Occupational pensions: Deviation from employer’s (contractual) obligation to adjust pension benefits requires detailed statement of reasons

By judgment of 21.06.2019 (docket number: 7 Sa 92/18) the State Labour Court Hamburg has ruled that a deviation from the employer’s obligation to adjust pension benefits in accordance with an increase in state pension benefits – as provided for in the employer’s pension plan in the event that the employer considers an adjustment “not justifiable” – requires a detailed statement of reasons. The employer must describe all relevant factors for his decision, the company’s economic status quo and the assumed negative development which would arise from the pension adjustment.

The parties were in dispute over the adjustment of the plaintiff’s company pension benefits. The company pension was based on a collective bargaining agreement, which stated that pension benefits shall be increased automatically in accordance with the official increase in the state pension benefits. However, the agreement enabled the employer to deviate from this obligation, provided that the board considers the adjustment to be not justifiable and beforehand informs the works council and the advisory board. In 2015 and 2016, the employer made use of this exception clause and adjusted the pension benefits only insofar as the increase took into account the inflation rate but was significantly below the official adjustment of state pension benefits. The employer argued that the whole group is subject to continuous restructuring measures due to poor developments in the economic markets as well as the global economic and financial crisis, requiring austerity measures which also include the level of pension benefits. The deviating adjustment would lead to significant short-term savings in the amount of EUR 2,7 million as well as a reduction of pension provisions to be shown on the balance sheet in the amount of EUR 43,6 million. Moreover, in the employer’s view, the adjustment was determined in accordance with the principle of protection of legitimate expectation and the principle of proportionality, being based on factual reasons which are transparent, commendable and non-arbitrary. The plaintiff argued that the exception clause can only be applied if the existence of the company was endangered. This requirement, argued the plaintiff, was not met since both profit and dividends increased in 2015.

The State Labour Court Hamburg followed the plaintiff’s view and held that the adjustments were too low. The plaintiff is entitled to adjustments in accordance with the increase in state pension benefits. The court stated that the employer’s decision to deviate must be based on reasonable discretion by taking into account all significant facts and the interests of both sides. This did not happen in the present case, since – inter alia – the employer did not provide detailed information in terms of the company’s initial economic situation (economic status quo at the time he made his decision to deviate). Without such information it is not possible to assess whether or not a (normal) adjustment would have been “not justifiable”. Moreover, the employer did not provide information on the assumed long-term cost burden which would arise from a (normal) adjustment. General statements on the amount of cost savings resulting from the restructuring measures do not allow any conclusion that a normal adjustment would have led to a difficult economic situation allowing the employer to deviate from his obligation to adjust pension benefits.

The decision shows that pension adjustment clauses must be drafted as clearly as possible. An employer should determine in detail the requirements which enable deviations to the detriment of employees and he must provide a detailed statement of reasons at the time he decides to deviate (including particularly the company’s economic status quo and the assumed negative development which would arise otherwise).