By Nicholas Bora
Published on: 25 June 2007
The Munich ruling is causing a stir: consumer protectionists are calling it a “breakthrough”, employers want legal certainty and, above all, no liability, insurers are cautious in their comments – and the aba wants to prevent occupational pension schemes from falling into disrepute. One thing is certain: the game will go into overtime. What will become of the employee-financed company pension scheme? Are contracts with zillmerized tariffs void if the contributions are financed by deferred compensation? Are employers liable if employees do not even get back the contributions paid in when they quit early? Does zillmerization violate the portability requirement? These questions have been the subject of heated discussion in the industry since the Munich Regional Labour Court declared remuneration conversion contracts with zillmerised tariffs to be invalid in a sensational ruling of 15 March this year (reference number: 4 Sa 1152/06).
Zillmerisation prevents vested rights of equal value and violates portability
Zillmerisation, according to the court, prevents the converted remuneration from becoming an entitlement to pension benefits of equal value, as is prescribed. It also infringes the portability of occupational pension rights. In this method, developed by the Prussian mathematician August Zillmer in 1863, the first premiums of the policy are used for the agents’ commission. The customer’s account is immediately debited with a maximum of four percent of future premiums. In the case of a company pension contract for which 200 euros per month are to be converted for 30 years, this leads to an amount of around 2,800 euros which is “hidden” from the employee and paid by the first instalments. Only then is a positive actuarial reserve built up. Because of this zillmerisation, the surrender value is low in the first few years.
Employee of a car dealership sues successfully
A young employee of a car dealership also had to make this experience. She had agreed with her boss that, with effect from March 2002, 178 euros per month of her basic salary of 2,000 euros would be paid into a provident fund to build up a company pension scheme. The fund took out a reinsurance policy. After a contract period of 38 years, the young woman was to receive a guaranteed annual pension of 5,060 euros. By the end of April 2005, when the young woman left the company, she had converted 6,230 euros of her salary. Because contracts with provident funds still cannot be transferred, the fund recommended that she have the surrender value of the insurance paid out to her in the amount of 639 euros, minus an administrative fee. The young woman felt that she had been taken advantage of by her ex-employer. She accused him of having chosen the wrong type of contract by opting for a zillmerised contract and demanded that he pay her the difference between the premiums she had paid and the surrender value. The employer refused. She sued in the labor court – and lost. In the second instance, she was proven right.
Very different reactions
Reactions to the Munich ruling, which goes beyond a similar decision by the Stuttgart Labor Court as well as landmark rulings by the Federal Court of Justice (BGH) and the Federal Constitutional Court (BVerfG) on the admissibility of Zillmerung, have been highly varied. The Federation of German Consumer Organisations (VZBV) spoke of a “breakthrough for employees”. Its head, Edda Müller, called on the Grand Coalition to prohibit zillmerisation by law for occupational pension contracts, because it “does not fit in with the ever-invoked flexibility in the workplace”. Acquisition costs would have to be spread over the entire term. “The fact that some pension schemes have managed without zillmerised tariffs for a long time shows that an advance charge of the first contributions with acquisition costs is dispensable.” The difference between pension schemes and occupational pension contracts financed by deferred compensation has not yet made its way to the vzbv. Employers want legal certainty and, above all, they do not want to be liable. In a letter dated May 9, 2007, addressed to several experts, including the honorary judges at the Federal Labor Court, the Confederation of German Employers’ Associations wrote: “Based on this ruling and the ruling of the Stuttgart Labor Court, the necessary legal certainty for employers is lacking for the majority of deferred compensation agreements, which is detrimental to occupational pension plans as a whole. For this reason, we already approached the Federal Ministry of Justice last year on the occasion of the planned VVG amendment with the request to anchor a clarifying reference to the VVG regulation on the distribution of acquisition costs in the Occupational Pensions Act.”
Solution sought that is also acceptable to insurers …
The draft amendment to the VVG provides for the possibility of spreading acquisition and distribution costs over the first five years, as is the case with Riester products. According to the responsible ministries, this will not change. Such an arrangement is also acceptable to insurers. Contracts with deferred compensation are not free, says Peter Schwark, spokesman for the German Insurance Association (GDV). “The legislator had a professional pension scheme in mind when it linked the legal entitlement to deferred compensation with the fall-back offer of direct insurance. Not every employer can set up his own pension scheme, nor should he be burdened with the costs of the legal entitlement. In fact, more than 80 percent of the employees who have taken out a salary conversion contract since the Riester reform have done so through the professional sales forces of the insurers. With the transfer agreement, the insurance industry has extended its offer for mobile employees to pension funds. In this way, employees are not burdened with multiple acquisition costs and are consequently not disadvantaged by Zillmerung.” – Johannes Fiala, lawyer In his dissertation “Betriebliche Altersversorgung im Spannungsfeld von Portabilität und Verfallbarkeit” published by Nomos, Schwark goes into detail on the subject of costs, which can only be touched on here. It is clear that deferred compensation has led to an increased individualisation of occupational pension provision, as a result of which the cost advantages of group insurance are largely lost.
… but these comment with restraint
In general, the insurance industry has been very cautious in its comments on the Munich ruling. Again and again it is said that such a case is settled without going to court. This is why many insurance managers are also annoyed with their Nuremberg colleagues, who did not contact the GDV until the ruling was available. The Nuremberg-based company is not prepared to comment. In a press release dated 4 May, the company said it would “continue to offer its full range of occupational pension products (zillmerised and non-zillmerised plans)” and that the employee had not been unfairly disadvantaged. The chairman of the aba – Arbeitsgemeinschaft für betriebliche Altersversorgung, Boy-Jürgen Andresen, wants to prevent company pension schemes from falling into disrepute. At the aba annual conference in Stuttgart on 23 May, he said: “The problem, which is undoubtedly significant, only has economic relevance where employees participate in the financing of their company pension scheme by way of deferred compensation, this is done by way of an insurance product, a zillmerised tariff is chosen, the employee leaves the company very shortly after the start of deferred compensation and the possibilities of a so-called transfer agreement cannot be used.” The number of cases is therefore manageable. Peter Schwark, GDV, Spokesman
The Munich ruling: one with serious consequences?
The Munich lawyer Johannes Fiala, who represented the plaintiff before the LAG Munich, sees this quite differently. In his opinion, contracts without “equal value” deferred compensation are null and void and must at least be converted, if not reversed. That would be an expensive undertaking. He told dpn: “Together with an actuarial expert, we have estimated the damage potential for employers for past and present contracts at around 65 billion. Employers are particularly burdened by the social security liability of so-called phantom wages, i.e. wages due to the employer that have not been paid out but have been ineffectively converted into a company pension scheme. In this case, the employer must pay his saved social security contributions as well as those of the employee, because by law he only has three months to deduct the employee’s social security contribution from the employee’s salary. In addition, there is interest of 0.5 percent per month due because of the delay in reporting and paying Social Security.”
Federal Labour Court rules again – insurers are already positioning themselves
So now the Federal Labour Court, as the court of appeal, will have to decide over what period the costs for contracts with deferred compensation may be spread. Insurers will draw particular attention to two points: According to their statements, Gezillmerte contracts have a higher maturity benefit than ungezillmerte contracts, and in the case of ungezillmerte contracts, customers who are loyal to the contract bear the acquisition and set-up costs of those who cancel their contract early.
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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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