– Judgement of the Munich Regional Labour Court is legally binding – Appeal apparently withdrawn due to lack of prospects of success – Employer and intermediary are in a billion-euro liability –
Employer collects first – and pays twice later
The Regional Labor Court (Landesarbeitsgericht – LAG) Munich (ruling of March 15, 2007, file no. 4 Sa 1152/06, final and absolute) ordered an employer to pay the approximately 90% of the salary that was missing due to the Zillmerung once again – now directly to the employee and not to the relief fund. Due to the legal costs and back-paying wage tax and social security, the employer costs have even more than tripled.
Acquisition and administrative costs of the Unterstützungskassen insurance solution
The employer has concluded a deferred compensation agreement with his employee. When the employee had left the company after less than 4 years, she learned from the support fund and the insurance company from Bavaria that only about 10% of the paid or converted salary was still available as a value. The remainder, i.e. about 90%, had been “consumed” mainly as acquisition or administrative costs.
Piquant: The contract had been arranged by the employer, who also runs an insurance agency on the side. Insurance agents work against commission payment.
More in the account without deferred compensation
If the employee had had the money paid out via payroll accounting, without deferred compensation, in order to invest it well at the bank for her retirement, she would probably have accumulated assets of around 70% with compound interest. This money would then be available to her in old age – in contrast to the pension from deferred compensation – free of tax and social security contributions. Zillmerisation is a method in which the costs of concluding and accepting contracts are paid for in the first few years by the contributions.
It is also important to note that there are also so-called completely brokerage or commission-free tariffs that are suitable for deferred compensation, but not every provider or insurer offers them. Furthermore, some occupational pension schemes distribute the costs evenly over the term of the contract – with or without commissions.
Last attempt before final defeat: Unsuitable offer of retreat
After years of litigation through three instances, the employer offered an out-of-court settlement shortly before Christmas 2008, probably in the interest of the insurer behind it. No agreement was reached by the beginning of January 2009.
Delicate: The employee should also receive a hush money, as it were.
On 07.01.2009 – shortly before the date already scheduled – the employer withdrew the appeal to the Federal Labour Court (file no. 3 AZR 376/07) after he had apparently recognised the futility of his appeal. The employer was represented by a lawyer who had made a name for herself through years of publications in this special field. Seven grounds, each apparently sufficient in itself, show the invalidity of deferred compensation:
Acquisition costs charged by Zillmerisation lead to nullity
Agreements on deferred compensation that provide for zillmerized tariffs are simply invalid (cf. Reinecke in: Der Betrieb, issue 10 of 10.03.2006, p. 555 et seq., 562; LAG Munich, judgement of 15.03.2007, ref. 4 Sa 1152/06). The employer therefore continues to owe the ineffectively converted salary – the difference between the surrender value of the insurance and the sum of the contributions paid in must be paid in arrears regardless of any fault due to the violation of duties to advise and inform.
Tariffs that provide for zillmerisation are contrary to the legislative objectives. The legislator has attached greater importance to company pension schemes, especially those funded by employees, as can be seen from the provisions on immediate vesting (Section 1b (5) BetrAVG) and the transfer of vested rights (Section 4 BetrAVG).
The invalidity of the deferred compensation agreement leads to a claim by affected employees entitled to benefits under § 812, Subsection 1. 1 sentence 1 Alt. 1 BGB (in conjunction with Sections 1 (2) No. 3, 1a (1) Sentence 5, 17 (3) Sentence 3 BetrAVG).
- violation of the principle of equal value (Section 1 (2) no. 3 BetrAVG)In the case of zillmerized tariffs, if an employee leaves the employment relationship prematurely in the first few years, there is generally neither a vested right nor a benefit entitlement of equal value at the time of the occurrence of the pension claim. Because the paid-in contributions are initially used to pay off the acquisition costs, in the initial period there is often just no entitlement to benefits in the event of a pension or these do not correspond by far to the wage components contributed by the employee. Since a new employer is only legally obliged to contribute the transfer value to a new occupational pension scheme, but since this is considerably less than the sum of the contributions paid in due to zillmerisation in the first few years, there is no equal value.
- The inadmissibility of such agreements already follows from the requirement of equal value (§ 1 para. 2 no. 3 BetrAVG), which applies to deferred compensation: future compensation claims must be converted into an entitlement to pension benefits of equal value. The term “equal value” is to be understood in the sense of an economically comparable pension expectancy – at any time during the contribution payment phase. This inevitably results in the invalidity of deferred compensation agreements with zillmerised tariffs under Section 1(1). 2 No. 3, 17 paragraph. 3 Clause 3 BetrAVG.
Even a demonstrable reference to the lack of equal value between the conversion amount and the pension entitlement does not release the employer from its liability, as the Munich Regional Labor Court clarified in its decision of March 17, 2007. It is therefore not important to prove that the employer has given such notification. Equality of value is a legal requirement that cannot be waived in general.
- Violation of the duty of care under the employment contract (§ 611 in conjunction with § 241 (2) BGB)
Furthermore, the inadmissibility of zillmerized contracts for salary conversion can already be deduced from the employer’s duty of care under the employment contract (§ 611 in conjunction with § 241, Subsection 2, BGB). It is true that the employer who wants to provide his employees with a company pension has a wide scope of decision with regard to the structure of the pension benefits. However, within the scope of the contractual duty of care due to the parties to the employment contract, the employer is obliged to take into account the employee’s legitimate interests and to protect the legal assets brought into the company by the employee, such as life and health, assets and property. The employer is in a fiduciary position with regard to the funds provided to him by the employee for the company pension scheme and is therefore under a special obligation. Correspondingly strict standards must therefore apply to the equitable discretion to be observed by the employer under § 315 BGB when selecting the method of implementation.
The employer violates these obligations if, by choosing a zillmerised contract, he initially uses the funds entrusted to him by his employees exclusively to offset the acquisition costs of the insurance contract.
- violation of the transparency requirement (§ 307 BGB)In its judgement of 9.05.2001 (Az. IV ZR 121/00), the Federal Court of Justice decided: “Clauses in general terms and conditions of capital-forming life insurance that govern the exemption from premium payment, the termination of the contractual relationship as well as the surrender value and the acquisition costs are invalid due to lack of transparency if they do not clearly show the policyholder any economic disadvantages.“ Even stricter standards must be applied if the employer converts wage components of his employees. The insurance contract concluded in favour of the employee for the account of a third party is a contract in favour of a third party. Insofar as the insurer’s benefit obligations are also regulated with effect for or against the pension beneficiary, the latter must be taken into account (cf. Federal Supreme Court, judgement of 23 June 1999, NJW 1999, p. 3558).310 para. 4 sentence 2 of the German Civil Code (Bürgerliches Gesetzbuch – BGB) requires that the special features applicable under labour law, in particular the provisions of the Company Pensions Act (Betriebsrentengesetz – Betriebsrentengesetz), be taken into account. The contractual provisions are therefore to be measured against the requirement of equal value and the employer’s strict liability for non-pecuniary loss (§ 1, Subsection 1, Sentence 3, § 1a, Subsection 4, Sentence 2, BetrAVG). Accordingly, if the actuarial reserve saved with converted wage shares is affected by a zillmerization provision, this constitutes an unreasonable disadvantage and the corresponding clause is invalid.
- If zillmerisation is permitted by clauses in agreements on the conversion of remuneration, this means an unreasonable disadvantage for the employee within the meaning of § 307, Subsection 3, of the German Commercial Code (HGB) contrary to good faith. 1 sentence 1 BGB. Formal contractual provisions are unreasonable if the user of the clause hereby abusively seeks to enforce his own interests at the expense of his contractual partner without also taking sufficient account of the latter’s interests and granting him reasonable compensation.
- The amounts payable pursuant to §§ 307 et seq. BGB refers both to the deferred compensation agreement and the contract between employer and insurer as an integral part of this pension agreement. The conversion of remuneration and, because it is a contract bundle with mutual reference, also the insurance contract with the product provider are therefore null and void in this respect, § 139 BGB.
- A corresponding claim by affected employees also arises from § 307 BGB due to a violation of the transparency requirement contained therein and the incompatibility of such a structure with essential aspects of the statutory regulation in the form of the requirement of equal value.
- Contradiction to the regulations on portability (§ 4 BetrAVG)
- Furthermore, zillmerized tariffs are contrary to the flexibility and portability (§ 4 BetrAVG) of company pension schemes as required by law and are therefore inadmissible.
The transfer options and entitlements (in accordance with § 4 BetrAVG) are intended to enable employees to concentrate the vested pension entitlements which they have acquired throughout their entire employment biography (with different employers) in a single retirement pension account. Since the value of the vested entitlement to be transferred in the event of a change of employer often tends towards zero in the event of zillmerisation – depending on the duration of the previous contribution payment – or in extreme cases it may not even have been possible to form a surrender value at all, the goal of portability pursued with the transfer rules in § 4 BetrAVG would be in vain if zillmerised tariffs were permitted.
In this context, the conclusion of a provident fund contract with zillmerized tariffs for reinsurance within the scope of deferred compensation proves to be particularly disadvantageous for the employees, because according to § 4 para. 3 BetrAVG does not apply if the company pension scheme is run through a relief fund.
- Incompatibility with the principles of the more recent case law of the Federal Court of JusticeFor example, in its decision of 15 February 2006 (Case No. 1 BvR 1317/96), the Federal Constitutional Court ruled that the agreement of zillmerised premiums only meets the requirement of a fair balance of the interests of all parties concerned if it is ensured that the acquisition costs charged to the policyholders in relation to the benefits provided by the insurer are also appropriate with regard to a possible premature termination of the contract and thus the shortening of its term.
- The aspects on which these decisions of the Federal Court of Justice are based must apply a fortiori in the case of (purely) employee-financed occupational pension schemes, where the choice of the method of implementation and the product provider (insurance company) is made solely by the employer and the basic idea of risk sharing, which is typical of insurance law, does not apply.
- Furthermore, zillmerised tariffs in the context of deferred compensation (according to the Munich Higher Labor Court) represent a violation of the principles of the more recent case law of the Federal Court of Justice (ruling of 12 October 2005, IV ZR 162/03) on (minimum) surrender values for life insurance contracts, which was confirmed by the Federal Constitutional Court. According to these provisions, the following must be ensured in the event of early termination of life insurance contracts with zillmerised tariffs: the acquisition costs calculated must be proportionate to the benefits provided by the insurance undertaking in view of the shortened duration and the policyholder³s objective of capital accumulation Accordingly, the surrender value may not be disproportionately low, which is why the BGH set a lower limit (50 % of the unzillmerised actuarial reserve).
- Restriction of legal flexibility (Section 1a (1) sentence 5 BetrAVG)
- A further aspect which leads to the invalidity of deferred compensation which provides for zillmerized rates could not be taken into account by the Higher Labor Court Munich due to the above-mentioned reasons, especially since the affirmation of a reason for invalidity was sufficient to substantiate the claim of the plaintiff former employee.
According to § 1a paragraph. 1 sentence 5 of the BetrAVG, the employee can determine anew each year whether and how much salary he or she wishes to convert to a company pension scheme. The only restriction: If he/she asserts the claim for deferred compensation, he/she must pay an annual amount of at least one hundred sixtieth of the reference value pursuant to § 18, Subsection 1, of the German Income Tax Act. 1 SGB IV for its company pension scheme – which currently amounts to only 189 euros annually. This flexibility, which is provided for by law, is deprived of by the use of zillmerised tariffs, since these assume constant financing over often several decades.
This problem is also further aggravated by the conclusion of a support fund contract, because according to § 4d para. 1 No. 1 c) EStG, the contributions must remain the same or increase. Constant or rising premiums are a problem, because falling premiums in the case of support funds and reinsurance can often only be implemented by exempting premiums and concluding a new contract (usually with renewed acquisition costs).
- incompatibility with the objectives of the legislatorThe zillmerisation would also, due to the losses incurred when changing employer, at least partially reintroduce the “forfeitability” of occupational pension schemes in the case of deferred compensation after a few years, although the legislator has expressly provided for vesting.
- In an information brochure on deferred compensation of May 2002, the Federal Ministry of Labour and Social Affairs stated that: “Contributions that employees invest in the company pension scheme through deferred compensation cannot lapse. Every euro that is paid in is either converted into a vested right that is retained even if the company changes, or can be retrieved later through severance pay …” Since it also says: “There are no acquisition commissions as with a private pension insurance and no issue surcharge as with the acquisition of investment shares of an investment fund.“, the prevention of the formation of a contract value in the first contribution years due to zillmerisation is excluded in the case of employee-financed occupational pension schemes.
- The admissibility of zillmerized tariffs would also counteract the intention of the legislator pursued with the introduction of the right to deferred compensation. This is to be seen in connection with the demographic development of the population structure and the associated reduction in the level of benefits provided by the statutory pension insurance. In order to close the resulting gaps in provision, the legislator wanted to promote the autonomous development of funded private and occupational pension schemes, which it considered indispensable. According to the Federal Labour Court, this funding purpose requires that it be ensured that the employee does not ultimately incur any risk by participating in deferred compensation. However, zillmerised contracts always involve a risk or certain loss for employees in the event of changes in the modalities of deferred compensation (contribution reduction or exemption from contributions). However, the fact that such models should then still receive tax incentives is not compatible with the objectives of occupational pension legislation.
Objections do not apply
The objections raised against this, which are primarily based on insurance law regulations, fail to recognise that the Company Pensions Act and labour law take precedence in this respect. In particular, the idea of the risk community of insured persons, which is mentioned again and again, is not relevant here, with which an attempt is made to justify the fact that financial disadvantages would have to be accepted in the event of premature termination of deferred compensation by the employee concerned. However, this is in contradiction to the above-mentioned legal requirements – the idea of a risk community is foreign to labour law. An employee who stops payments under the company pension scheme (e.g. because of dismissal or parental leave) does not act in breach of contract, but merely makes use of the rights to which he or she is entitled. Financial disadvantages simply because the employer has chosen to reinsure with a zillmerized tariff are not acceptable.
The view put forward by the insurance industry up to that time and taken as certain that the judgement of the Higher Labor Court of Munich would not stand up, thus proves to be unjustified. Many employers who were guided by this are now experiencing a rude awakening.
In view of the withdrawal of the appeal, one can only speculate about what a decision of the Federal Labor Court would have looked like exactly. However, it was to be feared for employers and insurers – as the withdrawal of the appeal shows – that the judgement of the LAG München would have been fully confirmed. The BAG also made it clear that labor law was decisive and that further considerations from insurance law had no room here.
It therefore does not appear justifiable that, with regard to the period for charging acquisition costs in the case of deferred compensation in the event of a “malfunction” (e.g. exemption from premium payment), five years – as regulated in the Insurance Contract Act in force since the beginning of 2008 – is sufficient. Rather, it must be distributed over a period of at least 10 years, as expressly addressed by the Higher Labor Court of Munich in its decision of March 2007.
In view of this situation, the insurance industry and intermediaries are now called upon to view occupational pension schemes not only as a further distribution channel for insurance contracts but also to offer products specially adapted to the requirements of occupational pension legislation.
With regard to the ruling of the Cologne Higher Labor Court (LAG Köln) (Case No. 7 Sa 454/08 dated August 13, 2008) mentioned in some of the contributions in connection with the notification on the withdrawal of the appeal before the BAG, the appeal is pending before the BAG. It is remarkable in this respect that some critics of the Munich ruling, who have so far always referred to the fact that it is not final and will most likely be overturned by the BAG, now in turn refer to the reasons for a decision which is not yet final.
Contrary to the view taken by the LAG Köln in its judgment, zillmerised tariffs are not advantageous for all parties involved in the insurance contract. This is also recognised by the Court of First Instance elsewhere, so that the decision is contradictory in this respect. Thus the LAG Köln states: “However, zillmerized tariffs offer a potential disadvantage for the employee in case of premature termination of the employment relationship “at an inopportune moment”. In view of this, there can be no question of any advantage to the entitled employee.
When taking out direct insurance or reinsurance within the scope of deferred compensation, the suitability of the insurance policy rather than the standard market practice (in the case of privately concluded insurance contracts) must be taken into account. There are also no apparent reasons why it should be unreasonable or impossible for the employer to conclude products with an allocation of the acquisition costs over the entire term of the contract.
It is incomprehensible that the aspect of capital formation in the context of occupational pension schemes could be neglected. Decisive for the benefits in the event of a pension is the actuarial reserve or assets formed. In view of the fact that, with zillmerized tariffs, the actuarial reserve can remain at zero even after years and is regularly significantly below the converted remuneration for up to more than ten years, the purpose pursued by the legislator of building up an old-age provision is precisely not guaranteed. In view of the example in the case decided by the LAG Munich, in which after 3.5 years of premium payments amounting to EUR 6,230 only EUR 639 in surrender value or actuarial reserve were available, it cannot be said that the “value for money” was “equally good”.
It is true that the surrender of a life insurance policy in the context of deferred compensation does indeed constitute a disruption. However, it is a statutory rule that the employee suspends the conversion of salary after one year of constant salary conversion, for example, whereby in the case of a zillmerized salary conversion there is still no cover capital available and thus no possibility of exemption from contributions at all. As a rule, the employee’s ability to maintain the deferred compensation at the same level – if possible with the same employer – until the start of the pension must be regarded as almost unworldly.
In case of loss of employment, the new employer is not obliged to take over and continue the old contract. Rather, he must simply transfer the transfer value to a new occupational pension scheme in favour of the employee. With zillmerized tariffs, however, this is often zero or only slightly higher. It must always be taken into account that an employment relationship currently only lasts for about five years on average; a constant implementation of deferred compensation over several decades, as assumed when using zillmerized tariffs, is therefore actually the exception.
In this respect, the employees concerned do not have to rely solely on the possibility of continuing the insurance contract with their own contributions. The Company Pensions Act hereby gives the employee a right, but not an obligation. It also remains open how, for example, an unemployed person is to pay the contributions. Particularly as these would now have to be paid out of taxed and social security net income, which usually doubles the burden – only to be burdened again when the pension is paid.
In view of the above quote from a brochure of the Federal Ministry of Labour and Social Affairs, according to which in the case of deferred compensation “every euro that is paid in is either converted into a vested entitlement which is retained even if the company changes, [verwandelt] or… be retrieved later through severance pay [kann]”It also remains questionable how the Court of First Instance arrived at the conclusion that it can generally be assumed that employees are aware that the early termination of an employment relationship leads to disadvantages in occupational pension provision. The legislator has provided for this case in particular with immediate vesting, equal value and portability. It does not follow from these company pension regulations that employees have to accept disadvantages or financial losses in this respect – certainly not because the employer has chosen unsuitable insurance rates.
Moreover, the fact that an employee should have to accept financial disadvantages with regard to the company pension scheme financed by his or her own funds when an employment relationship is terminated – especially in the case of dismissal for operational reasons – is diametrically opposed to the objective of building up a pension scheme.
The Regional Labor Court Cologne did not want to see a loss and lack of equal value due to the low surrender value because the contract was continued without premium and not repurchased at all, which is why a loss had not been realized at all. To this end it stated:
“The decisive point of reference for “equal value” within the meaning of § 1, Subsection 2, No. 3, BetrAVG, can thus, with an appropriate definition, only be the benefits which the employee can expect to receive as a result of the use of the insurance contributions financed by him/her in the event of a pension.
However, the employee can expect the converted remuneration to provide only the non-contributory benefits financed at the time of the exemption from contributions. In the case of the most commonly used endowment annuity policies, however, the value at the time of premium exemption is derived actuarially from the actuarial reserve or surrender value only, so that the deferred compensation cannot be equal in value even after that time if the surrender value is significantly lower than the converted compensation and the difference cannot be explained by risk protection used up, e.g. for occupational disability.
Liability of intermediaries and product suppliers
Affected employers who now find themselves exposed to the justified claims of their employees should remember to ensure at an early stage that intermediaries or product providers may have to contribute to the amounts to be paid to the employees in the context of a conceivable liability for incorrect advice or failure to provide information. Due to the above-mentioned legal requirements, doubts about the permissibility of using zillmerized tariffs in the context of deferred compensation should have been raised even before the most recent rulings, since surrender values or pension benefits which correspond to only a fraction of the funds contributed by the employee can under no circumstances fulfil the criterion of equal value.
Due to the low transparency of the products, which is often only available to the expert, incorrect advice and damages are often noticed very late – and are then possibly very difficult for laypersons to prove and even more difficult to sue. And then the agent is regularly gone, the insurer is protected by the statute of limitations and the employer is left alone with the problem.
Employer is obligated to convert remuneration into cash in accordance with the law
The Federal Labour Court decided in its judgement of 12.06.2007 – 3 AZR 14/06 – that the employer is obliged to carry out a conversion of remuneration with equal value if the employee so wishes. The BAG has determined that there is no statutory conversion of remuneration if there is no equality of value. It is up to the employer to ensure this equality of value, who must in principle choose the pension provider. He is not only exposed to a risk in the event of a lack of equal value, but also if the insurer becomes insolvent – the BAG states – because he must then himself fulfil the promise. However, these risks on the part of the employer which might even threaten the existence of the company were not a reason for the BAG to doubt the constitutionality of the obligation to deferred compensation in the judgment – and to question whether the legislator is allowed to impose the associated risks on the employer. The employer could choose from among the providers and was not prevented from choosing a product that minimized the risk for him and was in conformity with the law for a conversion of remuneration of equal value.
by Dr. Johannes Fiala, Dipl.-Math. Peter A. Schramm, Dipl.-Jur. Univ. Thomas Keppel
by courtesy of
www.kommunalverlag.de (Kommunalwirtschaft 02/2009, pp. 114-118)
www.versicherungsmagazin.de (published in the insurance magazine 01/2019, page 27 under the heading: The end of zillmerized deferred compensation)
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About the author
PhD, 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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