GERMANY – The Versorgungsanstalt des Bundes und Länder, a €10bn pension fund for public sector employees, has been dealt a legal blow in its efforts to switch to a capital-funded system from pay-as-you-go.

VBL provides a corporate pension to 4m employees in the public sector, including civil servants. It has 1.9m active members.

Since January 1 2002, the fund has ceased using PAYG for calculating pension benefits for members that had not reached the age of 55 on that date. Instead, VBL calculates the benefits on the notional assumption that these members contribute 4% of their annual salary to the fund.

But a court in Karlsruhe ruled late last week that the method was unfair. It agreed with plaintiffs from the VBL who argued that unlike the previous method, it would lead to a wide disparity in future pension benefits.

The court has ordered VBL’s backers – government employers and public sector unions – to agree a new method for calculating the benefits that would correct the disparity. However, the court upheld the fund’s basic right to use the new method.

VBL has appealed against the ruling to a higher administrative court. VBL spokesman Percy Bischoff said the fund was confident it would be overturned since VBL was on solid legal ground.

“The justification for the new calculation method can be found in Germany’s corporate pension law,” Bischoff said.

“The court has also no legal right to interfere with decisions made by collective bargaining. The method was adopted following agreement by government employers and the unions,” he added.

VBL’s transition to a capital-funded system in January 2002 followed enormous demographic pressure on the fund. Experts estimated that prior to the move, there were only 1.5 insured members for every one pensioner.

Bischoff noted that the move had already alleviated the pressure in that the fund had been spared a significant increase in pension expenditure.

VBL invests most of its €10bn portfolio in fixed income, with smaller portions allocated to equities and real estate. The fund said, however, that its asset allocation could change following the imminent compiling of a new asset-liability study.