Most types of German company pensions are required to be adjusted for the effects of inflation from time to time. The German Company Pension Act provides that, as a rule, every three years, the level of paid pensions is to be checked and adapted in line with "equitable discretion", taking into account both the interests of the pensioner and the economic situation of the (former) employer.
In the past year, there have been a number of decisions of the Federal Labor Court on the details of such adjustments.
Two particularly interesting decisions deal with the question of the circumstances under which a company is permitted exceptionally not to make an adjustment. A pension adjustment need not be made if the company's competitiveness would be jeopardized, measured by reference to the yield on the company's equity capital. An adequate interest on equity capital consists of a basis interest rate corresponding to the net yield of public loans, plus a risk surcharge of 2 percent which is deemed to compensate for the entrepreneurial risk. Below these margins, there normally is no requirement to adjust the pension payment.
In the first relevant decision (dated August 21, 2012, 3 ABR 20/10), the Federal Labor Court ruled on the calculation method which determines the interest on equity capital. It held that calculation in line with the German Commercial Code, and not any international accounting principle such as IFRS, is decisive. The argument for this was the fact that all German companies have such calculation available, and thus uniform criteria can apply. Corrections may nevertheless have to be made in view of extraordinary gains or losses.
In the second decision (dated May 28, 2013, 3 AZR 125/11), the Federal Labor Court dealt with a situation in which the legal successor company of the company initially making the pension promise had been economically weak. However, this successor company was merged with an economically strong and profitable company. Accordingly, a dispute arose as to which aspect would be decisive for the adjustment (i.e. the weakness of the company that made the pension promise or the financial position of the combined entity). The Federal Labor Court held that statutory law refers to the whole company and that, consequently, the good overall situation of the combined entity after the merger is decisive. Otherwise, the adjustment decision would have to be made by reference to a company which no longer exists. The lesson to be learned is that acquiring a distressed company and merging it with a profitable business may well trigger a pension adjustment which would otherwise not be required.
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