It all depends on timing: Federal Employment Court provides further clarity on company pension adjustment reviews

What is the decision about?

A recent decision by Germany’s Federal Employment Court (Bundesarbeitsgericht) focuses on legally sound arrangements for reviews to adjust company pensions.

In the case at hand, a recipient of a company pension challenged his former employer’s approach. The allegation: the company pension was insufficient, having only been partially adjusted; the required full adjustment for inflation had in his view been unjustly omitted.

Almost a year after Düsseldorf Higher Employment Court (judgment dated 9 October 2024 – 12 SLa 168/24) had dismissed the pensioner’s appeal on points of fact and law, the Federal Employment Court also dismissed the further appeal on points of law in its judgment dated 28 October 2025 (3 AZR 24/25), thus ruling in favour of the former employer.

The Federal Employment Court clarified: there is no absolute obligation to make a full pension adjustment. Instead, the obligation to adjust stands or falls with the economic forecast to be made on the review date. Especially in times of significant uncertainty (caused by pandemics or geopolitical events, for example) negative forecasts can mean that no adjustment or 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-related arguments in the context of pension adjustment reviews.

What happened?

The claimant was a beneficiary of the respondent’s company pension scheme and had been receiving benefits since 1 July 2007. As a result of the adjustment review as of 1 July 2022 (the review date), the respondent 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 and 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 claimant demanded a full adjustment to reflect the 21.14% increase in the consumer price index. 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 respondent (a bank) essentially constituted equity capital and should therefore be taken into consideration. Finally, he maintained that 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 respondent countered this mainly by stating that its annual financial statements for 2019 to 2021 prepared on the basis of German Commercial Code (Handelsgesetzbuch) standards showed a decline in equity and negative returns on equity. It maintained that an assessment of the economic situation according to IFRS and its management reports was irrelevant from a legal perspective. Moreover, it pointed out that Additional-Tier-1 bonds are legal liabilities under German commercial law and that at the review date the turnaround in interest rates and resulting expectations for increases in profits at the bank were not reliably foreseeable.

The Federal Employment Court’s decision – key points

The Federal Employment Court confirmed the lower court’s decision and dismissed the claimant’s appeal. While the full judgment 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(1) of the German Company Pensions Act (Betriebsrentengesetz) is the economic forecast to be established as of the review date, based on reliable, established data from financial statements prepared in accordance with German commercial accounting principles. 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 at the review date. Disregarding the associated burdens was not justified.
• Positive developments after the review date are only to be considered in the forecast if they were already sufficiently reliably foreseeable at the time the decision was taken. 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 Federal Employment Court will adopt the lower court’s reasoning. Statements by the federal court regarding the consideration of assets or returns from a CTA and its opinion on the treatment of financial instruments such as Additional-Tier-1 bonds will be of particular interest. The detailed reasoning for the judgment is therefore eagerly awaited.

Conclusion and outlook in practice

The Federal Employment Court’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(1) of the German Act to Improve Company Pension Schemes (Gesetz zur Verbesserung der betrieblichen Altersversorgung))

The main consequences for the handling of pension adjustment reviews in practice are as follows:

• Employers have a margin of discretion as at 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 data basis based on commercial accounting principles, covering at least a three-year reference period. The basis for the adjustment review as at 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.
• A decision to adjust pensions 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 be eagerly awaiting the Federal Employment Court’s judgment for possible conclusions on how any Additional-Tier-1 bonds issued should be considered during adjustment reviews.