Company pension law – Case Law update 2/2023

1. (Partial) conversion of a pension commitment from exclusively current benefits to lump-sum benefits requires independent justification even if the pension benefits are subsequently equivalent or higher (BAG judgement of 20 June 2023, 3 AZR 231/22)

In its judgement of 20 June 2023 (3 AZR 231/22), the BAG had the opportunity to further develop its legal principles on the effectiveness of the conversion of the current pension benefits originally promised in a company pension commitment to a lump-sum benefit to case constellations that include a (only) partial conversion to the lump-sum benefit.

In the facts underlying the decision, the defendant employer had originally granted the plaintiff pension beneficiary a company pension commitment via a spokesperson committee agreement as the legal basis (VO 1995), which included pension benefits as current pension benefits. The defendant modified the company pension commitment in 2004 by means of further spokesperson committee agreements (VO 2004) with effect from the redemption date of 31 December 2023 in such a way that (1) the entitlements earned up to 31 December 2023 from the VO 1995 (past service) are calculated in a so-called "starting module". (2) the entitlements that can still be earned from the redemption date onwards (future service) are determined as annual capital components that are granted as a lump-sum benefit (one-off capital plus any surplus participation on the capital components) in the event of a claim.

In accordance with the VO 2004, the defendant calculated pension benefits for the plaintiff as a monthly pension of EUR 1,945 and a lump sum of EUR 110,727 plus a profit participation of EUR 44,000. If the VO 1995 had been applied exclusively, the plaintiff would have been entitled to monthly pension benefits of EUR 2,628.

With his claim, the plaintiff sought a declaration that the defendant is obliged to provide pension benefits from the company pension scheme exclusively on the basis of the VO 1995. He claimed that the VO 2004 could not replace the VO 1995, as he was in a worse position overall under the VO 2004 compared to the VO 1995 - in view of the significantly lower monthly pension benefits - and that the replacement of the VO 1995 by the VO 2004 therefore did not fulfil the principle of proportionality under company pension law. The defendant replied to the complaint that the replacement could have taken place effectively, as there was no economic deterioration of the plaintiff in the cumulative consideration of the pension benefits granted under the VO 2004 in the form of the monthly pension benefits and the lump-sum payment. The conversion of the pension regulations was also covered by the defendant's interest in standardizing the pension systems.

The Labour Court and the Regional Labour Court (LAG) upheld the claim. The Federal Labour Court upheld the defendant's appeal and referred the judgement back to the Higher Labour Court for further clarification of the facts.

The BAG based its legal assessment of the effectiveness of the replacement of the VO 1995 by the VO 2004 on the legal principles established in its judgement of 15 May 2012 (3 AZR 11/10) on the conversion of current pension benefits in a company pension commitment to capital payments, according to which the conversion must satisfy the principle of proportionality under company pension law if the relevant cash values are equal in value - and not in accordance with its three-stage theory (Dreistufentheorie, fundamentally developed by it in its judgement of 17 April 1985, 3 AZR 72/83), but rather in accordance with the general criteria of proportionality and protection of legitimate expectations. The BAG had already stated in its judgement of 15 May 2012 that in the context of this balancing of interests, the employer can cite, among other things, an interest in standardizing the existing pension commitments, and that the assessment criteria to be taken into account in favour of the employee are in particular that (1) ongoing pension benefits have a special value for the employee, which a one-off capital payment does not have to the same extent, as the employer unilaterally shifts the longevity risk to the employee with the lump-sum benefit and lump-sum benefits are not subject to the adjustment (review) obligation in accordance with Section 16 of the German Company Pensions Act (Betriebsrentengesetz, BetrAVG) compared to current pension benefits, and (2) capital payments generally result in a higher tax burden for the employee than monthly pension benefits.

As a rule, the interests can only be weighed up once it has been established whether the new regulation worsens the pension benefits. In order to compare the benefits, the pension benefits are to be calculated according to the pension regulations of the old commitment and the new commitment, whereby the conversion of the capital for the comparability of the commitments is decisive according to actuarial principles, namely according to the current biometric calculation bases ("reference values") at the time the pension event occurs. The BAG clarifies that in the present case, a lower or higher pension benefit can only be determined at the time of the insured event, as only then are the surpluses granted in the new commitment, but not guaranteed in terms of amount, to be considered when determining the amount of the benefits.

Depending on whether the benefit that the employee receives from the new commitment is lower, equivalent or higher than the pension that he would have received under the old commitment, different requirements are to be placed on the necessary separate justification for the conversion. If the comparative cash value calculation results in a difference to the detriment of the employee, the replacement is assessed according to the three-stage theory. If there is no difference after the comparative cash value calculation, the interests must be weighed up solely on the basis of the aforementioned assessment criteria. In the event of only a partial switch from pension benefits to capital payments, the relationship between these two parts must be taken into account. The higher the proportion of the benefit that is continued as a current benefit, the lower the weight of the employee’s interests in the complete retention of the pension benefits. This applies in particular if - as in the present case - only the shorter-term future service is determined as a capital benefit and therefore the main benefit component of the company pension commitment is granted in the form of monthly pension benefits.

Consequences for practice

The BAG's decision is of considerable importance in practice - and very helpful from an employer's perspective, as it provides employers with relevant scope for structuring and arguing in the event of restructuring company pension commitments in the event of only partial capitalization of pension commitments originally promised as current pension benefits. At the same time, the decision creates - somewhat more - legal certainty for the case constellation frequently used in practice in the recent past for such restructurings, namely that only the future service is promised as a capital benefit and pension benefits from the past service are granted (unchanged) as monthly pension benefits.
 

2. Employer's obligation to assume liability if pension benefits are reduced by the pension fund (BAG judgement of 14 March 2023, 3 AZR 197/22)

In its judgement of 14 March 2023 (3 AZR 197/22), the BAG had the opportunity to continue its case law on the employer's obligation to assume liability towards the beneficiaries in a company pension commitment in the pension fund implementation path on the basis of the company pension law procurement claim pursuant to Section 1 (1) sentence 3 BetrAVG in the event of benefit reductions by the pension fund.

In the case underlying the decision, the defendant employer had granted the plaintiff pension beneficiary a company pension commitment via the Caritas Pensionskasse (PKC) as pension fund. Specifically, the employment contract between the parties contained a reference to the guidelines for employment contracts in the institutions of the German Caritas Association (AVR) in their current version and the AVR stipulated, among other things, the employer's obligation to "arrange for the provision of old-age and invalidity benefits for employees in accordance with the provisions of Annex 8 to the AVR (pension scheme)". Annex 8 to the AVR stipulated in the pension plan regulated therein, among other things, that the pension entitlements of the beneficiaries were determined in accordance with the articles of association of PKC. In addition to determining the content of the pension benefits, PKC's articles of association also contained a reorganization clause with the following content:

"If the actuarial balance sheet shows a deficit, this must be offset against the loss reserve and then the provision for premium refunds (RfB). If the loss reserve and the reserve for premium refunds are not sufficient to cover the remaining deficit, the members' contributions must be increased or the premium payment period extended or insurance benefits reduced or changes of the aforementioned kind made at the same time by resolution of the Delegates Meeting on the basis of proposals by the Responsible Actuary. All measures to eliminate deficits also influence existing insurance relationships and require the approval of the trustee required under § 142 VAG for tariffs not authorized by the supervisory authority. The levying of additional contributions is excluded."

The plaintiff received a retirement pension from PKC under the company pension scheme since 2014. PKC ran into financial difficulties in 2019 and informed its beneficiaries in September 2019, with reference to the restructuring clause, that it would reduce the pension benefits with effect from 1 January 2020, in the plaintiff's case by EUR 10.15 per month.

The plaintiff claimed this difference (between the monthly retirement pension benefit to be granted under the pension plan and the pension benefit granted by PKC after the reduction) from the defendant. The defendant countered the claim by arguing that it had not issued a pension commitment, but only a pure contribution commitment. In addition, the reduction in pension benefits made by PKC based on the restructuring clause should also apply in favour of the defendant.

The BAG upheld the claim and recognized the defendant's obligation to assume liability arising from the right to procurement under Section 1 (1) sentence 3 BetrAVG, according to which the employer is responsible for fulfilling the benefits promised by it in the company pension commitment (company pension benefits), even if the implementation is carried out via an external pension provider such as the pension fund and, in the present case, PKC makes use of a right to reduce benefits provided for in the articles of association. It interpreted the company pension commitment granted in accordance with the legal bases cited as such in accordance with the BetrAVG and not as a pure contribution commitment. In continuation of its case law (e.g. from its judgement of 10 February 2015, 3 AZR 65/14), it denied the restructuring clause regulated in the articles of association as part of the company pension commitment, as this only concerned the implementation channel between the defendant and PKC and did not relate to the basic employment relationship. In this respect, the entitlement to procurement under Section 1 (1) sentence 3 BetrAVG includes a claim for fulfilment of the pension beneficiary regardless of fault and the employer's obligation to assume liability also applies, in particular with the new version of Section 2 (2) sentence 3 BetrAVG for pension commitments made in 2019, even if the company pension scheme is implemented via pension funds, whereby the extension of the statutory insolvency protection via the PSV to the difference between the employer's pension commitment and the relevant lower benefit of the pension fund confirms the obligation to assume liability.

Conclusion

The judgement is in line with the previous case law of the BAG. Employers who grant a company pension commitment via an external implementation channel (primarily the pension fund) should therefore - unchanged - implement and apply needs-based risk management with regard to the implementation of the company pension commitment in order to minimize liability risks arising from the obligation to assume liability pursuant to Section 1 (1) sentence 3 BetrAVG. In addition to a careful selection of the external pension provider, needs-based risk management must include the active exercise of all material rights arising from the insurance contract relationship with the pension fund. The judgement also clearly demonstrates once again the requirements for careful structuring of the content and form of pension commitments, especially if employers want to issue such commitments - in individual cases - as pure contribution commitments and in this case want to avoid a possible interpretation of the pension commitment as a company pension scheme within the meaning of the BetrAVG through transparent wording.
 

3. Admissibility of an action for future benefits under a company pension scheme, even with regard to undisputed claims, if (only) part of the claims are in dispute (BAG judgement of 14 March 2023, 3 AZR 175/22)

In its judgement of 14 March 2023 (3 AZR 175/22), the BAG had the opportunity to further develop its guiding principles on the admissibility of an action for future benefits from a company pension commitment to circumstances in which (also) undisputed claims from the company pension commitment are the subject of the legal dispute.

In the judgement underlying facts of the case, the parties - ultimately still - disputed the admissibility of the claim for future recurring benefits from a company pension scheme consisting of various pension components, some of which were undisputedly recognized by the defendant employer. The plaintiff pension beneficiary had left the employment relationship with the defendant employer at the end of the 2019 calendar year and had been received a monthly company pension from the company pension commitment since January 2020, which included a monthly pension benefit from the defendant in the amount of EUR 440.08 and benefits from a pension fund in the amount of EUR 184.86. The plaintiff requested that the defendant grant monthly pension benefits totalling EUR 3,193.78 with effect from July 2021. This amount included the aforementioned pension benefits already indisputably awarded by the defendant and also granted since January 2020. In the legal dispute, the defendant argued that there was no need for legal protection for the action insofar as the claims were undisputed and that the action was therefore already inadmissible to this extent.

The BAG ruled in favour of the claim. It also recognized the admissibility of the action to the extent of the undisputed part on the grounds that benefit claims from a company pension commitment were granted by the employer irrespective of any consideration and therefore the filing of an action pursuant to Section 258 German Civil Procedure Code (Zivilprozessordnung, ZPO) was also possible in principle for future benefits or parts thereof and a special interest in legal protection was not required for this - in contrast to actions due to concerns about non-timely performance pursuant to Section 259 ZPO. For the admissibility of an action for future benefits, a relevant interest in enforceability on the part of the suing pension beneficiary is already sufficient, which could be assumed from a standardized perspective because the employer, which has voluntarily and punctually paid to date, could cease its benefits at any time. This is for the reason that creditors should be spared having to obtain identical titles for each instalment on the basis of a repetitive factual submission and, if necessary, also be dependent on the ongoing punctual payment of current benefits. Restricting this legal principle, the BAG also pointed out that the employer could, in exceptional cases, raise the objection of abuse of rights if it is obvious that the plaintiff company pensioner has no interest in enforcing his future claims and, in this respect, there is no need for legal protection. However, as individual parts of the pension claims were in dispute in the present case, such an exceptional case did not exist.

Conclusion

Employers must classify and observe the judgement in the range of possible legal disputes concerning company pension commitments granted, as the individual plaintiff receiving the pension will also receive an enforcement order relating to the portion of the pension benefits not yet disputed by the parties in the event of the judgement being upheld.

4. Employee’s entitlement to the provision of a company pension on the basis of a reference clause in a collective agreement in the employment contract - even if it is not possible to implement the company pension commitment via the pension provider specified in the collective agreement referred to (VBL) (LAG Niedersachsen judgement of 20 April 2023, 3 Sa 86/22 B)

In its judgement of 20 April 2023 (3 Sa 86/22 B), the LAG Niedersachsen had the opportunity to decide on an employee's claim to the provision of a company pension on the basis of a reference clause in a collective agreement via the employment contract, even in the event that the employer is in fact unable to implement the company pension scheme via the pension provider specified in the collective agreement referred to.

The plaintiff employee had been working as a paramedic for the defendant employer, which operated a rescue service, since 1 April 2017. The employment contract underlying the employment relationship contained a reference to the collective agreement for the public service - general part/VKA (TVöD-AT/VKA) in the version applicable to the area of the Association of Municipal Employers' Associations (VKA). The TVöD -AT/VKA determines an entitlement of employees covered by the collective agreement to insurance with their own participation for the purpose of a supplementary old-age and surviving dependants' pension in accordance with the collective agreement on the company pension scheme for public sector employees (Tarifvertrag Altersversorgung - ATV) and the collective agreement on the supplementary pension scheme for public sector employees (Altersvorsorge - TV-Kommunal - (ATV-K)), which each determine a company pension commitment of the public supplementary pension scheme via the VBL. The defendant was and is not a member of the VBL; this is also because it did not fulfil the statutory requirements for membership of the VBL.

The plaintiff subsequently requested the defendant to insure him with the VBL in accordance with TVöD-AT/VKA in conjunction with the ATV-K. As the defendant did not comply with this request, the plaintiff filed an action requesting that the defendant insure him with the VBL in return for payment of a monthly contribution, or alternatively that the defendant be obliged to provide the plaintiff with the pension benefits to which he would have been entitled if he had been insured with the VBL.

The defendant countered the plaintiff's request by arguing that it was not and could not become a member of the VBL - and that against this background alone he was not entitled to the company pension commitment he sought.

The LAG Niedersachsen ruled that the multi-level reference clause in the employment contract, which refers to the TVöD-AT/VKA, which in turn refers to the ATV-K, gave the plaintiff a right to a relevant company pension pursuant to Section 1 (1) sentence 3 BetrAVG, which, however, was not to be granted through membership of the defendant via the VBL, but was to be effected directly by the defendant within the framework of the right to procurement under Section 1 (1) sentence 3 BetrAVG in view of the fact that the defendant's membership was not possible under the VBL’s articles of association. It clarified that, in view of its function to close the gap that could arise between the pension commitment on the one hand and the organization of the implementation channel on the other, the right to procurement under Section 1 (1) sentence 3 BetrAVG also exists if the employer can already effect the implementation of the company pension commitment via the relevant external pension provider for legal reasons. The claim to procurement as such arises from the multi-level reference to the ATV, which in itself includes a reference to the entire collective agreement referred to in the employment contract. However, the plaintiff is not entitled to direct insurance with the VBL by the defendant. This already fails in the absence of a participation agreement between the defendant and the VBL as well as in the absence of the prerequisites for the defendant's admission to the VBL.

Conclusion

The decision of the LAG Niedersachsen clearly demonstrates the scope of the employer's obligation to fulfil the pension beneficiary's right to procure benefits under Section 1 (1) sentence 3 BetrAVG, which also covers company pension commitments in external implementation channels in which the employer cannot implement the company pension scheme via the relevant external pension provider for legal reasons. In terms of content, the decision is in line with the BAG's case law on Section 613a of the German Civil Code (Bürgerliches Gesetzbuch, BGB) regarding the transfer of undertakings in cases where the employee entitled to a pension has a claim against the acquirer of the undertaking if, after the transfer of the employment relationship, the latter is unable to fulfil the company pension commitment made by the previous employer via an external implementation channel via the specific external pension provider. Against this background, the examination of the legally possible implementation of the company pension commitment via the agreed external implementation channel with the relevant external pension provider is once again part of the catalogue of obligations of an employer who intends to (re)introduce a corresponding company pension commitment.