Death benefits in company pension schemes

1. Content design of death benefits in company practice: typifying inventory

In terms of the content of the death benefit, two basic constellations can still be distinguished in company practice:

For the most part, the relevant legal bases in the event of the employee's death for a certain period (usually the month of death and up to three subsequent months) determine

• in the active employment relationship, the continued payment of the remuneration last granted to the deceased employee, and
• after the company pension benefit case has already occurred, the continued payment of the company pension benefits last granted to the deceased pension recipient (which are then followed by any survivors' benefits also promised in the company pension commitment),

in each case to the group of persons specified in the relevant legal basis. The group of persons is often based on the statutory provisions of Sections 46ff. SGB VI (Social Code Book IV) and includes surviving spouses, registered partners and/or orphans. Sometimes the group of persons is defined even more broadly and also includes all other persons living in a joint household with the deceased employee (including non-marital partners) and/or their legal heirs.

In some cases, the relevant legal bases (still) stipulate that the specific death benefits are earmarked for the - exclusive - compensation of the special expenses incurred by the beneficiaries as a result of the death, in particular for the funeral of the deceased employee.

In terms of the contractual system, death benefits are promised in individual contracts either in the employment contract or in the legal basis of the general company pension commitment. If death benefits are granted company-wide or corporate-wide, they are usually regulated in a works agreement/staff agreement; this is also in order to fulfil the relevant co-determination rights of the works council or staff council from the employer's perspective. In practice, terms such as "bridging allowance" or "mercy pay" are also used to describe the benefit in addition to "death benefit".

2. Death benefit as a company pension scheme within the meaning of Section 1 (1) s. 1 BetrAVG

In company practice, when death benefits are included in the employer's catalogue of company benefits, the question regularly arises as to whether the death benefit can be qualified as a company pension within the meaning of Section 1 (1) s. 1 BetrAVG (German Act on Company Pension Schemes, Betriebsrentengesetz). The question is not only relevant from a balance sheet perspective for the calculation and presentation of pension-related provisions in accordance with the respective company code. It also arises in the case of restructurings (in the context) of company pension commitments, specifically, for example, direct commitments granted when considering changing the implementation channel for past service to a pension fund or - if death benefits are still granted in the event of the death of the beneficiary employee after his/her departure/after the pension event has occurred - in the event of a possible transfer of pension obligations to a pensioner company.

The Federal Labour Court (BAG) has so far taken a very restrictive position on the assessment under company pension law. In its previous case law, most recently in its judgement of 10 December 2019 (3 AZR 122/18), it rejects the qualification as a company pension scheme. This is essentially based on the standardized assumption that death benefits do not compensate for the loss of earned income after the insured event occurs, but are typically intended solely to cover event-related expenses (in particular funeral costs) for the surviving dependants. The BAG derives the purpose of the benefits, which serve exclusively to compensate for increased burdens, exclusively from the term "death benefit" mentioned in the relevant pension regulations. In the judgement of 10 December 2019, for example, it did not take into account the fact that a benefit designated as a death grant in the event of death also serves to secure the financing of the surviving dependants' ordinary living expenses; this is particularly true in light of the fact that benefits designated as "death grants" are also granted as cash benefits and not earmarked in accordance with the specific structure in the relevant legal basis and the surviving dependants can decide autonomously on the specific use of the benefit - as is also the case with general survivors' benefits granted as cash benefits.

The literature published to date - especially after the BAG judgement of 10 December 2019 - has predominantly taken a purpose- and practice-based position. It affirms the qualification of the relevant company death benefit as a company pension within the meaning of Section 1 (1) s. 3 BetrAVG if, according to its purpose, it is intended to fulfil a function of bridging and/or securing the livelihood of the relevant surviving dependants that is identical or comparable to the traditional survivors' benefit within the meaning of Section 1 (1) s. 1 BetrAVG. In some cases, this purpose - also plausible from a company pension law perspective - is also affirmed in the case of an expense-related grant, in particular to finance funeral costs; this with reference to the broad pension purpose of the surviving dependants' benefit laid down in the BetrAVG and the associated restriction on the use of the specific benefit not provided for in the BetrAVG.

At the same time, it must be stated that a qualification of the respective death benefit as a company pension in accordance with Section 1 (1) s. 1 BetrAVG presupposes that the group of beneficiaries corresponds to the group of surviving dependants within the meaning of the BetrAVG. To this end, the group of beneficiaries in the death benefit commitment must be based exclusively on the group of persons defined in Sections 46 et. SGB VI (= spouse/registered partner, orphan), so that a death benefit granted to the legal heirs according to the commitment cannot include a company pension within the meaning of the BetrAVG.

Finally, from a practical perspective, it should be noted that relevant stakeholders (e.g. auditors, internal auditors) (may) follow this reasoning in individual cases and support the employer's qualification of the specific death benefit granted as a company pension in the form of a survivor's benefit in accordance with Section 1 (1) s. 1 BetrAVG based on the aforementioned arguments.

3. Conclusion and outlook

It remains to be seen whether the BAG will continue its previously restrictive case law denying the qualification of death benefits as company pension schemes within the meaning of the BetrAVG even after the change in the chairmanship of the Third ("company pension") Senate. Employers who want death benefits to qualify as survivors' benefits within the meaning of Section 1 (1) s. 1 BetrAVG, particularly if they are structured as temporary continued payment of the relevant remuneration, should limit the group of beneficiaries to the persons defined in Sections 46 etc SGB VI and regulate the death benefit from a formal perspective in the legal basis of the specific company pension commitment. In individual cases, it is also advisable to coordinate with the relevant stakeholders as required in order to avoid subsequent discussions with the "wrong" result of the discussion.