Recent labour law judgements on company pension schemes

1. Employer contribution pursuant to Sec. 1a para. 1a BetrAVG and deviating collective bargaining agreement pursuant to Sec. 19 para. 1 BetrAVG (German Federal Labour Court judgement of 8 March 2022, 3 AZR 362/21)

In its judgement of 08.03.2022 (3 AZR 362/21), the German Federal Labour Court (Bundesarbeitsgericht, "BAG") had the opportunity for the first time to apply its "factual context" judgement on the catalogue of regulations stipulated in Sec. 19 para. 1 BetrAVG of the statutory provisions of the BetrAVG that are tariff-dispositive of collective agreements also to the statutory employer contribution in the case of deferred remuneration pursuant to Sec. 1a para. 1a BetrAVG.

In the case underlying the decision, the defendant employer, who is not a member of an employers' association, had concluded a company collective bargaining agreement with IG Metall on 15 April 2019 ("Firm CBA"), which essentially stipulated the dynamic application of the regional collective bargaining agreements of the wood and plastics processing industry in the Lower Saxony and Bremen area and here, inter alia, the collective bargaining agreement on company pensions ("CBA bAV") of 9 December 2008 to the employment relationships with the employees covered by the collective bargaining agreement. The CBA bAV includes a commitment on company pension schemes which consists of a basic employer contribution and a potential employee contribution based on deferred remuneration. The collectively agreed basic employer contribution amounts to 25 times the skilled worker's basic remuneration per calendar year; this corresponded to EUR 442/year for the calendar year 2019 and EUR 453.48/year for the calendar year 2020. The CBA bAV was not modified by the parties to the collective agreement following the entry into force of the Act to Strengthen Company Pensions (Betriebsrentenstärkungsgesetz, "BRSG"); in particular, it was not supplemented by a provision comparable to the statutory employer contribution pursuant to Sec. 1a para. 1a BetrAVG.

After the entry into force of the in-house collective agreement, the employer agreed upon a deferred remuneration agreement with the tariff-bound employee who was filing a suit on the basis of the company pension agreement of the CBA bAV, according to which the employer used a monthly contribution of EUR 86.83 to build up expectancies from the company pension agreement with effect from 1 November 2019, which consisted of a deferred remuneration contribution of EUR 50 and the employer's basic contribution of EUR 36.83. After the conclusion of the deferred compensation agreement, the employee requested the granting of the statutory employer contribution pursuant to Sec. 1a para. 1a BetrAVG on his deferred remuneration in the amount of EUR 7.50 per month. This was done on the grounds that the CBA bAV did not contain a deviating collective agreement provision from Sec. 1a para. 1a BetrAVG admissible according to Sec. 19 para. 1 BetrAVG, as it had been concluded before the BRSG came into force. The house TV was already not a collective agreement within the meaning of Sec. 19 para. 1 BetrAVG as it was limited to a mere reference to the CBA bAV and did not contain any independent regulation - which, according to the claimant, was relevant for the application of Sec. 19 para. 1 BetrAVG.

The BAG dismissed the claim. It argued that the Firm CBA included a collective agreement within the meaning of Sec. 19 para. 1 BetrAVG. Any collective agreement could be considered a collective agreement pursuant to Sec. 19 para. 1 BetrAVG, so that (company) collective agreements referring to selected association collective agreements could also constitute a collective agreement pursuant to Sec. 19 para. 1 BetrAVG, provided that their scope of application is closely related to the scope of application of the referring collective agreement norm. This was to be affirmed for collective agreements deviating from the statutory employer contribution pursuant to Sec. 1a para. 1a BetrAVG if the relevant collective agreements contained a distribution of the economic benefits and burdens of deferred remuneration deviating from Sec. 1a para. 1a BetrAVG. Such a regulatory system deviating from Sec. 1a para. 1a BetrAVG was to be affirmed for the CBA bAV with its graduated regulation for the employer's basic contribution and for the deferred compensation. Moreover, the Firm CBA had been concluded after the entry into force of the BRSG, so that, taking a typifying view, it could be assumed that the parties to the collective agreement, when concluding the house TV, had taken into consideration the legal development of the BRSG with the first statutory regulation of the employer contribution according to Sec. 1a para. 1a BetrVG.

Conclusion

With this judgement, the BAG continues its "factual context" case law on the potential modification by collective agreements of the statutory provisions of the BetrAVG tariff-dispositive of collective agreements listed in Sec. 19 para. 1 BetrAVG also for the statutory employer's contribution pursuant to Sec. 1a para. 1a BetrAVG. In this context, it remains to be clarified whether the statutory employer contribution pursuant to Sec. 1a para. 1a BetrAVG can also be excluded by a collective agreement pursuant to the aforementioned principles if the collective agreement was concluded before the BRSG. The BAG expressly left this legal question open in its judgement. From the point of view of company pension law and collective agreements, there are important reasons for assuming such a tariff-dispositive effect also for collective agreements concluded before the entry into force of the BRSG, provided that they contain provisions in the factual context of the statutory employer contribution according to Sec. 1a para. 1a BetrAVG.

2. (Broad) Scope for assessment by the parties to the undertaking in the content-related structuring of a pension agreement - eligibility for pension of variable remuneration components (BAG judgment of 25 January 2022, 3 AZR 406/21)

In its judgement of 25 January 2022 (3 AZR 406/21), the BAG had the opportunity to continue its case law on the discretion of the parties in the determination of the content-related remuneration parameters of a company pension scheme agreement and a different treatment of non-tariff/tariff employees in this context.

In the case underlying the decision, the defendant employer had granted its employees covered by collective agreements and non-tariff employees a pension scheme agreement in the form of a final remuneration-related direct commitment on the basis of a general works agreement (Gesamtbetriebsvereinbarung, "GBV bAV"). The amount of the pension benefits was to be based on the monthly gross remuneration received by the employee in the last 36 months of his employment. The GBV bAV explicitly stipulated the remuneration components to be allocated to the monthly gross remuneration, which included performance-related remuneration components, and explicitly excluded the consideration of year-related remuneration components for the determination of the pension benefits. On the basis of another company agreement, the employer granted its employees a variable remuneration ("VAZ") which is paid on a monthly basis for employees covered by collective agreements and on an annual basis for non-tariff employees - and to that extent is taken into account by the employer for the pensionable income (1) of the employees covered by collective agreements, and (2) of the non-tariff employees is not taken into account. The claimant employee not covered by collective bargaining agreements, asserted that the VAZ should be taken into account when determining the amount of his pension benefits after he became eligible for pension benefits and justified this, inter alia, by arguing that not taking the VAZ into account as opposed to taking it into account for the pension benefits of employees covered by collective bargaining agreements violated the principle of equal treatment under works constitution law.

The BAG dismissed the claim. In its justification, it stated that the VAZ are granted to non-tariff employees on an annual basis and are therefore not to be allocated to the monthly gross remuneration pursuant to the GBV bAV. The resulting unequal treatment of the non-tariff employees compared to the tariff employees with regard to the (non-)consideration of the VAZ in the calculation of the pension benefits did not violate the principle of equal treatment under works constitution law. The parties to the works agreement may assume, taking a typical and generalised overall view, that employees not covered by collective agreements are more able than employees covered by collective agreements to make provisions for their own retirement from their higher remuneration and for this reason determine differentiated provisions on the (non-)consideration of individual remuneration components as calculation parameters for the amount of the pension benefits between these two groups of employees.

Conclusion

In its judgement, the BAG confirms its case law on the standardising and estimating assessment scope of the business parties when determining the calculation parameters for the content-related structuring of a company pension scheme agreement and a different treatment of non-tariff/tariff employees made in this context. At the same time, employers should carefully derive and document the relevant assessment parameters in order to be able to explain the reasons for the different treatment of the individual employee groups in individual cases.

3. Payment of a surrender value from a terminated (direct) insurance contract after termination of the employment relationship if the vesting of pension benefits from the company pension scheme commitment is not achieved - not a company pension scheme within the meaning of Sec. 229 para. 1 s. 1 no. 5 SGB V (LSG Baden-Württemberg, judgement of 2 August 2022, L 11 KR 3297/21)

According to Sec. 229 para. 1 s. 1 no. 5 and s. 3 SGB V, pension benefits received from a company pension scheme constitute income of the beneficiary subject to social security contributions for the statutory health insurance. The German Federal Social Court (Bundessozialgericht, "BSG") had already ruled in the past that, in addition to the regular pensions and lump-sum benefits expressly covered by Sec. 229 para. 1 s. 1 no. 5 and S. 3 SGB V, the obligation to pay contributions for benefits earned during the term of the employment relationship relevant to the company pension scheme agreement also applies to severance payments on vested pension rights (BSG judgement of 25 April 2012, B 12 KR 26/10 R). In its judgement of 02.08.2022, the Higher Social Court Baden-Württemberg (LSG Baden-Württemberg) had the opportunity to assess whether such an obligation to pay contributions also exists for the payment of a surrender value from a terminated (direct) insurance contract after termination of the employment relationship if the vesting of pension benefits from the company pension scheme agreement is not achieved.

In the case underlying the decision, the employer had granted the claimant employee a company pension scheme in the form of direct insurance with effect from 1 October 2003. The employee terminated the employment relationship after a period of five months with effect from 29 February 2004 in order to subsequently commence work as a self-employed farmer. After termination of the employment relationship, she had the insurance transferred to her by the employer and continued the insurance with her own contributions. She terminated the insurance with effect from 31 October 2019 and received the surrender value from the insurance company in the amount of EUR 12,341.99 on 5 November 2019. The defendant health insurance company subsequently assessed health insurance contributions in accordance with Sec. 229 para. 1 s. 1 no. 5 and s. 3 SGB V on the share of the surrender value of EUR 771.37, which was based on contributions from the employment relationship. It justified the determination by stating that this part of the payment of the surrender value included a pension payment from the company pension scheme agreement, since it was established exclusively on the basis of the company pension scheme agreement and was subsequently implemented. The early payment to the claimant did not change the nature of the pension. The lump-sum payment received by the claimant ultimately only resulted from an early surrender of this direct life insurance policy initially contracted for old-age pension purposes, which should actually have been paid out at a later date. The claimant's decision alone to have the benefits from the direct insurance paid out early could not possibly affect this. If this circumstance would lead to exemption from contributions, it would be up to the pension recipient to decide whether the pension payment was subject to contributions or exempt from contributions. The Social Court of Constance dismissed the action for annulment filed by the claimant against the decision on identical grounds.

The LSG Baden-Württemberg allowed the claimant's appeal against the decision of the court of first instance. The payment of the surrender value of a direct life insurance policy in the event of non-achievement of the statutory vesting of the pension benefits in the event of early termination of the employment relationship due to non-fulfilment of the required minimum length of service (and in the facts at issue also due to the claimant's young age) according to Sec. 1b para. 1b para. 1 BetrAVG did not include a capital payment in connection with the company pension scheme and was therefore not subject to the obligation to pay contributions according to Sec. 229 para. 1 s. 1 no. 5 and s. 3 SGB V. The claim to the payment of the surrender value was in this respect not part of an operational pension benefit, but rather (only) the consequence of the termination of the insurance contract and the associated rescission of the direct insurance. This also distinguishes the payment of the surrender value from the early settlement of a vested claim from a direct insurance, where the insurance contract is terminated in a contractually stipulated manner and therefore the capital benefit paid out as severance payment has the sufficient connection with the company pension scheme agreement required for the obligation to pay contributions according to Sec. 229 para. 1 s. 1 no. 5 and s. 3 SGB V.

Conclusion

The decision of the LSG Baden-Württemberg completes the puzzle of case constellations that have to be noted in practice for the assessment of the obligation to pay contributions for benefits from or in connection with company pension scheme agreements within the framework of Sec. 229 para. 1 s. 1 no. 5, and s. 3 SGB V. The differentiation of the obligation to pay contributions made by the LSG Baden-Württemberg, according to the vesting of the benefits earned with the contribution payments during the term of the employment relationship, is plausible from the perspective of company pension law. The defendant health insurance fund has filed an appeal against the second-court judgement with the BSG (B 12 KR 4/22 R), so that the final decision of the BSG on this case constellation is still pending.

4. Admissibility of the conversion of a pension benefit to a lump-sum benefit if the employee has a right to choose (LAG Düsseldorf judgment of 9 February 2022, 12 Sa 746/21)

The German Federal Labour Court has already ruled in its judgement of 15 May 2012 (3 AZR 11/10) that an employer can effectively modify the benefit structure of a company pension scheme agreement from an originally granted pension benefit to a lump-sum benefit in any case if the employee is (still) entitled to the granting of the pension benefits as a pension benefit in the form of a right to choose that is not dependent on further content-related requirements. If the option does not exist to this unrestricted extent, the effectiveness of the conversion of the pension benefit to a lump-sum benefit requires an independent justification according to the case law of the German Federal Labour Court, which must be performed on the basis of an overall assessment of the circumstances of the individual case. In addition to economic reasons (in particular, if the employer is no longer in a position to cover the costs of the previous pension scheme, including the review of adjustments), any improvements in benefits due to an increase in the funding framework must be weighed in favour of the employer against the disadvantages of the employee resulting from the conversion (in particular, with regard to the higher tax burden on lump-sum benefits, the lower seizing protection and the obligation to review adjustments according to Sec. 16 BetrAVG, which no longer exists in the case of a lump-sum benefit).

In its judgement of 9 February 2002, the Higher Labour Court Düsseldorf (LAG Düsseldorf) had the opportunity to assess the aforementioned legal principles of the German Federal Labour Court for the case of a partial conversion of the pension benefit to a lump-sum benefit (partial capitalisation) and to further substantiate them in relation to the facts of the case.

In the facts in dispute, the defendant employer had originally granted the claimant employee a company pension scheme agreement in the implementation method of a direct commitment on the basis of a Spokespersons' Committee Agreement (Sprecherausschussvereinbarung, "SPA") (SPA 1995) concluded in 1995, which included final remuneration-related monthly pension benefits and an additional annual Christmas bonus in the event of retirement, whereby an adjustment of the pension benefits was to be performed according to the scheme of Sec. 16 BetrAVG. In the further Spokespersons' Committee Agreement (SPA 2004) concluded with the Spokespersons' Committee in 2004, the employer modified the SPA 1995 in such a stipulation that after 31 December 2003 as the redemption date, entitlements could be earned by way of a defined contribution plan (BOLZ), whereby a starting module was determined for the pension benefits earned up to the redemption date on the basis of the actuarial calculation parameters specifically stipulated in the SPA 2004. The BOLZ scheme of the SPA 2004 stipulated an annual pension module (basic contribution) for the vested pension rights (1), which was to be calculated from 3% of the contributory remuneration up to a maximum of EUR 48,000 per year and a pension factor, and (2) an annual lump-sum capital contribution (top-up contribution), which was calculated from the sum of (i) 3% of the contributory remuneration based on the difference between the upper limit and the respective statutory income threshold and (ii) 13% of the contributory remuneration exceeding the statutory income threshold. The employer contributed the top-up contribution to a provident fund and allocated the employees benefiting from the pension scheme notional shares in the provident fund with which the employees could participate in the development of the fund's assets. The SPA 2004 stipulated pension benefits from the earned basic contributions, which were to be adjusted at 1% per year, and a capital benefit from the earned top-up contributions. The amount of the capital benefit was stipulated according to a guaranteed capital share and a surplus participation dependent on the development of the fund assets. According to the SPA 2004, the individual employee with a pension benefit had the right to choose whether to receive the lump-sum benefit as a lump-sum payment or in a maximum of five instalments.

The employment agreement concluded between the claimant parties stipulated that the employer and the employee each had the right, under stipulated conditions, to terminate the employment relationship before reaching the statutory age limit after reaching the age of 62. The employee exercised this option right when he reached the age of 62 in 2020. On the basis of the SPA 2004 (and the associated replacement of the SPA 1995 by the SPA 2004), the employer calculated, in relation to 1 February 2023 as the date of the employee's retirement age relevant for retirement benefits pursuant to the SPA 2004, from the earned basic contributions a monthly retirement pension of EUR 1,910.20 and from the earned top-up contributions a lump sum benefit of EUR 170,700, the amount of which consisted of the guaranteed lump sum of EUR 120,590.06 and a surplus participation of EUR 38,116 according to the state of fund development on 14 November 2019 as well as notional surpluses of EUR 12,000 calculated by the employer for the period between 14 November 2019 and 01 February 2023. The employee rejected this calculation and claimed monthly pension benefits from the employer in the amount of EUR 3,117 according to the SPA 1995. He based his claim on the fact that the SPA 2004 could not effectively replace the SPA 1995, as the employer could not cite any justification for the replacement according to the above-mentioned legal principles of the German Federal Labour Court. The employer rejected the claim sought by the employee on the grounds that the SPA 1995 had been validly replaced, which meant that the pension benefits calculated by the employer pursuant to the SPA 2004 exceeded the amount of the pension benefits that could be earned by the employee pursuant to the SPA 1995, whereby the employer could also have taken into account the surplus participation for the assessment of the advantage with regard to the capital benefit. Without the consideration of the surplus participation, the benefit assessment would be in favour of the pension benefits according to the SPA 1995. In addition, in order to justify the replacement of the SPA 1995 by the SPA 2004, the employer's interest in standardising the more than 200 existing company pension scheme agreements for its executives prior to the enforcement of the SPA 2004 had to be taken into account, and with regard to the lump-sum benefit, the employer had granted the employee the right to choose a capital benefit in rates in the SPA 2004. The employee then took legal action for the pension benefit he was claiming according to the SPA 1995. The Labour Court Düsseldorf upheld the claim. The employer appealed against the judgement of the court of first instance to the LAG Düsseldorf.

The LAG Düsseldorf dismissed the appeal. In essence, it confirmed the legal principle of the German Federal Labour Court that an employer can effectively modify the benefit structure of a company pension scheme agreement from an originally granted pension benefit to a lump-sum benefit in any case if the employee is (still) entitled to receive the pension benefits as a pension benefit in the form of a right to choose which is not dependent on further content-related preconditions. In the present case, the employer had not granted the employee such an option in the SPA 2004. The option stipulated in the SPA 2004 to pay out the lump-sum benefit in instalments did not include such a right of choice, as it did not contain an equivalent option to choose an old-age pension in view of the non-application of Sec. 16 BetrAVG (also not) to the lump-sum benefit in rates. The employer's intention to replace the SPA 1995 by the SPA 2004 did not meet the criteria of objective justification pursuant to the above-mentioned case-law of the German Federal Labour Court, the application of which the LAG Düsseldorf also affirmed in the case of the partial capitalisation of pension benefits into a lump-sum benefit. In essence, the justification was already not given because the employer could not take into account the employee's surplus participation for the consideration of the advantageousness with regard to the lump-sum benefit, as this was not guaranteed, and the amount of the pension was thus only calculable to a limited extent. In addition, the LAG Düsseldorf recognised that the interest in standardisation cited by the employer for the replacement could not be used as a justification criterion for the weighing of interests, as it was to be regarded as value-neutral with regard to a (partial) capitalisation.

Conclusion

In its decision, the LAG Düsseldorf clearly substantiates the differentiated criteria already elaborated by the German Federal Labour Court in its judgement of 15 May 2011 when assessing the effectiveness of the employer's intended capitalisation of pension benefits and, in particular, points out the focus to be placed on the material quantitative assessment. In such a material quantitative assessment, the argument often used in practice in the past for the capitalisation of pension benefits, namely the standardisation of company pension scheme agreements, would have no relevance. Of great importance for practice is, among other things, the rejection by the LAG Düsseldorf of the consideration of surplus shares in the assessment of advantageousness due to the lack of a contractual guarantee. However, depending on the concrete design of the capital structure, surplus shares can have a significant share in the total capital benefit. The employer has appealed against the decision of the LAG Düsseldorf (3 AZR 208/22). It remains to be determined whether the German Federal Labour Court will confirm the aforementioned legal principles recognised by the LAG Düsseldorf.

_{Published: November 2022}