(3 AZR 427/08, 29 September 2010)

The issues

According to German law, every three years an employer must adjust its current company pensions to the rise in the cost of living, but only if its financial situation allows it to do this. When assessing the employer's financial situation, it has been a frequent matter of dispute whether only the immediate employer is to be considered, or whether the financial situation of the parent company should also be taken into account.


In the present case, the immediate employer was threatened with insolvency, but the parent company was financially stable. The parent company had delivered a binding letter of comfort to the Pension Guarantee Fund, Pensionssicherungsverein ("PSV") to avert the insolvency of the subsidiary. In this comfort letter, the parent company undertook to provide funds to the subsidiary so that the subsidiary could maintain its business operation over a particular period.


The Federal Labour Court decided that owing to the poor financial situation of the immediate employer, it was not obliged to increase pensions in payment. The employer did not need to take into account the strong financial situation of the parent company. Factoring in the parent company was only possible to the extent that, according to company law, the subsidiary could pass the burden of the pension increases on to the parent company, thus refinancing itself. This was the case, first and foremost, if a control and profit transfer agreement existed between the subsidiary and the parent company. By contrast, the comfort letter from the parent company did not fulfil these conditions as it was directed to the PSV solely as an external declaration. It did not constitute the required internal liability, since the subsidiary could not derive from it any claims of its own against the parent company. So, even binding financial commitments did not trigger any obligation to increase pensions if these commitments were given to third parties. The court also hinted that it might restrict the possibilities of factoring in the parent company's financial state in the assessment of possible pension adjustments in further intra-group situations. Employers will therefore be following with keen interest how judicial decisions develop in this area.