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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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