Background

There are a large number of “pensioner companies” (Rentnergesellschaften) in Germany. They relate to undertakings that have operated in the past, frequently with many employees, but have since closed down or sold their business operations or passed them on to another company within their group. A pensioner company then merely processes the pensions of its former employees, and has sufficient assets to pay the ongoing benefits. The pensioner company is often integrated into a group by means of a control and profit transfer agreement with a parent company.

Obligations on pensioner companies to provide inflationary increases

Every three years, employers are obliged by German law to examine whether pensions should be adjusted to reflect inflation and, if so, by what amount. A company can refuse to make such an adjustment if it does not have sufficient funds to do so. Historically, a pensioner company was able to invoke such an argument solely on the basis of its own financial status, (not that of its parent company) and a control and profit transfer agreement with an economically strong parent company did not, in and of itself, lead to a duty to provide inflationary increases to pensions. 

New developments

The Federal Labour Court has now changed its approach and has held that, where a control and profit transfer agreement exists, the pensioner company must adjust pensions whenever the financial position of the parent company is sufficient to allow pension increases. The pensioner company must obtain the necessary funds for such increases from the parent company. This may also lead to an obligation to adjust pensions for periods in the past.

Comment

Both pensioner companies and their parents are now exposed to the risk of retrospective and future pension increases; it is expected that pensioners will now initiate court proceedings in order to claim for an increase in their pensions. It may be possible to mitigate this exposure by terminating the control and profit transfer agreements but this may in turn give rise to difficult company and pensions law questions.