Occupational Pensions: No liability of the employer for a reduction of benefits by an external pension carrier before the pension benefits fall due

By judgment of 12 May 2020 (docket number: 3 AZR 157/19) the Federal Labour Court (Bundesarbeitsgericht – BAG) has ruled that the employer’s liability for pension benefits based on pension commitments under the involvement of an external pension carrier pursuant to Section 1 Paragraph 1 Sentence 3 of the German Company Pensions Act (BetrAVG) only exists from the time when the pension payments become due and not before. Therefore, an employer is not obliged to pay additional contributions to an involved external pension carrier in the event that this carrier adjusts its tariff such that he demands additional contributions in order to avoid a reduction of benefits.

The employer and the former employee were in dispute over the question of whether the employer is obliged to pay additional contributions to a so-called captive pension insurance (Pensionskasse) which has been involved as external carrier and which had to demand additional contributions in order to avoid a reduction in benefits (compared to the benefit level as provided for in the pension commitment granted by the employer). The plaintiff was of the opinion that the employer has granted a pension commitment which also comprises such additional contribution payments, referring to the employer’s mandatory liability pursuant to Section 1 Paragraph 1 Sentence 3 of the German Company Pensions Act (BetrAVG). According to this provision, an employer is generally obliged to compensate for reductions in benefits in the event that an external pension carrier is involved and that this carrier is unable to provide the pension benefits in the amount promised by the employer. The employer rejected the claim.

The Federal Labour Court ruled that the employer was not obliged to pay additional contributions to the captive pension insurance. The Court stated that the employer’s pension commitment did not comprise such obligation since it does not arise from Section 1 Paragraph 1 Sentence 3 of the German Company Pensions Act (BetrAVG); This provision only refers to the period from which pension benefit payments are due and not to periods before that date. Whether – in the event that a pension promise given by the employer refers dynamically to an insurance tariff – an employer would then (at this later stage) be liable for the reduction of benefits resulting from the tariff amendment made by the external pension carrier depends on whether the relevant legal prerequisites for a deterioration of the pension commitment at the time when such amendment had been made would have been met. A deterioration requires substantiated reasons as well as compliance with the principles of the protection of legitimate expectations and proportionality. If such requirements had been met at that point in time, the employer would not be obliged to compensate for the reduction in benefits.

The ruling shows that liability of the employer for an external carrier pursuant to Section 1 Paragraph 1 Sentence 3 of the German Company Pensions Act only comes into question from the time when the benefit payments become due. Whether the employer is then liable from this point on requires an examination of each individual case.