GERMANY - A German court has ruled that charging upfront fees related to setting up a life insurance contract for corporate pensions is only partly within the legal framework for occupational pensions.

The ‘Zillmerung’ payment system, named after a German insurance mathematician, has caused controversy for many years as the practice see parts of a person’s salary which goes into an insurance-based occupational pension plan, the so-called “Direktversicherung”, means no assets are actually accrued initially but instead used to cover upfront fees.

While this is less of an issue over the longer term, it has caused problems for one German individual who wanted to leave a company three years after he had started putting parts of his salary into an occupational pension plan.

Instead of the €7,000 he paid in, he was only left with just over €4,000 and sued his employer for pay-back of the whole sum and annulment of the insurance contract.

The Federal Labour Court (“Bundesarbeitsgericht”, BAG) has now made a final verdict in the case after a first ruling in favour of the employee had been appealed and then went through several legal discussions.

According to the BAG, the employee knew of all the risks involved in this type of occupational pension plan and was therefore not entitled to a full pay-back of his contributions.

However, the court pointed out in its verdict that charging all costs upfront might be a “disproportionate disadvantage” for some employees, such as those leaving the company after only a few years.

It instead argued the payment of fees from accrued benefits should be staggered over five years - a practice that had been made compulsory for contracts signed after December 2007.

The court stressed in its verdict that while the BAG has now confirmed there are no rights to full pay-back from old contracts but those employees “might be entitled to higher benefits”, so employers might have to make extra payments.

As this question was not part of the appealed verdict, the BAG said it could not make a final decision on this issue.

In the meantime, the German insurance federation GDV welcomed by arguing the verdict ensured legal certainty for employers which have offered their staff this form of occupational pension plan.

 

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