What is the Decision About?
At the center of a recent decision of the Federal Labor Court (Bundesarbeitsgericht – BAG) is the legally sound design of the review process for the adjustment of company pensions.
In the case at hand, a company pensioner challenged his former employer’s approach. The allegation: the company pension was insufficient, having only been partially adjusted; the required complete inflation adjustment had, in his view, been unjustly omitted.
Almost one year after the Higher Labor Court of Düsseldorf (judgment dated 9 October 2024 – 12 SLa 168/24) had dismissed the company pensioner’s appeal, the BAG, with its judgment dated 28 October 2025 (3 AZR 24/25), also dismissed the further appeal, thus ruling in favor of the former employer.
The BAG clarified: there is no absolute obligation to make a full pension adjustment. Rather, the obligation to adjust stands or falls with the economic forecast to be made on the review date. Especially in times of significant uncertainty – for example, caused by pandemic or geopolitical events – negative forecasts can mean that no (full) adjustment is to be made.
Particularly noteworthy is the classification of Additional-Tier-1 bonds in this context.
This ruling provides companies and those responsible for occupational pensions with significantly greater legal certainty and strengthens the transparency of business arguments in the context of pension adjustment reviews.
What Happened?
The plaintiff is a company pensioner of the defendant and has been receiving occupational pension benefits since 1 July 2007. As a result of the adjustment review as of 1 July 2022 (the review date), the defendant voluntarily increased pension benefit payments by 2%, justifying the absence of a full adjustment in line with inflation by citing negative returns on equity over the past three years, as well as substantial risk factors at the time (COVID-19 pandemic, Ukraine war, energy crisis), which were said to be contrary to a positive outlook for the future.
By contrast, the plaintiff demanded a full adjustment according to consumer price index developments – 21.14%. He based this, among other things, on what he saw as the already foreseeable rise in interest rates at the time of the adjustment decision and thus expected revenue increases, as well as actual improvements in the company’s economic situation in 2022 and positive trends apparent in the company’s IFRS interim disclosures and management reports. Furthermore, he argued that the Additional-Tier-1 bonds issued by the defendant bank essentially constituted equity capital and should therefore be included in the consideration. Finally, returns from the pension trust (CTA) set up by the company should also be included in the forecast, as they would be sufficient to cover the financial burden of the requested adjustment.
The defendant replied mainly that its annual financial statements for 2019 to 2021 prepared on the basis of the German Commercial Code standards (Handelsgesetzbuch – HGB) showed a decline in equity and negative returns on equity. An assessment of the economic situation according to IFRS and its management reports was, legally, irrelevant. Moreover, it pointed out that Additional-Tier-1 bonds are legal liabilities under German commercial law and that, as of the review date, the turnaround in interest rates and resulting expectations for increases in profits at the bank were not reliably foreseeable.
The BAG’s Decision – Key Points
The BAG confirmed the lower court’s decision and dismissed the plaintiff's appeal. While the full judgement is not yet published and therefore a final assessment is not currently possible, the following key points can already be taken from the decision:
- Decisive for the pension adjustment review to be carried out in accordance with Section 16 para. 1 of the German Company Pension Act (Betriebsrentengesetz – BetrAVG) is the economic forecast to be established as of the review date, based on reliable, established data from HGB financial statements. IFRS financial statements, management reports, press releases, and internal planning are less important.
- The company’s economic situation justifies non-adjustment if it is sufficiently probable that neither an adequate return on equity nor sufficient equity capital will be available until the next review date.
- The COVID-19 pandemic and the geopolitical situation (Ukraine war, energy crisis) created a volatile data situation as of the review date. It was not justified to disregard the associated burdens.
- Positive developments after the review date are only to be considered in the forecast if, at the time the decision is taken, they were already sufficiently reliably foreseeable. Future events/developments that could not be reliably predicted as of the review date can be disregarded.
It remains to be seen to what extent the BAG aligns with the lower court’s reasoning. Of particular interest will be statements by the BAG regarding the consideration of assets or returns of a CTA and the court’s opinion on the treatment of financial instruments such as Additional-Tier-1 bonds. The detailed judgement is therefore eagerly awaited.
Conclusion and Outlook for Practice
The BAG's decision is correct. Unsurprisingly, the court has continued to develop its case law on familiar ground and thus created more legal certainty in an area that is increasingly presenting employers with challenges in practice – the obligation to regularly review pensions adjustments (Section 16 para. 1 BetrAVG)
The main consequences for the handling of the pension adjustment reviews in practice are as follows:
- The employer has a margin of discretion as of the review date. This margin should be used, and existing CTAs may play a role.
- Employers should always prepare adjustment decisions made in detail and support them with a reliable, documented HGB data basis, covering at least a three-year reference period. The basis for the adjustment review as of the review date should be as detailed as possible.
- Management reports, forecasts, market commentaries, etc., are important components of corporate communication. Before publication, they should be examined, where possible, as to whether they could negatively affect the planned adjustment decision.
- The adjustment decision is not an all-or-nothing decision. The ruling shows clearly that employers are free to make only a partial adjustment, as long as this decision is taken within the boundaries established by the courts.
- Ultimately, banks are likely to await the BAG’s judgement for possible conclusions on the consideration of issued Additional-Tier-1 bonds in adjustment reviews.
