Company pension law – Case Law update 1/2023

1. (Ineffective) reservation by the employer to grant an employer-provided pension benefit as a capital payment (BAG judgement 17 January 2023, 3 AZR 220/22)

In its judgement of 17 January 2023 (3 AZR 220/22), the Federal Labor Court (Bundesarbeitsgericht, BAG) had the opportunity to further substantiate and continue its case law on the alternative granting of an old-age pension benefit intended as monthly standard payments as a single capital payment.
In the case, the employer had granted the employee a company pension commitment via implementation path of pension fund (Unterstützungskasse). The benefit plan of the pension fund provided for the granting of pension benefits as annuity benefits and stipulated a reservation right of the pension fund to pay a one-time capital payment in the amount of 10 times the annual pension instead of the monthly pension payments. In 2021, after reaching her regularly retirement age, the employee applied to the employer to be granted the pension benefits from the company pension commitment. The employer informed the employee that it would exercise its right of reservation and settle the monthly pension payment of EUR 1,030.41 gross with a one-time capital payment of EUR 123,649.20 gross. The amount of the capital payment was lower than the present value of the company pension commitment. The employer subsequently paid out the capital payment. The employee rejected the capital payment, immediately repaid it to the employer and filed a lawsuit against the employer for payment of the monthly pension payments.

The BAG upheld the action. The right of reservation contained in the company pension commitment to grant the pension benefits as a single capital payment instead of monthly pension benefits included a right of substitution (facultas alternativa), which gave the employer the option of subsequently amending the company pension commitment with regard to the content of the pension benefits. In the actual exercise of the right of reservation, however, this was not compatible with the statutory AGB control regulations of Section 308 No. 4 of the German Civil Code (Bürgerliches Gesetzbuch, BGB). Pursuant to Section 308 No. 4 BGB, the agreement of a right of the employer in the specific contractual commitment to change or deviate from the promised performance is invalid if the change or deviation is unreasonable for the employer, taking into account the interests of the employer. Reasonableness is to be affirmed if the interests of the employer outweigh the typical interests of the employee or are at least equivalent. Such equivalence is said to exist in the case of the right of replacement if the single capital payment to be paid as a result of the replacement corresponds at least to the actuarial present value of the monthly pension payments. This equivalence was not given in the present case. The BAG rejected the existence of a genuine elective debt within the meaning of Section 262 BGB, which as such is generally free of general terms and conditions control, due to the wording of the clause in question.

The BAG also clarified that such a single capital payment option can only be exercised until the occurrence of the insured event, since an exercise of the single capital payment option and subsequent capital payment after the insured event includes a settlement of the pension benefits, which is not covered by Section 3 of the German Company Pension Scheme Act (Betriebsrentengesetz, BetrAVG).

Conclusion

The BAG's judgement is (only) partially consistent with its previous case law on the alternative granting of a single capital payment compared to originally promised monthly pension benefits. In its judgement ruling on this matter dated 15 May 2021 (3 AZR 11/10), the BAG announced that the effectiveness of the conversion of the pension benefit to a single capital payment requires an independent justification, which must be made on the basis of an overall assessment of the circumstances of the individual case - and stated in the judgement for the overall assessment as an interest that can be taken into account in favor of the employee, among other things, the pension increase opportunities from Section 16 BetrAVG as well as the higher attachment protection compared to the lump-sum benefit. The BAG did not address these aspects further in the reasons for its decision in the present judgement - which is also the first judgement on this issue following the change in the chairmanship of the Third Senate in the meantime. Following this decision, it remains advisable for employers to endow any alternative benefit options as monthly pension benefits or single capital payments on the basis of an equivalent present value of the retirement pension benefits and to link the alternative lump-sum benefit to an option in favor of the employee or, in the case of the unilateral replacement of the monthly pension payments by the capital payment stipulated in the company pension commitment, to slightly increase the endowment framework.

2. Section 16 BetrAVG Update 2023

I.a. no group-related calculation penetration in the context of the adjustment test pursuant to Sec. 16 (1) BetrAVG in the (mere) existence of an isolated profit and loss transfer agreement, no meaningfulness of pension provisions under company pension law, no hypothetical assessment of the economic situation of the employer, ex post assessment of the business development of the last three fiscal years for the forecast of the economic development as a rule (BAG judgement 15 November 2022, 3 AZR 505/21)

In its judgement of 15 November 2022 (3 AZR 505/21), the BAG - in particular due to the complex subject matter of the dispute - had extensive opportunity to illuminate its case law on the adjustment test pursuant to Section 16 BetrAVG and to partially update it on individual issues.

In the facts underlying the judgement, the employer was a group company of an international group. In September 2016, it had concluded a profit transfer agreement with another group company. Since August 2016, the company pensioner had been receiving a monthly gross company pension of EUR 5,918.63 from the company pension commitment under the employment with the employer, including from a direct commitment. The employer informed the company pensioner on 19 December 2018, that an adjustment of his company pension as of 1 January 2019, could not be made for economic reasons. In support of its decision, the employer stated, among other things, that although it had achieved a profit on ordinary activities before tax of EUR 138.9 million in fiscal year 2016 (with average equity of EUR 47.3 million, including a capital gain of EUR 111.7 million from the sale of shares in the defendant to another group company), it had achieved a negative profit on ordinary activities of EUR -22.6 million and EUR -30.6 million in fiscal years 2017 and 2018, respectively. In fiscal year 2019, the employer generated a negative result from ordinary activities of EUR -774,544; this result included pension provisions of EUR 903,000 recognized for the company pension adjustment. The management report prepared by the employer for the 2018 financial year indicated a positive outlook for the company. The company pensioner objected to the omission of the pension adjustment in a letter dated 15 January 2019 and requested a pension adjustment in the amount of the consumer price development as a loss of purchasing power for the adjustment period.

In support of the assertion of the adjustment, he stated, inter alia, that

1. the employer had achieved positive results from ordinary business activities and also a sufficient return on equity in each of the financial years 2014 to 2016 and the negative trend was only apparent after the profit and loss transfer agreement and was attributable to it and therefore a calculation pass-through to the economic situation of the controlling company must be possible,
2. in particular, the negative development of earnings from the 2017 financial year onwards had occurred as a result of the disposals of investments in 2016,
3. the pension provisions recognized for the company pension adjustments in 2019 were to be excluded for the purpose of assessing the economic result in fiscal year 2019; and
4. for the assessment of the positive trend of the economic development of the employer's company, also the positive outlook in the management report for the fiscal year 2018 had to be taken into account.

After the employer failed to adjust the pension benefits even in response to the objection, the company pensioner brought an action for adjustment.

The BAG dismissed the action and, based on the general legal principles it established for the adjustment review under Section 16 BetrAVG (see also our article in DPEsche 8/2022), dealt with the core considerations of the company pensioner and dismissed each of them on the following grounds:

1. An isolated ("mere") profit and loss transfer agreement cannot justify a calculation pass-through to the economic situation of the controlling company. If an isolated profit transfer agreement exists, the controlling company does not have any influence on the profit being generated at the employer. A controlling influence that is decisive for a calculation pass-through can only be assumed if the controlling company has secure legal possibilities of influencing the dependent company and is thus in a position to threaten the latter with consequences in the event of non-compliance and to enforce them.
2. As a rule, the assessment of the economic forecast shall be based only on the economic development of the employer in the past three financial years. Consideration of the economic development in earlier periods (such as in the fourth or even fifth previous year) can only be considered in exceptional cases if the quantitative data for the economic development do not provide a consistent picture and therefore the earlier economic development may contain another resilient indicator for this purpose.
3. Only the actual situation is relevant for the assessment of the economic situation and fictitious considerations (in the specific case: sale of the shareholdings in 2016 and resulting negative economic development in the subsequent period) are not to be applied.
4. The pension provisions for company pension increases are not to be factored out for the assessment of the economic result for 2019, as the provisions have no relevance for earnings but only include a time (in particular tax deferral) effect.
5. The management report to be prepared by the employer in accordance with the accounting requirements is not to be used for the assessment of the economic situation because, among other things, in view of the freedom of content in its presentation, it does not contain sufficiently reliable quantitative data for the assessment of the economic situation.

Conclusion

Employers can place the BAG's ruling in its established case law and, depending on the specific group-related status and the individual economic and balance sheet conditions at the time of adjustment, refine their canon of arguments on individual approaches to justifying the (only partial/no) adjustment of pension benefits by the individual considerations of the BAG in the context of the recurring adjustment review or expand the parameters to be considered.

3. Obligation to pay contributions for pension benefits from old-age pensions in accordance with Section 229 of Fifth Social Code (Sozialgesetzbuch V, SGB V)

No consideration of qualifying periods from periods of voluntary membership in a (physicians') pension scheme (Social court Landshut judgement 22 June 2022, S 10 KR 392/20)

The obligation to pay contributions for pension benefits from company or occupational (retirement) pension schemes pursuant to Section 229 SGB V continues to be the focus of social court judgements. A regular point of discussion and dispute is the social security assessment of pension benefits based on contributions and contribution periods that the pension beneficiary has paid to the pension provider after termination of the specific employment - in particular due to a continuation of the pension arrangement based on voluntary membership of the pension provider or, in the case of insurance-based implementation of the pension arrangement, due to the assumption of the policyholder position in the specific contractual arrangement. In its decisions of 28 September 2010 (1 BvR 1660/08) and 27 June 2018 (1 BvR 100/15), the German Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) ruled that only entitlements earned under the company pension commitment during the term of the specific employment can be taken into account for the obligation to pay contributions under Section 229 SGB V.

In its judgement of 22 June 22 2022 (S 10 KR 392/20), the Social Court Landshut (SG Landshut) had the opportunity to assess the obligation to pay contributions for pension benefits from a professional pension scheme within the meaning of Section 229 (1) no. 3 SGB V (in the specific case: doctors' pension scheme), which are based on qualifying periods after the termination of the employment. In the specific case, the plaintiff was a compulsory member of the relevant doctors' pension scheme until 2006 and a voluntary member in the period from 2006 until the occurrence of the pension case in 2016, whereby the period of voluntary membership accounted for 2/3 of the total period of membership. After the occurrence of the insured event in 2016, the defendant issued the plaintiff a notice of pension payment (pension notice), which included the pension benefits from the entitlements earned during the period of voluntary membership from 2006 to 2016 in the obligation to pay contributions. After an unsuccessful appeal procedure, the plaintiff filed an action with the SG Landshut requesting that the pension notice be rescinded and that a new pension notice be issued without the pension benefits earned during the period of voluntary membership being subject to contributions.

The SG Landshut allowed the action. It based its decision on the transferability of the considerations made by the BVerfG in the 2 decisions from 2010 and 2018 for the exemption from contributions of pension benefits related to periods after the termination of the employment. According to the BVerfG, an assessment of pension benefits from company pension schemes that is identical to that of company pension commitments for social security purposes is already required by the constitutional principle of equal treatment under Article 3 (1) of the German Constitution (Grundgesetz, GG). If a member of a company pension scheme decides to voluntarily continue his company pension under private financing, he would be in a significantly worse position than a member who does not continue the company pension and decides in favor of private life insurance due to the subsequent consideration of the entire pension payment in the statutory health and long-term care insurance. Therefore, the fundamental legislative decision not to include private pension provision in the obligation to pay contributions must be taken into account.

Conclusion

The decision of the SG Landshut is consistent against the background of the decisions of the BVerfG from 2010 and from 2018 on the scope of the contribution obligations determined in Section 229 SGB V for pension benefits and can force considerations of the employees to continue the membership in the pension scheme from the specific company pension commitment after the termination of the employment contract as a voluntary member.