Update on occupational pension schemes: Employers’ obligation to assume liability for pension reductions

Germany’s Federal Labour Court has once again ruled on employers’ obligation to assume liability in the event of benefit reductions by pension funds in its judgment of 14 March 2023 (case no. 3 AZR 197/22). The employer, a charitable wing of the Catholic Church, had granted an employee certain pension commitments in accordance with the Guidelines for Employment Contracts in the Institutions of the German Caritas Association as amended (“Richtlinien für Arbeitsverträge in den Einrichtungen des Deutschen Caritasverbandes (AVR) in ihrer jeweils geltenden Fassung”). After the employee had been drawing her company pension since 2014, the pension fund informed her in 2019 that it would reduce her pension by around €10 per month. The employee then claimed compensation from her employer for the pension reductions and the Federal Labour Court upheld her claim for compensation.

In its reasoning, the Federal Labour Court remained true to its usual line. In several decisions since 2014 on pension reductions by various pension funds, including Pensionskasse der Deutschen Wirtschaft, Kölner Pensionskasse and BVV Versicherungsverein des Bankgewerbes aG, the Federal Labour Court has obliged the employer in question to make up for the shortfall in pension payments by a pension fund.

For a purely defined contribution commitment, there must be special indications reflected in the pension scheme

In the present case, the Federal Labour Court argued that the employer had not merely issued a purely defined contribution commitment outside the scope of the German Occupational Pensions Act (BetrAVG), but instead intended to issue a pension commitment under company pension law by referring to the guidelines for employment contracts in the institutions of the German Caritas Association. The employer should have presented specific evidence of the existence of a purely defined contribution commitment outside the scope of the German Occupational Pensions Act and reflected in the pension commitment. The employer would therefore have to compensate the employee for the reductions in pension payments as part of the no-fault claim for fulfilment under section 1(1) sentence 3 of the German Occupational Pensions Act.

Restructuring clauses in the articles of association of a pension fund do not become part of the pension commitment

Once again, the Federal Labour Court pointed out that the employer cannot take advantage of the statutory restructuring clauses that apply in favour of the pension fund. The Federal Labour Court was also not convinced by the objection that the employer was financially overcommitted, as the employee had also planned to maintain her standard of living based on the company pension. Although reference was made to the pension fund guidelines as a whole, the restructuring clauses do not affect the basic relationship under labour law. The employer could only have reduced the scope of its own pension commitment if it had been able to intervene in the pension commitments in accordance with the three-stage review scheme developed by the Federal Labour Court (three-stage theory).

Practical tip

When setting up occupational pension schemes, employers should not only select the external pension providers carefully and review them on an ongoing basis, but also act with foresight when it comes to the type of implementation and the specific structure of the pension commitments. Occupational pension schemes are usually set up to span several decades, and it is advisable to keep options open for changes, such as a change in the pension provider or implementation method, and to make adjustments if problems arise.