Company pension law – Case Law update 1/2024

1. Payment of company invalidity pension may be made dependent on legal termination of the employment (BAG judgements of 10 October 2023, 3 AZR 250/22, and of 21 November 2023, 3 AZR 14/23)

In its judgements of 10 October 2023 (3 AZR 250/22) and 21 November 2023 (3 AZR 14/23), the German Federal Labour Court (Bundesarbeitsgericht, BAG) had the opportunity to recognise that the condition of legal termination of the employment stipulated in an overall commitment (Gesamtzusage) (3 AZR 250/22) or in a works agreement (Betriebsvereinbarung) (3 AZR 14/23) for the granting of a company disability pension is effective.

In each case, the parties disputed the plaintiff's entitlement to payment of a company invalidity pension prior to the legal termination of the employment. In the facts underlying the decision 3 AZR 250/22, the defendant employer had promised the plaintiff employee, among other things, invalidity pension benefits in an overall commitment (ZVO 1981), whereby the ZVO 1981 stipulated, among other things, the receipt of the statutory invalidity pension and the legal termination of the employment as a prerequisite for the granting of benefits. The plaintiff was granted a statutory reduced earning capacity pension for the period from 1 November 2020 to 31 August 2022 by decision of the German Federal Pension Insurance (DRV Bund) dated 6 January 2021. He then claimed invalidity benefits from the defendant under ZVO 1981, which the defendant rejected in a letter dated 15 March 2021, referring to the fact that the employment had not yet been legally terminated. The plaintiff then terminated the employment on 20 August 2021 with notice to 31 March 2022. The defendant granted the plaintiff company invalidity pension benefits from 1 April 2022. The plaintiff filed a claim for invalidity pension benefits also for the period from 1 February 2021 to 31 March 2022. 

In the facts underlying the decision 3 AZR 14/23, the defendant employer had promised the company disability pension benefits in a works agreement (VR 1979), which provided for identical conditions for disability pension benefits as the ZVO 1981. The plaintiff employee was promised a statutory disability pension with retroactive effect from 1 February 2020 by decision of the DRV Bund dated 9 August 2021; he claimed the company invalidity pension benefits from the defendant with effect from 7 September 2021 without having terminated the employment.

The BAG dismissed the claim in each case. It considered the determination of the legal termination of the employment as a prerequisite for the granting of invalidity pension benefits to be effective on the basis of the respective substantive standard of review (Section 75 of the German Works Constitution Act (Betriebsverfassungsgesetz, BetrVG) for ZVO 1981 as a works agreement and Section 307 of the German Civil Code (Bürgerliches Gesetzbuch, BGB) for the VR 1979 as an overall commitment subject to general terms and conditions). The BAG initially clarified - in continuation of its case law - that the term "invalidity" is determined according to the general social insurance law conditions in the absence of a separate definition in the company pension commitment. When assessing the substantive validity of the condition of a terminated employment for the granting of invalidity benefits, it must be taken into account as part of the balancing of interests that the employer granting the pension has a legitimate interest in avoiding double benefits to the employee and ensuring planning security for the employee's job, which is significantly increased by the legal termination of the employment relationship. On the other hand, the beneficiary has a legitimate interest in deciding autonomously whether the employment should be maintained or terminated. This interest of the employee is safeguarded, as the employee is aware of all relevant circumstances (in particular health situation, the amount of the statutory invalidity pension benefits), so that the employee can decide on this basis whether and for how long they wish to maintain the employment. If the employee wishes the employment to continue, he must accept in return that there is no entitlement to payment of the pension during this time. This means that the conflicting interests are at least equally weighted.

Consequences for practice

The BAG's decisions create legal certainty for employers when structuring the content of invalidity benefits in company pension commitments. They confirm common practice - employers can or should include the legal termination of the employment as a prerequisite for granting the relevant invalidity benefits in the company pension commitment after these decisions at the latest.

2. Eligible pensionable periods in a company pension commitment (BAG judgement of 10 October 2023, 3 AZR 312/22)

In its decision of 10 October 2023 (3 AZR 312/22), the BAG had the opportunity to continue its case law on the legal methodological interpretation of collectively agreed provisions on the content of occupational pension commitments.

In the case underlying the decision, the defendant employer (BARMER GEK) had promised the plaintiff employee a company pension commitment via a company collective agreement (TV BAV) concluded with ver.di, which, among other things, provided for a retirement pension depending on length of service.

In accordance with Clause 3 TV BAV, the retirement pension was calculated according to the uninterrupted period of employment of the pension beneficiary in the employment with the defendant and amounted to 0.34% of the pensionable salary for each full year of employment. The framework collective agreement (MTV) also applicable to the employment concluded by the defendant with ver.di defined, among other things, the period of employment as an uninterrupted period of employment and training and, in Section 6.3 MTV, allowed employees who were entitled to a severance payment upon termination of the employment on the basis of a collective agreement or a service agreement to demand that the employer continue the employment relationship beyond the intended termination date by releasing them from their work obligations instead of paying the severance payment. The MTV stipulated the following regulation for the remuneration of the employment relationship during this continuation period:

"During this continuation of the employment, the employee shall only be entitled to monthly remuneration in the amount of the salary applicable prior to the envisaged termination date [...] In the event of termination during the course of a calendar month, there shall be a pro rata entitlement to remuneration in accordance with the remaining duration of the employment in this calendar month. The employment ends at the latest at the point in time at which the employer has paid a total amount for the continued payment of remuneration, including the social security contributions to be borne by it and contributions or allocations to a supplementary pension scheme, which would have corresponded to the severance payment to be paid."

In 2014, the defendant carried out a comprehensive reorganisation with a voluntary programme and also concluded a collective agreement with ver.di, which, among other things, stipulated a severance payment entitlement for the employees affected by the staff reduction. The plaintiff's employment was affected by the reorganisation and the parties concluded a termination agreement to this effect, which in its starting point determined a termination of the employment relationship on 31 December 2014 and according to which the plaintiff exercised the above-mentioned option to use the severance payment to extend the employment relationship until 31 May 2018 with commercial use of the severance payment for the plaintiff's monthly remuneration during this extension period. The defendant granted the plaintiff retirement pension benefits from 1 June 2018 in accordance with the company pension commitment, whereby it only used the period of employment up to 31 December 2014 as the pensionable period for determining the amount of the pension benefits and calculated a monthly gross retirement pension of EUR 146.04 on this basis. The plaintiff also requested that the period from 1 January 2015 to 31 May 2018 be taken into account as pensionable periods for the retirement pension benefits from the company pension commitment and brought an action before the labour court. The labour court upheld the claim, while the court of second instance and the BAG dismissed the claim.

The BAG justified the dismissal of the action essentially on the basis of the result of its interpretation of Clause 6.3 MTV and Clause 3 TV BAV, which it arrived at on the basis of its established catalogue of interpretations based on the wording, meaning and purpose as well as the system of the two collective agreement provisions. Accordingly, the wording of Clause 3 TV BAV does not exclude the consideration of the period between 1 January 2015 and 31 May 2018 from the outset. However, the non-consideration of this period results from Clause 6.3 MTV, which, according to its regulatory purpose, should only give employees affected by a termination of the employment in return for severance payments the opportunity to extend the employment relationship - with simultaneous release from work - by converting the severance payment into additional employment time at no cost to the employer instead of the severance payment claimed. In this respect, the employee affected by the regulation should only receive his monthly remuneration for this period. These periods of employment should not be able to be taken into account - from the employer's point of view with an effect on expenses - for the establishment of further entitlements from the company pension commitment.

Consequences for practice

The BAG's decision is in line with the BAG's case law on the legal methodological interpretation of the legal basis of collective agreements, which the BAG has carried out in an exemplary manner in the present case. At the same time, the decision shows from the employer's perspective that relevant collective agreement regulations should contain transparent provisions on the relevant requirements and benefit parameters for the pension benefits from the outset and, within this framework, should also define the pensionable qualifying periods as clearly as possible.

3. 3-step theory extended: Replacement of a company pension commitment on the basis of a group works agreement - falsa demonstratio and economic situation of the group as a standard of assessment for the effectiveness of the replacement (LAG Hamm judgement of 27 September 2023, Sa 163/22).

In its judgement of 27 September 2023 (4 Sa 163/22), the Hamm Regional Labour Court (LAG Hamm) had the opportunity to discuss the content parameters of the principle of proportionality under company pension law based on the three-stage theory of the Federal Labour Court when regulating and replacing the occupational pension commitment in a group works agreement and also to deal with the legal question of how an employment contract reference clause to a company pension commitment that had already been replaced by a subsequent regulation at the time of the employment contract agreement should be interpreted.

In the case underlying the decision, the parties were in dispute over the amount of the retirement pension to which the plaintiff former employee was entitled. The plaintiff, who was born on 3 August 1955, had been employed since 1 April 1986 as a foreman in the joinery of a group company of the defendant (A-GmbH). It had been agreed in the employment contract that the company pension scheme would be based on a pension scheme from 1977 (PO 1977). 

On 1 January 1987, a group works agreement (Konzernbetriebsvereinbarung) was concluded which provided for the pension scheme to be replaced by a new pension scheme (PO 87) and led to lower benefits due to a change in the pension formula. The plaintiff transferred within the group to B-GmbH on 1 January 1989. At this time, B-GmbH and the plaintiff concluded a new employment contract, which also referred to PO 77 for the company pension scheme. This was followed by further transfers of undertakings to C-GmbH and finally to the defendant. Since 1 September 2020, the plaintiff has been drawing a statutory pension and a company pension from the defendant in the monthly amount of EUR 145.61 gross, which the defendant paid for the qualifying period until 1987 on the basis of PO 77 and for the subsequent pensionable employment period on the basis of PO 87.

The plaintiff was of the opinion that his pension commitment would be calculated exclusively on the basis of the provisions of PO 77 and that he would therefore be entitled to a monthly pension of EUR 500.85 gross; this was essentially based on the consideration that the employment contract as an individual contractual provision of the occupational pension commitment (also in the new version concluded in 1988) referred to PO 77 and could therefore not have been replaced by PO 87. In addition, the replacement was also not possible under substantive law, as the group had reported a balance sheet profit of more than DM 154 million in the financial year and an associated return on equity of more than 15%. He claimed the difference in the labour court.

The defendant defended its calculation of the pension benefits by arguing that the employment contract concluded with B-GmbH on 20 December 1988 had referred to the PO 87 in force at that time and invoked the principle of falsa demonstratio. The reduction in pension entitlements that accompanied the transition from PO 77 to PO 87 was also objectively justified due to the fact that the company was severely affected by the steel crisis. According to an actuarial report, the pension provisions would have doubled within 15 years from around DM 1.554 billion in 1985 to around DM 3.1 billion in 2000 - in view of the cohort of pension beneficiaries and the changes in the mortality tables since PO 77 to the detriment of the employer - and would not have been economically viable for the company.

The Dortmund Labour Court upheld the claim on the grounds that the employment contract provision in the new version of the employment contract in 1988 referred to PO 77, thus constituting an individual contractual commitment, and for this reason alone PO 77 could not have been replaced by PO 87.

The LAG Hamm dismissed the action on appeal by the defendant. It based the dismissal of the action on the consideration that no individual contractual commitment had been made in the employment contract in accordance with PO 77, but - according to the interpretation of the employment contract provision based on the principles of Sections 133 and 157 BGB - the parties wanted to refer to PO 87 in the employment contract and in this respect the "falsa demonstratio" principle had to be applied, which essentially focuses on the actual will of the parties. In this case, it was clear from the circumstances that the new version of the employment contract concluded in 1988 was not intended to give the plaintiff a commitment under the former PO 77 in view of the new PO 87 already in force and that PO 87, as a group works agreement, was also to be applied to the employment relationship in accordance with Section 77 (3) BetrVG.

The LAG Hamm assessed the content of the replacement of PO 77 by PO 87 on the basis of the principle of proportionality under company pension law on the basis of the three-stage theory of the BAG (see also our recent overview of current labour court case law in DPEsche 2/2023: https://www2.deloitte.com/dl/de/pages/legal/articles/rechtsprechung-betriebliche-altersversorgung-2-2023.html): According to this, the vested rights of the employees from the specific occupational pension commitment must be compared according to the employer's graduated, differently weighted grounds for intervention. Entitlements that have already been earned can only be restricted or withdrawn for compelling reasons (first-level intervention). Increases resulting from variable calculation factors independent of length of service can only be reduced for good cause (2nd level). Factual and proportional reasons are sufficient for interventions in pension entitlements that are dependent on length of service but have not yet been earned (3rd level).

In the present case, the LAG Hamm assumed - plausibly from a company pension law perspective - an intervention at the 3rd level. Such reasons exist if the employer's company is in economic difficulties and the employer reacts reasonably to this. If savings are initially made through a bundle of measures and these do not lead to success, the employer may react by reducing the company pension scheme in order to get a grip on the difficult economic situation. The intervention must not be arbitrary. In the opinion of the LAG Hamm, these conditions were met in the present case, i.e. the expected significant increase in provisions for pension commitments and the associated considerable burden that would have resulted from the continuation of PO 77. The LAG Hamm correctly considered that the balance sheet provisions in themselves only represent an instrument for the internal financing of the pension obligations, but that their increase, which is necessary in the long term, can be used by the employer for the 3rd stage if the increase in the provisions is necessary in the long term. In this case, they can form the factual-proportional reason for an intervention at the third level even if the company achieves a positive return on equity operationally at the time of redemption. The LAG Hamm carries out the assessment from a group perspective - this already follows from the legal basis of PO 77 and PO 87 in each case as a group works agreement and is also given if and because in the present case the necessary group interdependence between the pension debtor and the other group companies is given.

Consequences for practice

The legal dispute is currently pending before the BAG (3 AZR 255/23) and the BAG has scheduled the court hearing for 2 July 2024.

In terms of content, the legal principles established by the LAG Hamm, in particular on the "falsa demonstratio" interpretation of the contractual reference clause to PO 77 and on the legal assessment of the interference of PO 87 with PO 77 on the basis of the 3rd level of the proportionality principle under company pension law, are of particular importance. However, with regard to the assumed group-related approach, the mere status of the legal basis as a group works agreement is not entirely convincing and therefore the necessary group-related interdependence of the employer as the pension debtor must generally be required for the group-related approach in each individual case. In practice, the judgement once again raises awareness of the need to formulate employment contract reference clauses to applicable occupational pension schemes in a transparent and substantively correct manner.

4. Employer's obligation to assume liability for company pension benefits despite the statute of limitations vis-à-vis the pension provider (LAG Niedersachsen judgement of 24 April 2023, 15 Sa 125/22)

In its judgement of 24 April 2023 (15 Sa 125/22), the Lower Saxony Higher Labour Court (LAG Niedersachsen) had the opportunity to update the legal principles on the employer's obligation to assume liability for company pension commitments via an indirect implementation channel. 

The parties were in dispute over the payment of an occupational disability pension. The plaintiff, born in 1965, had been employed by B-Bank AG - the legal predecessor of the defendant - since 1 January 1990 and was entitled to a company pension scheme via the BVV pension fund under his employment contract. In 2001, the plaintiff rejected an offer to switch his pension scheme from the BVV Pensionskasse to the BVV Versorgungskasse. After the termination of the employment on 30 June 2003, his company pension insurance was continued on a non-contributory basis. The insurance provides for a monthly disability pension of EUR 189.29 gross. 

After the plaintiff was already classified as partially disabled in 2002, he was granted a pension for full reduction in earning capacity by the DRV Bund in January 2014 from December 2012 up to and including November 2015. Since March 2014, the claimant has been unable to work, meaning that the requirements for an occupational disability pension in accordance with the BVV statutes have been met ever since. Following a rejection by BVV Pensionskasse in August 2014, the plaintiff filed an action against BVV Pensionskasse before the Regional Court (LG) for payment of a monthly pension of EUR 189.29 in 2019. The Regional Court dismissed the claim on the grounds that the asserted claim had already become due with the rejection letter from BVV Pensionskasse in August 2014 (Section 14 (1) of the German Insurance Contract Act (Versicherungsvertragsgesetz, VVG), meaning that the 3 year limitation period under Section 195 BGB had already expired at the end of 2017. 

In the summer of 2021, the plaintiff finally brought the action on which this decision is based against the defendant as the legal successor to the original action. The plaintiff invoked the defendant's liability for the company invalidity pension promised to him. Despite the implementation of the occupational pension scheme via BVV Pensionskasse as an indirect pension provider, the defendant was liable for the benefit if the plaintiff was unable to enforce his claims against BVV. The Hanover Labour Court dismissed the claim with reference to a teleological reduction of Section 1 (1) sentence 3 BetrAVG. It would be contrary to the meaning and purpose of the provision if the pension provider's primary obligation to assume liability did not come into effect only because the employee had allowed his pension claim to lapse.  

The plaintiff's appeal against this decision before the LAG Niedersachsen was successful. 

In the opinion of LAG Niedersachsen, the occupational disability pension had already been due since 1 March 2014 in accordance with the insurance conditions of the BVV Pensionskasse. Even if the plaintiff had been granted a commitment to pay the company pension, which was implemented via a pension fund within the meaning of Section 1b (3) BetrAVG and therefore by an indirect pension provider, the defendant was liable for the benefit (subsidiarily) pursuant to Section 1 (3) sentence 3 BetrAVG. A teleological reduction of the provision is not necessary, as there is no unintended loophole and the purpose of the employer's obligation to assume liability is to provide special protection for the employee's claims to a company pension. For this reason, the plaintiff is entitled to the claim against the employer in addition to the claim against the external pension provider. 

In particular, the plaintiff's claims for pension payments against the defendant were not time-barred. Pursuant to Section 18a sentence 2 BetrAVG, benefits from the company pension scheme for recurring benefits are subject to the regular limitation period of the BGB. According to § 195 BGB, this is 3 years. The start of the regular limitation period is based on Section 199 (1) BGB. According to this provision, the regular limitation period begins at the end of the year in which the claim arose and the creditor became aware of the circumstances giving rise to the claim and the person of the debtor or should have become aware of them without gross negligence. In the present case, the limitation period could not have started before 31 December 2018 in accordance with these legal principles pursuant to Section 18a BetrAVG, as the plaintiff was prevented from bringing an action against the defendant until the end of 31 December 2017 (commencement of the limitation period vis-à-vis the pension provider) due to the primary liability of the pension provider. Joint and several liability of the pension provider and the employer does not arise from a contractual agreement or from statutory or general principles.

Consequences for the practice

The legal dispute is currently pending before the BAG (3 AZR 164/23) and the BAG has scheduled the hearing for 7 May 2024.

It remains to be seen whether the decision of LAG Niedersachsen will be confirmed by the BAG. Irrespective of this, the legal principles of the LAG Niedersachsen can be used to recommend that employers ideally clarify such issues or conflicts before the three-year limitation period under insurance law expires. In this context, it should also be noted that the regular limitation period of the BGB (of 3 years) pursuant to Section 18a sentence 2 BetrAVG applies exclusively to benefits from the company pension scheme for recurring benefits. According to Section 18a BetrAVG, claims from the company pension scheme, insofar as they are not recurring benefits such as pensions, generally only expire after 30 years.