over 100 billion potential for employer liability through deferred compensation. Employers are often allowed to “pay twice” for company pension schemes !*
*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)
A recent ruling by the Munich Regional Labor Court confirms that the offsetting of acquisition costs in the first few years – in particular by zillmerization – is not permissible in occupational pension schemes with deferred compensation. Such agreements are null and void and must be rescinded – regardless of whether the employee was previously informed of the acquisition costs. In its reasons, the Regional Labor Court also assumes that other forms of accounting for acquisition costs – e.g. over the first five years – are also inadmissible due to their zillmer-like effect. Conversion of remuneration
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 an insurance (surrender) value. The employee noted that she was thus missing about 90% of the commuted salary. Ultimately, an absolutely typical case that is considered normal in the insurance industry.
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 premature termination of the contract, since Zillmerization was generally impermissible in the context of deferred compensation.
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.
Regional Labor Court (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% of the salary that was missing after the salary conversion once again – this time to the employee and not to the provider of the occupational pension plan. Legally, this deferred compensation was found to be legally invalid.
Four reasons why Zillmerung leads to nullity in the case of deferred compensation
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 § 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). The deferred compensation thus violates the statutory requirement of equal value and is therefore null and void, § 134 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 offsetting acquisition costs in the first few years – puts employees at an unreasonable disadvantage and is not compatible with the fundamental ideas of the statutory regulation, § 307 I S.1, II No.1. BGB. This follows the established case law of the Federal Labour Court on “unfair discrimination contrary to good faith”, § 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, § 1 II Nr.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. violation of portability, § 4 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 26.07.2005 and 15.02.2006) and the Federal Supreme Court (rulings of 12.10.2005) have ruled that zillmerisation is contrary to the contractual objective of capital formation. Thus, it cannot be agreed if the (redemption) value upon termination of the contract is disproportionately low or even tends towards zero in the first years. This applies all the more with remuneration conversion contracts. The judgement was obtained by RA Dipl.-Jur.(Univ.) Thomas Keppel, law firm Dr. Johannes Fiala, MBA. 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 lost the case in full, to appeal to the Federal Labour 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 – e.g. over the first five years – are also invalid for the same reasons. This means that more than 90% 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, e.g. for risk protection, have been charged. In case of doubt, the specialist lawyer or tax advisor 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 EUR 65 billion today – a liability potential that will continue to increase rapidly in the future.
Action option for intermediaries
The worst idea for affected brokers of such deferred compensation products is to wait until the employer takes recourse against them. For this purpose, the employer does not have to wait for a lawsuit of his employees and risk that the intermediary is insolvent in the meantime, and the employer possibly also insolvent as a result of the wage arrears as well as the wage tax and social security contributions to be paid in arrears. The employer cannot afford to wait if he discovers that the deferred compensation is ineffective, as otherwise he will also be liable to prosecution for tax evasion and non-payment of social security contributions – he will therefore be best advised to make a voluntary declaration. The intermediary is therefore advised to go on the offensive. With the help of a lawyer, tax advisor and actuarial expert, the models sold must be checked for ineffectiveness and shortfalls. He must not rely on statements made by product providers – e.g. that there is no zillmerisation at all. The intermediary should then approach the product providers so that they undertake to pay compensation or to unwind the contracts in question. At present, there is still a good chance that product providers will make payments for economic reasons alone – without recognising a legal claim – and not risk litigation with the risk of further judgements. Later, for example, one or the other provident fund may itself be insolvent and the intermediary pays alone. With this backing, a concept can then be worked out with employers to reorganise the contracts. In this way, the intermediary may at least be able to avoid insolvency, possibly also keep part of the commission/fee received for his work and, at best, even design a forward-looking occupational pension scheme together with his client. In the end, there will be no way around the fee-based brokerage of contracts that are free of acquisition costs.
The above contribution was made available to us today, 28.04.2007, by the law firm Dr. Johannes Fiala Ingeborg Weiler öffentlichkeitsarbeit De-La-Paz-Str. 37 D – 80639 Munich Tel.: + 49 89 17 90 35 Fax : + 49 89 17 90 70 E.Mail: firstname.lastname@example.org for presentation. Team Werner Schell
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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.
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