A German company granting a ‘market average’ interest rate as guarantee for an employee’s pension payout can now use federal zero-coupon bonds as a basis for calculation, according to a recent court ruling.

Germany’s federal labour court – the Bundesarbeitsgericht (BAG) – reached the verdict last week, overturning a previous decision by a regional court in the spring of 2015.

A former employee sued the company, whose name has not been disclosed.

When the employee retired in 2011, he said he expected the company to guarantee 3.55% of the capital remaining in his pension account.

The company, however, had employed the yield curve for German and French government bonds as the basis for its calculations and instead offered a guarantee of 0.87%.

The regional court in Nuremberg estimated that, based on the returns from some German bunds bought in February 2012, the guarantee should be 2.13%.

The BAG, however, has now ruled that the company had the right to its own interpretation of the phrase ‘market-average interest’ set down in the contract.

Sascha Grosjean, a partner at law firm Taylor Wessing, told IPE: “It is legally interesting to see the BAG says it is not for any court to decide how this provision of a ‘market-average interest’ set down in the contract is to be interpreted.”

The German pension fund association (aba) agreed that it was “positive” the court had confirmed the employer’s right to interpretation.

An aba spokesperson added that the term ‘market-average interest’ had not been “defined anywhere”.

Mercer’s Thomas Bischopink and Stefan Oecking said German companies could breath a “sigh of relief” over the verdict.

“It means that an employer can use low-risk investments to achieve a ‘market-average interest’,” they said. 

Grosjean said the BAG’s ruling was about the phrasing within a contract rather than the phrasing in law.

He added that such contracts were the exception, not the rule, as, in most German pension plans, there is no additional interest guarantee on pension assets remaining with the employer before payout.

Bischopink and Oecking said employees would also “thank the BAG” for its verdict.

A different outcome, they said, might have deterred companies from offering instalments, and lump-sum payouts enjoy less of a tax advantage in Germany, they added. 

Grosjean pointed to the wider implications of the verdict, with “the low-interest-rate environment affecting workers directly for the first time”. 

Under German law, pension plans must come with a guarantee; if the Pensionskasse or insurer fails to fulfil this guarantee, the employer must top up the scheme.

At present, there are no so-called ‘pay-and-forget’ models in Germany’s second pillar, but they being debated under proposals for industry-wide pension plans.

“But we can already see some Pensionskassen and insurers struggling with the guarantees,” Grosjean said.

From 2017, the legal minimum guarantee life insurers must meet will fall below 1% for the first time; it was set at 0.9%, down from the current 1.25%.

In recent months, a number of court verdicts – including the BAG’s – have been reached allowing providers to cut guarantees if a company pays the difference.

Grosjean said he was convinced the ‘pay-and-forget’ model would come to Germany eventually, in particular to make occupational pensions more attractive for small and medium-sized enterprises.

“Just as in this court case,” he said, “it is a question of whether an employer has to increase the accrued assets or merely keep them safe.”

Bischopink and Oecking took pains to emphasise that “vague phrasings” such as ‘market-average interest’ were “very often the reason for a dispute between employer and employee and should be avoided”.