Update on occupational pension schemes: Calculating part-time workers’ company pensions

Germany’s Federal Labour Court clarified an issue of practical relevance with its ruling of 20 June 2023 (case 3 AZR 221/22). It considered whether, in pension schemes based on the employee’s final salary, it is admissible to calculate the size of the company pension based on the level of employment in the last ten years before leaving employment or whether the average level of employment over the entire period of service should be taken as a basis:

Pension entitlements may be based on the level of employment over the last ten years

The Federal Labour Court clarified that pension schemes may be based on the employee’s level of employment in the last ten years before leaving the company. According to the pension regulation, the income in the last twelve months before retiring generally determined the size of the pension. For part-time employees, income was to be adjusted to reflect the employee’s average working hours during the last ten years of service before leaving (i.e. according to the level of employment). The level of employment prior to that period was not relevant, the court said. In the case at hand, the employee, who had originally worked full-time but switched to part-time during the assessment period, considered this firstly to be a breach of the prohibition of discrimination against part-time employees under section 4(1) of the German Act on Part-Time and Fixed-Term Employment, and secondly, to be indirect discrimination based on gender, as women were statistically more likely to work part-time than men.

Should the average scope of employment for the entire period of service be used as a basis?

The admissibility of such a regulation was recently called into question because the Federal Labour Court had ruled, in a judgment on 19 April 2016 (case 3 AZR 526/14), that part-time employees must receive company pension benefits of an amount at least corresponding to the ratio of their working hours to the working hours of a comparable full-time employee (the pro rata principle). From this, a considerable part of the legal authors concluded that it was inadmissible to base the calculation purely on the employment ratio of the last ten years.

A ten-year assessment period does not disadvantage part-time employees and is compatible with the pro rata principle

The Federal Labour Court stuck to its established practice. It had already approved the use of salary figures from the last five years back in 1983, and then in 1998 and 2012 the use of salary figures from the last ten years before leaving employment. It ruled that in a final salary pension, the average level of employment in the last ten years before leaving employment may be used as a basis in the event of a change in the level of employment. It stated that firstly it was permissible to base the calculation on the average income received during the last twelve months. The last income received corresponded to the number of working hours and applied both to full-time and part-time work. The ten-year assessment period merely extended this twelve-month period. The purpose of a final salary pension scheme was to maintain the final standard of living earned in their working life. It was objectively legitimate to base the pay factor on the period of ten years because that was a period in which the standard of living was established, determined by the earnings and relevant for the pension entitlement. The period did not lead to a disproportionate consideration of years of employment with lower working hours, the court concluded.

Unequal treatment would be objectively justified

Finally, the Federal Labour Court clarified that possible unequal treatment of part-time workers would be justified. Securing the standard of living last achieved by the employee was an objective reason, the court said. The ten-year period was suitable and necessary in order to achieve that goal, as well as being reasonable. The same applied to possible unequal treatment due to age or gender, the court added.

In practice

While doubts had arisen in the meantime about the admissibility of a ten-year employment ratio in final salary pension schemes, the Federal Labour Court has stuck to its previous case law and now once again affirmed such admissibility, which is very helpful in practice. Companies would be well advised to conduct a regular compliance check on their occupational pension schemes in order to spot any (accounting) risks early on and take remedial action if necessary.