In a recent ruling, the Munich Regional Labor Court prohibited the zillmerization of contracts for deferred compensation. Now a dangerous incendiary is smoldering.
In mid-March, the Munich Regional Labour Court ruled that the offsetting of acquisition costs in the first few years of deferred compensation in occupational pension schemes (bAV) is not permissible. This not only broke the baton on flawless zillmerization. Even attenuated forms, for example offsetting in the first five years, the court put a stop to. The insurance industry will probably have to deal with the consequences for a long time to come. This is because the Munich labor judges declared such agreements null and void. This is true even if the employee was expressly informed of the consequences of the offsetting of acquisition costs prior to the conclusion of the contract and confirmed this by signing the contract. The insurers could have suspected it, at the latest since the decision of the Stuttgart Labor Court in January 2005. At that time, an employer had been ordered to pay damages to his personnel manager who had left the company because the Zillmerung had eaten up a considerable part of his payments. After this ruling, there was still a widespread assumption in the industry that it would be sufficient to inform employees sufficiently about the consequences of the initial offsetting of acquisition costs and everything would be back to normal. Legally ineffective remuneration conversion But now attorney Thomas Keppel of the Munich law office Fiala obtained a further judgement against the Zillmerung. In the case in dispute, an employee had converted 178 euros of her salary into a company pension for 35 months and paid it into an inter-company pension fund. From there, the premiums flow into a life insurance policy via reinsurance. After almost three years, the woman left her previous employer. By this time she had paid 6,230 euros into the pension fund. However, the surrender value was only 639 euros. About 90 percent of the converted premium had been used for acquisition costs. Such a low surrender value is not unusual in the first years of an insurance contract. However, the Munich Regional Labour Court found that this was not the case with deferred compensation. It therefore ordered the employer to pay the missing 90 percent to the employee (judgment of 15 March 2007, Case No. 4 Sa 1152106). The conversion of remuneration on this basis was legally invalid. In doing so, the court was not bothered by the fact that an insurance broker, acting as the employer’s vicarious agent, had expressly informed the employee of the losses she would incur if the contract were terminated in the early years. She had even been given documents showing the amount of the low surrender value in the event of termination in the third year. None of this matters, according to the judges, there are four solid reasons why the zillmerization leads to nullity. For example, the violation of the legal requirement of equal value. According to the law on occupational pensions, the employer must ensure that the employee receives an entitlement of equal value at all times. Equality of value, but when? This is the condition that will be at stake in the dispute over the coming months. This is because the legislator has introduced the concept of an entitlement of equal value, but has not yet explained in more detail what exactly is meant by this. In any case, according to the Munich judgement, zillmerised insurance contracts do not fulfil this requirement. On the other hand, it is often argued in the industry that the equality of value applies primarily with regard to the end of the contract. In addition: In the opinion of the Munich LAG, zillmerized tariffs also violate portability in occupational pension schemes. If the transfer value tends towards zero due to zillmerisation, then portability is in fact not possible. The employee would have to start all over again after each job change. The ruling could become an incendiary device for the entire insurance industry; assuming it actually becomes legally binding. The Regional Labor Court allowed the unsuccessful employer to appeal to the Federal Labor Court. In the event of an appeal, the case will be heard by the 3rd Senate, which is responsible for occupational pension schemes. It is chaired by Judge Dr. Gerhard Reinecke, whose rejection of Zillmerung is well known in the industry. Some time ago, at a Handelsblatt conference on company pension schemes, Reinecke gave a clear rejection to this form of allocation of acquisition costs. Reversal looms Reinecke’s appearance was somewhat ridiculed by the insurance industry at the time and dismissed as the judge’s private opinion. Now it’s on to the next round, and off the record, Reinecke is said to be looking forward to the process. Until clarity is achieved in the final instance, a sword of Damocles hangs over the entire industry. If the ruling is upheld, a large number of existing contracts will be threatened with reversal, which could turn into a disaster. Second problem: What will happen to new business until final clarification? Actually, every intermediary would have to handle zillmerized contracts with pointed fingers after knowing the Munich judgement. Otherwise, he risks being in the liability boat afterwards. The insurance industry hopes that the Munich labour judges have simply overshot the mark. According to Dr. Peter Schwark, press spokesman for the association, the ruling is completely out of line with actual practice. The current watchword is therefore to wait and see what the revision brings. The German Insurance Association sent out a circular letter to its members on this matter at the end of April. But the biggest problem with the ruling is not so much the rejection of zillmerization. In any case, the industry had already come to terms with the fact that flawless zillmerised tariffs in occupational pension provision would sooner or later have to be shelved. Much more serious, on the other hand, is the more far-reaching rejection of the distribution of acquisition costs over the first five years of a contract. Until now, this model seemed to be the accepted alternative to the current remuneration systems. This has already been agreed in the case of Riester contracts. The new ICA should make it the industry standard. The following scenario may now be looming: The new VVG comes into force in 2008. A short time later, the Federal Labour Court decides and follows the lower court in Munich. This would mean that, after the new Insurance Contract Act came into force, an essential point of the dewy VVG would already be wastepaper. But maybe it won’t be so bad after all. In internal discussions, BAG Judge Reinecke is said to have somewhat relativized his drastic statements on Zillmerung. Perhaps in the end a Solomonic verdict will emerge: Zillmerung no, distribution over five years yes.
(PERFORMANCE 5/2007, 52)
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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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