Federal Labor Court has tightened legal requirements concerning a special procedure regarding the calculation of vested pension entitlements (so-called “insurance contract solution” (“versicherungsvertragliche Lösung”))

By judgment of 19 Mai 2016 (BAG, docket number 3 AZR 794/14), the Federal Labor Court has ruled that an employer’s choice in favor of the so-called “insurance contract solution” – which is a special procedure for calculating vested pension entitlements – requires in every single case a new corresponding declaration to the employee and the insurance company, regardless of whether such declarations have already been made in the past on the basis of a works agreement or a collective insurance contract.

When granting a pension promise through a direct life insurance (Direktversicherung) or a captive pension insurance (Pensionskasse), an employer can choose the so-called “insurance contract solution” according to the German Occupational Pension Act (Betriebsrentengesetz). By doing so, a future pension payment arising from a vested pension entitlement can be limited to a certain amount (= pension payment claimable on the basis of the life insurance contract). This requires a corresponding declaration to both the employee and the insurance company (at the latest within 3 month following termination of employment). An employer’s choice in favor of the “insurance contract solution” used to be a part of the pension scheme/promise itself and as such did not have to be declared again at the time of termination of employment. In the present case the Federal Labor Court had to determine whether this was sufficient.

The Federal Labor Court declared the previous practice inadmissible. An employer’s choice in favor of the “insurance contract solution” can still be made prior to termination of employment, but this requires a close/specific factual and temporal relation between the employer’s declaration and the imminent termination of employment. In addition, it is necessary for the employer to make his declaration on an individual basis and not – as in this case – on the basis of a works agreement. The judgement has far-reaching consequences and will give rise to the need for action by all employers concerned.