News /

German Federal Labour Court (BAG) interprets company pension commitments: despite pension promise at 65, payments from 67 (BAG ruling 15/05/2012, 3AZR 11/10)

In its ruling dated 15/05/2012 (3AZR 11/10), the BAG decreed that retirement benefits from a company pension scheme are not payable until the person attains the statutory retirement age (67 years) — despite the explicit specification of 65 years as the age at which the person qualifies for a pension. Contrary to the majority opinion in trade literature, the Court reached its interpretation by considering the fact that the employer, in specifying an age limit of 65 years, had typically assumed that company pension payments would be honoured at the same point in time at which the employee could also claim his or her full state pension. Notwithstanding the explicit specification of 65 as the pensionable age, the statutory age of eligibility from the state pension scheme must therefore be viewed as the age agreed.

Which pension commitments are governed by this ruling?

In principle, this ruling applies to all pension commitments agreed before 1 Jan 2008 — the date of entry into force of the German Pension Insurance (Retirement Age Adjustment) Act (RV-Altersgrenzenanpassungsgesetz) — in which 65 years was taken as the pensionable age.
Company pension policies that envisaged a retirement age other than 65 years are not affected by the ruling, since in such cases employers have explicitly drawn attention to the fact that they wish to decouple their policy from the statutory retirement age.
In practice, the BAG ruling applies only to employees born in or after 1947, since only this employee group is affected by the postponement of the statutory age of eligibility.
It applies to employees who are already retired or will retire in the future and — importantly — also for employees that already are or will become vested retirees.

Impact analysis

Assignment to the statutory age of eligibility generally leads to cost savings on the part of the employer, since the employee’s company pension benefits are thereby worsened.

Where pension commitments depend on the length of the entire period of service performed for the company, the BAG ruling may well lead to a lengthening of the applicable period of service if the employee remains employed by the company until s/he reaches the age of 67. If the employee should retire aged 65, then a curtailment applies, since s/he has left company employment earlier. If the employee does leave earlier, this modifies what is known as the ‘m/ntel’ factor used to calculate the vested right, since the total potential period of employment at the company lengthens by 2 years.

If the ruling is applied to contributions-based defined benefit plans utilising either the fully-reinsured support fund or fully-reinsured book reserve scheme model, then financing risks may be incurred if the company committed to the retirement benefits scheme before 1 January 2001. As regards pension commitments and vested retirees, the proportional model still used to apply, which considered the total potential period of company employment.

The question of ruling applicability also needs to be asked when considering the direct insurance and pension fund insurance-style models. If the actuarial method is applied when the employee leaves, then no effects are generally experienced with a retirement age of 65. If the employee leaves at the statutory age of eligibility, however, then difficulties arise due to the fact that the insurance expires well before — at age 65. For pension funds there is another aspect to consider, namely that the fund may only render benefits if the person is no longer working.

Case-by-case review required

In terms of details, the actual implications for the pension policies in effect at your company will depend on the benefits model, the terms of the commitment agreement and the reinsurance method chosen.

Alongside rights granted to employees, pensioners, dependents and vested retirees by labour law, repercussions for the company’s tax position and balance sheet also need consideration. As we see it, the lack of a written formulation means that provisions cannot be increased in the company’s tax account. The situation is different for the financial accounts.

For the book reserve scheme model in particular — although this also applies to other models — we recommend a review of the repercussions of the BAG case law in terms of the labour law, operational business and financial aspects. To avoid establishing legally-binding company practice, we advise the inclusion of provisos when making pension notifications before these have been fully reviewed.

We therefore offer you an audit of the repercussions of the BAG ruling for your pension policies in terms of labour law. Taking the results from this analysis, we show you the effects on provisions (according to the German Commercial Code, HGB) for financing to age 67.

We are happy to advise you on the legal and balance sheet aspects.