could at best address her claim to the provident fund or the insurer. The Regional Labour Court did not even address the question of sufficient information on the consequences of zillmerisation because this was generally inadmissible in the case of occupational pension schemes with deferred compensation.
Faulty training and contracts: Employer must “pay twice”
In a decision dated 17.01.2005, the Stuttgart Labour Court (case no. 19 Ca 3152/04) had already sentenced an employer to pay damages in connection with zillmerised tariffs, although the plaintiff was a former personnel manager and thus a specialist. The reason for liability was the failure to inform the employee who had left the company about the consequences of zillmerization. Many product providers in the field of occupational pensions therefore assumed that informing the employee about the “zillmerisation” excluded liability. Some even wrongly concluded from the Stuttgart ruling that the admissibility of Zillmerisation in the case of deferred compensation was thereby established. Zillmerisation means that all acquisition, distribution and acquisition costs are offset against the first premiums. The actuarial reserve for the pension scheme is only built up subsequently. In the case decided by the Munich court, the sum of the premiums paid would only have been available as a surrender value after 20 years – without taking into account interest and compound interest. Although it has been stated in the trade press for years that employers are liable on the basis of their duty of loyalty under the employment contract, irrespective of fault, and must therefore “pay twice” in the case of deferred compensation if the employee has been informed.
Employer must pay wages again
The Regional Labor Court (Landesarbeitsgericht, LAG) in Munich (judgment of March 15, 2007, Case No. 4 Sa 1152106) ordered the employer to pay the approximately 90 % of the salary that was missing due to the zillmerization once again – now directly to the employee and not to the provident fund. The deferred compensation agreement was deemed to be legally invalid.
Four arguments for the inadmissibility of Zillmerisation in the case of deferred compensation
The LAG gave four reasons for its ruling, although one reason would have sufficed.
1. infringement of the legal requirement of equality of value
According to § 1 para. 2 No. 3 of the German Occupational Pensions Act (BetrAVG), it is mandatory for the employer to ensure that the employee is entitled to a “vested pension right of equal value” at all times (including during the contribution payment phase). In particular, zillmerised tariffs do not comply with this legal requirement. Costs estimated for the risk of death are regularly negligible in this context (possible higher costs for the risk of disability did not exist in the specific case). Consequently, zillmerized tariffs in the case of deferred compensation violate the principle of equality of value and are thus null and void pursuant to Section 134 of the German Civil Code (BGB).
The implementation method of the occupational pension is irrelevant:
The LAG Munich states that an employer, as the contractual partner of its employee in the case of deferred compensation, does not merely owe the mere forwarding of the earned pro rata salary “as a messenger”. This means that all implementation channels are covered: direct insurance, Pensionskassen, pension funds and support funds. With some product providers or implementation channels, there are apparently only zillmerised contracts.
2. infringement of the prohibition of unreasonable discrimination
Salary conversion with zillmerised tariffs, like such conversion with other zillmer-like acquisition cost allocation methods, constitutes an unreasonable disadvantage for employees. Such a contractual arrangement contradicts the essential basic ideas of the legal regulation and is therefore ineffective, § 307 I S.1, II Nr.1. BGB. This is in line with the established case law of the highest courts on “unfair disadvantage contrary to good faith”, § 307 I S.1. BGB, since the employer thus abusively pursues his own interests at the expense of his employees. The employer must be responsible for the fulfilment of the deferred compensation under the Occupational Pensions Act, § 1 II No.3. BetrAVG. The insurer is liable for default irrespective of fault, in particular if the selected offsetting of acquisition costs leads to an essential reduction of the actuarial reserve. For this reason too, deferred compensation with zillmerised tariffs is ineffective.
3. violation of portability (§ 4 BetrAVG)
Portability means that the employee can demand that his old employer “give” him his occupational pension and that his new employer convert it into a pension entitlement of equal value. § Section 4 of the German Occupational Pensions Act (BetrAVG) stipulates that in the event of a change of employer, the “current transfer value” of the occupational pension can be “taken along”. However, the idea of portability is counteracted by Zillmerisation, as the (repurchase) value always tends towards zero in the first few years. In this respect, employees would have to “practically start from scratch” again with a new employment relationship. For employers, on the other hand, this means that brokering such contracts within the framework of occupational pension schemes is a violation of the established case law of the highest court on “advice appropriate to the investor and the object”: since employees are employed in a company for an average of only five years, contracts with a term of up to more than 40 years and consequently very high commissions or acquisition costs are unsuitable.
4. infringement of the principles of recent case-law of the Federal Court of Justice and the Constitutional Court
The Federal Court of Justice (judgements of 12.10.2005) decided, confirmed by the Federal Constitutional Court (judgements of 26.07.2005 and 15.02.2006), that the extremely high acquisition costs on termination of the contract in the first few years as a result of zillmerisation are not compatible with the objective of capital formation associated with a life insurance policy. This idea must apply all the more so in the case of deferred compensation agreements. The judgement of the LAG Munich was fought for by RA Dipl.-Jur. Univ. Thomas Keppel, Kanzlei Dr. Johannes Fiala, MBA. The reasons for the decision are based on the case law of the higher courts and the prevailing opinion in the specialist literature. The appeal to the BAG was only permitted by the Munich court for the fully unsuccessful employer.
Almost all deferred compensation agreements are affected
Since, according to the LAG Munich, in addition to Zillmerisation, other methods of offsetting acquisition costs – for example over the first five years – are also inadmissible on the basis of the same considerations, more than 90 % of all salary conversion agreements are to be considered null and void. Employees can then demand that their employers – even former ones – rescind the contracts. Due to the lack of transparency in many deferred compensation agreements, the vast majority of employees do not know how acquisition costs and any other expenses, e.g. for risk protection, are charged. A lawyer or tax adviser dealing with the matter will therefore, in case of doubt, first have the contracts examined by an actuary. Possible claims for repayment plus interest as well as back-payments of social security contributions amounting to a total of around 65 billion euros can already be expected today. However, the potential for liability will continue to increase in the future.
Possible courses of action for intermediaries
Affected intermediaries of such deferred compensation products should not wait for an employer to make a claim against them for their own liabilities to their employees. Affected employers do not have to wait for their employees to file lawsuits and possibly accept that the intermediary will file for insolvency in the meantime (and possibly the employer himself as a result of the additional wage payments, and the additional wage tax and social security contributions to be paid). Employers should not wait if the salary conversion agreement is found to be ineffective, because otherwise there is also the threat of criminal liability for tax evasion and non-payment of social security contributions – it may be advisable to make a voluntary disclosure. Intermediaries should therefore take action themselves at an early stage. With the involvement of a lawyer, tax advisor and actuarial expert, the models offered are to be examined for their ineffectiveness and shortfalls. Statements by product providers – such as that there is no zillmerisation at all – should be viewed critically. For its part, the intermediary should contact the product providers in order to obtain their commitment to pay compensation or to unwind the contracts concerned. There is still a chance that a product provider may be willing to manage for economic reasons alone, without acknowledging a legal claim, because it does not want to risk litigation with the risk of further judgments. Later, however, it is likely that some provident funds, for example, will themselves become insolvent and the intermediary alone will then have to pay. With this safeguard in place, further action can then be determined with employers to remediate existing deferred compensation arrangements. In this way, intermediaries may at least be able to avoid insolvency, possibly keep at least part of the commissions/fees received and, in the best case, even design a sustainable occupational pension scheme together with their customers. In the end, however, there will be no way around a pure fee-based brokerage of contracts that are free of acquisition costs.
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 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.
You are already receiving legal advice and would like a second opinion? In this case please contact Dr. Fiala directly via the following link.
The first telephone call about your request is free of charge.