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Occupational Pensions: “Split pension formula” and pro-rata reduction of pension entitlements in accordance with European law

By judgment of 13.07.2017 (C 354/16) the European Court of Justice has ruled that a “split pension formula” and a pro-rata reduction of pension entitlements do not constitute discrimination against part-time employees or age discrimination.

The employer granted to his employees a pension promise, according to which salary components above the German Social Security Contribution Ceiling and salary components below are treated differently and those above have a larger impact on the calculation of the pension entitlements than those below (so called “split pension formula”). The chargeable period of service was limited to 35 years. In the case of part-time employees the calculation of the pension entitlements was based on an average degree of employment. In the event of early departure a pro-rata reduction according to Section 2 of German Occupational Pension Act was made. The plaintiff was a part-time employee and claimed for higher pension entitlements, arguing that the calculation (“split pension formula” and a pro-rata reduction) would constitute an inadmissible discrimination.

The European Court of Justice rejected the plaintiff’s arguments and remitted the lawsuit back to the initial German court, pointing out that the “split pension formula” does not give rise to a claim. Though women are at a disadvantage, as women are often part-time employees and the salary for part-time work rarely exceeds the German Social Security Contribution Ceiling, the calculation of the pension entitlements in such a way that prior to using the “split pension formula” the average degree of employment is determined – and not in reverse order which would lead to higher pension entitlements as claimed by the plaintiff – does not constitute inadmissible discrimination since salary components above the German Social Security Contribution Ceiling are not taken into account for state pension entitlements and therefore may be taken into account more strongly for company pension entitlements. Since there is no such supply gap and therefore no disadvantage for employees whose salary is below the German Social Security Contribution Ceiling – as is often the case with part-time employees – it is permissible to differentiate and to calculate in such a way. There is no discrimination against part-time employees. Furthermore, the Court stated that the pro-rata reduction according to Section 2 of German Occupational Pension Act does not constitute age discrimination. The calculation according to Section 2 of German Occupational Pension Act may lead to the result that younger employees receive a lower pension than those employees who have passed the same period of service at a higher age. However, the pro-rata reduction is to be considered appropriate since there is no better and equally effective calculation method.

The European Court of Justice has decided on two topics of high practical relevance. With regard to both the “split pension formula” and the pro-rata reduction according to Section 2 of German Occupational Pension Act the European Court of Justice followed the German Federal Labour Court’s view or the experts’ prevailing view.