Insolvency protection of company pension schemes via pension fund
(„Günther Bauer ./. PSV“, ECJ judgment of 19.12.2019, C-168/18)
In its ruling of December 19, 2019, the European Court of Justice (ECJ) ruled that company pension commitments (BAV commitments) via pension funds are also subject to special insolvency protection in accordance with Article 8 of the EU Directive on the protection of employees against the insolvency of their employer (Directive 2008/94/EC). The ECJ further held that employees may also claim this special insolvency protection against the individual EU member state if the existing domestic legal provisions do not provide for a sufficient level of protection. The ruling will lead to a material modification of the statutory insolvency protection for such BAV commitments - its economic significance becomes clear from the legal positions of the instance courts involved in this multiact piece.
Prologue: The special insolvency protection under Article 8 of Directive 2008/94/EC, its previous interpretation by the ECJ... and the status quo in German company pension law
According to Art. 8 of Directive 2008/94/EC, the Member States must ensure that the necessary measures are taken outside the national statutory social security schemes to protect employees and their descendants under occupational pension schemes.
The purpose of this statutory requirement is to ensure that pension beneficiaries can continue to benefit economically from the pension benefits promised in the company pension scheme even if their employer becomes insolvent. It instructs the Member States to establish adequate protection mechanisms to this end.
In its previous case law, the European Court of Justice had recognized that sufficient protection of pension beneficiaries under Article 8 of Directive 2008/94/EC did not require the member state to provide comprehensive protection of pension claims.
In principle, the necessary adequate protection was already guaranteed if the protective mechanisms provided covered at least 50% of the promised pension benefits.
Exceptionally, the protection should have to go beyond this minimum threshold, in particular if the losses to be accepted by the employees due to the insolvency of the employer were obviously disproportionate, whereby the ECJ had not yet defined the content of the criterion of obvious disproportionality.
The German legislator has so far implemented the requirement under Art. 8 of Directive 2008/94/EC by providing for statutory insolvency protection in Sections 7 et seq. of the German Company Pensions Act (BetrAVG). Under current legislation, this statutory insolvency protection essentially covers pension benefits from direct commitments and via support funds and pension funds (§ 7 (1) sentence 2 no. 2 BetrAVG) and - under the restrictive provisions of § 7 BetrAVG - from BAV commitments via direct insurance (§ 7 (1) sentence 2 no. 1 BetrAVG).
1st act: The facts of the case... and the startling intermezzo of the Higher Labor Court Cologne (LAG Köln): PSV's obligation to assume liability under § 7 BetrAVG
The employer granted the employee born in 1950 a BAV commitment as a direct commitment and a BAV commitment via pensions fund from Pensionskasse der Deutschen Wirtschaft (PKDW). The employment relationship was terminated in 2000. As of December 1, 2000, the employee received invalidity benefits of EUR 5,237.85 per year from the BAV commitment as a direct commitment and EUR 10,533.72 per year from the BAV commitment via the PKDW.
In 2002, the PKDW got into financial difficulties. In 2003, the general meeting of PKDW decided to gradually reduce the pension benefits to be provided by PKDW by a total of 13.78% over an 11-year period.
The employer initially compensated the employee for the pension benefits not (or no longer) provided by the PKDW due to the reduction on the basis of its obligation under company pension law to pay the costs arising from § 1 (1) sentence 3 BetrAVG.
Insolvency proceedings were then opened for the employer's assets on January 30, 2012.
The German Pension Security Fund (Pensionssicherungsverein, PSV) informed the employee on September 12, 2012 that it would assume the payments from the direct commitment. However, the PSV refused to pay the employee the amount of EUR 2,443.20 per year resulting from the reduction in benefits of the PKDW, which was also demanded by the employee. The employee then sued the PSV for payment of this amount as well.
In its - unpublished - judgement of January 1, 2014 (6 Ca3482/13), the Labour Court Cologne, as competent first instance court followed the view previously held in case law and denied statutory insolvency protection in accordance with the provisions of the BetrAVG, without going into the require-ments of Art. 8 of the Directive in more detail. The Higher Labor Court Cologne in the second instance granted the action on the appeal filed by the plaintiff (judgement of October 2, 2015, 10 Sa 4/15).
It derived the PSV's obligation to meet its obligations from the statutory insolvency protection under § 7 BetrAVG. This was based on the argument that the obligation to pay compensation under § 1 (1) sentence 3 BetrAVG contained an original obligation of the employer under the BAV commitment, was to be treated as a direct commitment from the point of view of insolvency law and therefore the employee's compensation claims under § 1 (1) sentence 3 BetrAVG were also subject to the statutory insolvency protection under § 7 BetrAVG.
2nd Act: The order for reference of the BAG ... and the striking opinion of the Advocate General at the ECJ: Comprehensive protection of the pension beneficiary from Art. 8 of Directive 2008/94/EC
The German Federal Labor Court (Bundesarbeitsgericht - BAG), which was called in to decide on the basis of the appeal lodged by the PSV, did not share the opinion of the Higher Labor Court Cologne and, by order of February 20, 2018 (3 AZR 142/16 (A)), referred questions concerning special insolvency protection to the ECJ for a preliminary ruling.
In the order for reference for a preliminary ruling, the BAG stated that the BetrAVG does not, in the BAG's understanding, stipulate any obligation on the part of the PSV to pay the compensation claim of the pension beneficiary under § 1, Subsection 1, Sentence 3, BetrAVG.
In the context of the reference for a preliminary ruling, the BAG referred the following four questions on special insolvency protection to the ECJ for a preliminary ruling:
(1) Are company pension commitments made by the pension fund also subject to the protection under Art. 8 of Directive 2008/94/EC?
(2) Can a pension beneficiary also claim the special insolvency protection under Article 8 of Directive 2008/94/EC before a national court directly against the Member State (in this case: against the Federal Republic of Germany)?
(3) If a direct claim against the Member State can be assumed: Can the pension beneficiary turn to the PSV as a public body?
(4) Under what circumstances is there a manifest disproportionate loss to the pension beneficiary?
In his opinion of 8 May 2019, the Advocate General (Gerard Hogan) answered the first two questions in the affirmative. In his opinion, he criticized the previous ECJ case law on the limited protection of pension claims and pointed out that Article 8 of Directive 2008/94/EC does not restrict the protection of the beneficiary in terms of content and therefore, in his opinion, all benefits affected by the employer's inability to pay should generally be protected by the Member State.
3rd act: The judgment of the ECJ... and the one-two pass with the BAG
In its ruling of December 19, 2019, the European Court of Justice recognized that company pension commitments in the pension fund implementation path are also subject to the protection of Art. 8 of Directive 2008/94/EC and thus continues its case law on the limited protection of pension entitlements. At the same time, the Court declares that a manifest disproportionality of the loss for the pension beneficiary exists if the loss is not only minor or if the pension beneficiary is likely to be unable to cover his or her living expenses due to the loss. According to the ECJ, the latter should be the case if the pension beneficiary is already below the poverty risk threshold relevant for the Member State concerned due to the reduction of pension benefits associated with the loss.
The ECJ further recognized in the ruling that a pension beneficiary can also claim the special insolvency protection under Art. 8 of Directive 2008/94/EC from the individual member state. The PSV could be regarded as a public body if the statutory provisions of the BetrAVG provided for a claim of the pension beneficiary against the PSV for compensation for the reduction in benefits; the BAG had to answer this question in continuation of the legal dispute.
4th Act: The expected decision of the BAG
If the BAG maintains its interpretation of the law as discernible from the reference for a preliminary ruling, according to which the BetrAVG does not provide for a protection of the insolvent employer's obligation to pay for the reduction of pension fund benefits, it will not be able to avoid taking a position on the legal question of a direct claim of Mr. Bauer against the Federal Republic of Germany for compensation for the reduction in benefits.
5th Current Epilogue: The legislator is called upon to achieve a balanced legal structure for special insolvency protection
The sensation feared in view of the opinion of the Advocate-General, which was quite vehement in his view of the need for comprehensive protection of those entitled to pensions, did not materialize for the time being.
However, the ECJ has de facto instructed the legislator to regulate insolvency protection from company pension commitments via pension fund. The German Ministry of Labour and Social Affairs has already initiated the legislative process (see also DPEsche; available in German only).
In view of the Advocate General's aggressive arguments, the draft bill will also have to take into account the design of the minimum level of protection.
It also remains to be seen whether the legislature will take into account in the further legislative procedure not only the inclusion of company pension schemes via pension fund in the statutory insolvency protection via the PSV and the associated arrangement of the financing of such special insolvency protection in line with the interests of the company, but also alternative insolvency-proof arrangements.
We will keep you up to date on the further development of the legislative process and the Günter Bauer ./. PSV legal proceedings.