Content and scope of co-determination when introducing and amending commitments to occupational pension schemes (bAV)
27 October 2022
With the exception of the entitlement to deferred compensation, employers are free to grant employees occupational pension benefits within the scope of their entrepreneurial freedom of decision. However, existing co determination rights of the works council must not be completely ignored. In fact, the works council has co determination rights that must be taken into account when introducing and amending occupational pension schemes. Further, in practice, the establishment of occupational pension entitlements and the corresponding benefit plans are often based on works agreements. In this respect, the question arises as to which measures the employer can implement "on its own" and for which it is dependent on the involvement of the works council. The following article will provide a brief overview of this issue.
Basic decisions of the employer not subject to co-determination
The introduction of an occupational pension scheme for employees is a voluntary benefit provided by the employer. The employer is free to determine whether, to what extent and for what purpose the employer financed occupational pension scheme is to be provided. According to the case law of the Federal Labour Court (BAG), four basic areas of decision-making in connection with occupational pension schemes – the "four basic freedoms" – have emerged which are not subject to co-determination under works constitution law (Federal Labour Court, 29 July 2003 – 3 ABR 34/02). According to this, the employer decides completely autonomously:
- whether they wish to introduce an occupational pension scheme for their operation, company or group;
- the financial resources they wish to provide for the occupational pension scheme;
- which specific group of persons shall be beneficiaries; and
- which implementation form and which pension provider should be selected.
Since the decision to introduce an occupational pension scheme and the related issues entail a major financial risk for the employer, the employer may decide for themselves whether they wish to expose themselves to such a risk, unless there is a collective bargaining agreement on this. Therefore, the question of which pension risks (advanced age, invalidity, death) the employer wants to cover with the occupational pension scheme and whether they want to grant a pension benefit in the form of a pension or a capital payment is also free of co-determination. As the decision to introduce an employer-funded occupational pension scheme is not subject to any right of co-determination, the works council cannot force the introduction on its own initiative. Notwithstanding the freedom of decision, when determining the group of persons, the prohibition of discrimination and the principle of equal treatment must be observed, in particular between men and women and in the case of fixed-term and permanent employees. Differentiations require a sufficient objective reason.
Co-determination in occupational pension schemes under works constitution law
If the employer wishes to grant an occupational pension scheme to its employees and they have taken the necessary decisions (which are not subject to co-determination), they must observe the co determination rights under sec. 87 para. 1 no. 8 and no. 10 of the Works Constitution Act (Betriebsverfassungsgesetz "BetrVG"). However, this must involve general or collective regulations that relate to a specific group of people and not a design of individual cases.
In addition, the external implementation forms of support fund, pension insurance fund and pension fund may be social institutions within the meaning of sec. 87 para. 1 no. 8 BetrVG. This requires that their scope is limited to the respective operation, company or group. On the other hand, intercorporate institutions which as "competition funds" are directed at an undefined group of persons are not covered by the works council's right of co-determination. If a social institution exists, the right of co-determination applies to the form, design and administration of this social institution. This means that in the context of occupational pension schemes, the works council has a right of co-determination in the design of the benefit plan and the distribution principles. The benefit plan or the pension scheme regulates the details of the accrual and expiry of occupational pension expectancies and entitlements.
In the case of direct pension commitment and direct insurance, on the other hand, the catch-all provision of sec. 87 para. 1 no. 10 BetrVG applies since the voluntary occupational pension scheme is a matter of remuneration and, for no. 8 BetrVG, in the case of direct insurance the limitation of the sponsoring undertaking's sphere of activity to the operation, company or group is missing and in the case of direct pension commitment the independent institution is missing. If the employer concludes life insurance contracts for the benefit of its employees for the purpose of direct insurance, the benefit plan and the provisions on the employees' contributions to the insurance are also subject to co-determination.
Change of implementation form and insurance company
As explained above, the employer's decision to introduce an occupational pension scheme is not subject to co-determination, also with regard to the choice of the implementation form. The same applies to the selection of the specific insurance company with which the life insurance contracts are concluded in the case of direct insurance (Federal Labour Court dated 16 February 1993 – 3 ABR 29/92). Since the choice of the implementation form and the insurance company are among the decisions which are not subject to co determination, the change of the implementation form or the insurance company by transferring the insurance policies is in principle also free of co-determination. However, this only applies as long as the distribution plan and the employees' contribution burden remain unaffected (Federal Labour Court dated 16 February 1993 – 3 ABR 29/92).
Reduction or discontinuation of voluntary occupational pension benefits
Just as the employer may grant occupational pension benefits without co-determination, they are also entitled to restrict the financial resources without co-determination and to close or change the purpose of a pension scheme (Versorgungswerk) or social institutions established for this purpose (e.g. support fund) without the involvement of the works council.
It should be noted, however, that after financial resources have been reduced, they must be redistributed to the existing beneficiary employees. This process, the establishment of the new benefit plan on the basis of the reduced financial resources, is again subject to works council co-determination.
Works agreements as a legal basis
In practice, occupational pension benefits are often established and structured through – voluntary – works agreements as a legal basis. These can regulate both the enforceable rights of co-determination, for example with regard to the design of the benefit plan and the principles of distribution, as well as the matters that are not subject to co-determination. Such works agreements on occupational pension schemes are usually of indefinite duration. However, unless otherwise agreed, they may be terminated with three months' notice. The right of termination does not require any justification and is not subject to review as to content (Federal Labour Court dated 18 September 2001 – 3 AZR 728/00).
Pension schemes may also be introduced on an individual basis. However, the aforementioned co determination rights would still have to be observed, unless it is an individual commitment. A works agreement as the basis for an occupational pension scheme is a good solution because it allows the introduction of a uniform regulation, especially if it is related to a company or group, and only an agreement with the works council is required for a change. With individual agreements, on the other hand, each individual employee would have to agree to the changes, which is difficult in practice, especially with larger occupational pension populations.
Termination of works agreements on occupational pension schemes
In principle, terminated works agreements are effective until they are replaced by another agreement. In matters of occupational pension schemes, however, this is generally not the case, as the after-effect (sec. 77 para. 6 BetrVG) explicitly refers only to works agreements on matters of enforceable co-determination, which does not include works agreements on occupational pension schemes. According to settled case law, after-effect can only be considered in exceptional cases, if a comparable new regulation under works constitution law is sought in close temporal connection with the expiry of the notice period (Federal Labour Court dated 18 September 2001 – 3 AZR 728/00). In this case, the employer is concerned with the enforcement of a change in the benefit plan, which is subject to enforceable right of co-determination. If the employer terminates the works agreement without aiming to continue the occupational pension scheme, there is no after-effect.
Since the termination of such a works agreement on occupational pension schemes not only prevents new employees from joining the pension scheme, but also affects the rights of employees who have already benefited, the principles of protection of legitimate expectations and proportionality must be observed with regard to the legal consequences of the termination (Federal Labour Court dated 13 November 2007 – 3 AZR 455/06). The vested rights already acquired by the employees are protected by the three-step theory developed by the Federal Labour Court.
Amending or replacing works agreement
An existing works agreement on occupational pensions may also be changed by a works agreement amending or replacing it. According to the time conflict rule, the new works agreement then applies and replaces the previous one. In the opinion of the Federal Labour Court, however, this does not apply without restrictions for occupational pension schemes. Rather, in this case the new regulation is subject to a fairness review and replacing agreements are to be reviewed according to the principles of the protection of legitimate expectations and the principle of proportionality on the basis of the so-called three-stage theory:
- 1st vested rights level – interference in vested entitlements: In principle, there may be no interference in vested entitlements and entitlements to future pension payments. A reduction of non-forfeitable and insolvency-protected entitlements is only permissible for compelling reasons. These include, for example, unplanned overprovision or extraordinary additional burdens that were not foreseeable when the occupational pension scheme was introduced,
- 2nd vested rights level – interference in a vested dynamic: Changes in increases that result solely from variable calculation factors independent of length of service, i.e. interference in the future vested entitlement dynamic (Anwartschaftsdynamik), can only be justified for good reasons (e.g. endangerment of assets),
- 3rd vested rights level – interventions in not yet vested service-dependent increases: At this level the lowest requirements apply for interventions. Factual and proportionate reasons are sufficient, which must not be arbitrary and which clearly show the circumstances and considerations that gave rise to the change in the pension commitment (e.g. difficult economic situation).
Conversion of remuneration
Company pension commitments through deferred compensation may also be regulated in a voluntary works agreement. However, the works council has no enforceable right of co-determination under the existing statutory provision in sec. 1a of the Occupational Pensions Act (Betriebsrentengesetz "BetrAVG"). Pursuant to sec. 87 para. 1 introductory sentence BetrVG, the works council only has co-determination rights if there are no statutory or collectively agreed regulations on the matter. However, the details regarding occupational pension schemes through deferred compensation are comprehensively regulated in the Occupational Pensions Act (sec. 1a BetrAVG). In addition, there are a large number of collectively agreed regulations, so that a regulation in a works agreement requires an opening clause in the collective agreement. The question of the choice of the concrete implementation form for deferred compensation is in any case not subject to co-determination.
When introducing, amending or replacing (existing) occupational pension schemes, it should always be carefully examined whether and which co-determination rights of the works council have to be taken into account. The introduction of occupational pension schemes by means of works agreements is a good way to regulate collective issues on occupational pension, since later changes can be achieved more easily in a uniform manner and with regard to only one negotiating partner (the works council). However, it is important to consider the enforceable elements of co-determination and the risks associated with changes to works agreements on occupational pension schemes. In particular, unjustified interventions in vested pension entitlements and measures implemented in violation of works council co-determination to the detriment of employees may lead to considerable financial burdens retroactively.