In a ruling of 20 September 2020 (docket number: 3 AZR 303/18), the Federal Labour Court confirmed that a so-called CTA (Contractual Trust Arrangement) – which is a special trust structure for occupational pensions – is a suitable vehicle for protecting pension commitments against insolvency. In addition, however, the Federal Labour Court has raised another important question (that has not yet been answered but much discussed in the meantime), namely: Are such trust structures to be regarded as a social institution [Sozialeinrichtung] according to the Works Constitution Act [Betriebsverfassungsgesetz] and as such triggering a right of co-determination of the works council?

Background:

CTAs are a popular and a common instrument for funding pension obligations. The employer pays money to an independent trustee who manages the assets and, in the event of insolvency, uses the assets to meet the pension liabilities. Since pension commitments under German law are furthermore legally protected against insolvency up to a certain amount via the Statutory Pension Security Association [Pensionssicherungsverein, PSV], the practical relevance of CTAs is (in the main) limited to the part of the pension commitment that exceeds these limits. In addition to insolvency protection, however, a CTA also pursues balance sheet purposes; the assets create plan assets according to accounting standards, which can be offset against the underlying pension liabilities in the balance sheet. This improves the balance sheet and is therefore for many companies the main reason why they implement a CTA structure.

In the case at hand, the trustee (CTA) and the Statutory Pension Security Association argued about the order of the claims to be secured with the CTA assets: The CTA had determined that pension adjustments (COLA adjustments) should be secured with the assets as a priority, as these are not secured by the PSV.

Ruling and conclusion:

The Federal Labour Court has ruled in favour of the trustee and confirmed (once again) that CTAs are suitable instruments for insolvency protection. This basic statement did not really surprise anyone. However, in a side passage, the court implied that CTAs would constitute so-called social institutions [Sozialeinrichtungen]. Since the term social institutions [Sozialeinrichtung] also appears in the Works Constitution Act and triggers the co-determination of the works council there, the question has arisen as to whether CTAs indeed have to be qualified as social institutions [Sozialeinrichtungen] in the meaning of the Works Constitution Act and trigger co-determination rights of the works council.

The court left this question open, and it remains to be seen if and when this question will be finally decided in another proceeding. We consider the prevailing view in practice as convincing, according to which a CTA is not to be regarded as a social institution in the sense of the Works Constitution Act. Essentially, it can be argued that a social institution within the meaning of the Works Constitution Act must, according to common understanding, serve a social purpose and provide for an additional benefit. However, the main purpose of CTAs is typically to create financial impacts on the balance sheet and reduce liabilities through matching plan assets.

Should the Federal Labour Court decide otherwise, the attractiveness of CTAs could decrease noticeably, as there are numerous different topics when implementing such trust structures, which would then have to be coordinated with the works council in a time-consuming manner. From the employers’ point of view, it would therefore be welcome if the current practice remained unchanged and the works council does not receive any rights of co-determination.