Occupational Pensions: European Court of Justice confirms protection of employees in the event of employer insolvency

By judgment of 19 December 2019 (docket number: C-168/18) the European Court of Justice has ruled that employee’s pension entitlements which are based on so-called captive pension insurance schemes (Pensionskassenzusagen) are (to a certain extent) protected from benefit reductions in the event of employer insolvency.

The plaintiff participated in a captive pension insurance scheme (Pensionskasse). From 2000 on he received benefit payments. In 2003 the captive pension insurance ran into financial difficulties and had to reduce its level of benefit payments. As a result, the employer became liable for the difference in benefits resulting from the reduction. In 2012 the employer became insolvent and, thus, was not able to continue assuming the aforementioned difference in benefits. The plaintiff was of the opinion that the German Statutory Insolvency Protection Fund (PSVaG) was obliged to step in and to assume the difference in benefits from then on.

The German Statutory Insolvency Protection Fund rejected the claim as – under (current) German pension law – it is not obliged to assume obligations which arise from captive pension insurance schemes. The case went through all court instances and ended up at the Federal Labour Court (Bundesarbeitsgericht). The Federal Labour Court submitted the case to the European Court of Justice as there were considerable doubts that the German Statutory Insolvency Protection Fund was liable for the difference in benefits resulting from the reduction.

The European Court of Justice did not make a final decision on the question whether or not the German Statutory Insolvency Protection Fund is liable. It referred to a directive relating to employee protection and ruled that this directive obliges the member states to guarantee a certain level of protection of pension benefits. Member states have to provide special protection in the event that a reduction of pension benefits would be disproportionate – even if the pension benefit level is above 50 % of the original level. A reduction could be disproportionate if it seriously affects the person’s ability to make a living. The European Court of Justice referred the case back to the Federal Labour Court, stating that it is the role of the national court to rule if or not the directive also applies to the German Statutory Insolvency Protection Fund.

It is currently unclear how the German legislator will react to the decision. However, it is conceivable that in the future there could be better protection for pension entitlements which arise from captive pension insurance schemes, as there are several such captive pension insurances which have been struggling with financial problems in recent years. It remains to be seen if there will be any corresponding change in the law.