By judgment of 20.03.2018 (3 AZR 277/16) the Federal Labour Court has ruled that a transitional payment (taking into account pension payments) that is granted to a former employee during the first six months after their retirement is to be deemed to be an occupational pension and is, therefore, covered by the German Pension Insurance Association (Pensionssicherungsverein).

The former employee (plaintiff) was granted a transitional payment on the basis of a works agreement by his former employer, which was insolvent at the time when the payment was due. According to that agreement, the transitional payment was intended to be granted for a period of six months, provided that the employee retired from the employer immediately after his active period of employment ended.

As of January 2015, the plaintiff received an occupational pension. Due to his employer’s insolvency, this occupational pension was granted by the German Pension Insurance Association. The plaintiff claimed that the German Pension Insurance Association was obliged to pay the transitional payment as well, since, in his opinion, it was to be considered as an occupational pension according to German law. In the German Pension Insurance Association’s view the transitional payment was not to be classified as a pension benefit as defined by German occupational pension law.

The Federal Labour Court rejected the German Pension Insurance Association’s view and upheld the plaintiff’s claim, according to which the German Pension Insurance Association is now obliged to pay the transitional payment. The court argued that the transitional payment is referable to a risk as defined in the German Occupational Pension Act (“old age”). The terms of the payment require that the employee reaches retirement age; the payment is not being made for the purpose of improving the plaintiff’s financial situation until he retires, but solely to improve his standard of living after retirement. As a result, the transitional payment is to be classified as a pension benefit.

The classification of such payments, commonly referred to as “transitional payments” (“Übergangszahlungen”), is often unclear. It always requires an in-depth analysis of the purpose that is intended by the payment. If the payment is referable to a risk as defined in the German Occupational Pension Act, it is to be considered as an occupational pension and will therefore be covered by the German Pension Insurance Association. This is not the case if, for example, the payment is only made until the employee reaches retirement or is compensation for the period until the employee has found a new job.