A recent ruling by the Munich Regional Labour Court confirms that the offsetting of acquisition costs in the first few years in occupational pension schemes with deferred compensation is not permissible.
Corresponding agreements are null and void – even if the employee was previously expressly informed about the offsetting of acquisition costs. In its reasons, the LAG also assumes that other forms of settlement of acquisition costs – e.g. over the first five years – are also inadmissible due to their zillmer-like effect.
Deferred compensation:
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 – documents had also been handed over to the employee, from which the low surrender value of 639 euros was recognisable in terms of amount when terminating the policy 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.
Incorrect 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 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. 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 reasons – even one would have been sufficient.
- Violation of the legal requirement of equal 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 owe only 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.
- Infringement of the prohibition of unreasonable disadvantage The deferred compensation with Zillmerung – and similar methods of charging acquisition costs in the first years – disadvantages employees unreasonably, and is not compatible with essential basic ideas of the statutory regulation, § 307 I S.1, II Nr.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.
- Infringement of portability, § 4 BetrAVG Portability means that the employee can take his occupational pension with him from his previous employer to his 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.
- Infringement of 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 Court of Justice (rulings of 12.10.2005) have ruled that zillmerisation infringes the contractual objective of asset 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 has 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 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, e.g. 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 EUR 65 billion today – a liability potential that will continue to increase rapidly in the future.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.channelpartner.de (posted 05/03/2007)
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Dr. Johannes FialaPhD, MBA, MM
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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