Occupational pensions: No claim for employee to terminate an employee-funded direct life insurance policy

By judgment of 26 April 2018 (docket number: 3 AZR 586/16) the Federal Labour Court has ruled that an employee has no claim against his employer to terminate an employee-funded direct life insurance policy (deferred compensation /salary conversion) in order to receive the surrender value.

The employee (plaintiff) concluded a deferred compensation agreement with the employer in 2001. According to that agreement, the employer – as policyholder – was obliged to pay an annual amount of approximately 1,000.00 euros to an insurance company for the purpose of funding the insurance policy. The insurance policy was concluded in favour of the employee. In 2009 the insurance policy was amended so that contributions no longer had to be paid. In 2013 the employee informed his employer that he had terminated the insurance policy in order to receive the surrender value due to financial distress. The employer refused both to approve this termination and to terminate the insurance policy by himself.

The Federal Labour Court dismissed the case. The Court holds that the employee does not have a right to terminate the insurance policy or have a legitimate interest to demand the termination. Since the employee was not a concluding party of the insurance policy, the employer’s approval would have been necessary to terminate the policy. The purpose of the option to convert salary (deferred compensation) as stated in the German Occupational Pension Act (Betriebsrentengesetz) is – at least partly – to secure the employee’s standard of living in old age. It is the legislator`s intention to prevent vested entitlements being paid out before retirement. The saved capital shall not be used for consumption or to settle debts.

The ruling creates legal certainty. According to the Federal Labour Court there is normally no right to terminate the insurance policy if it is funded via salary conversion (deferred compensation). However, the court points out that in specific cases – such as substantial financial distress, which must be concretely presented to the court and not, as it was in this case, only abstractly – the legal situation could be judged differently.