In the second quarter of 2026, we will publish a two-part review of the most significant case law of the Federal Labour Court in the field of occupational pension schemes from the previous year (2025). This first part focuses on two decisions concerning the adjustment of pension benefits and their implications for employers.
As with employment law generally, the often less prominent area of occupational pension schemes („betriebliche Altersversorgung“, bAV)—which employees regularly rank among the most valued benefits—is subject to constant change and must adapt to evolving factual circumstances, requirements and developments. In many instances, this evolution is shaped by the case law of the Third Senate of the Federal Labour Court („Bundesarbeitsgericht“, BAG), which has special jurisdiction in all matters relating to occupational pensions and clarifies both specific and more general questions of application through the interpretation and application of pension regulations and the underlying statutory provisions.
Against the backdrop of four key decisions issued in 2025, our two-part blog series examines the issues that particularly occupied the Court over the past year.
We begin with two decisions from September and October 2025 concerning the adjustment of pension benefits.
Federal Labour Court judgment of 25 September 2025 – 3 AZR 91/25
In its judgment of September 25, 2025, the BAG considered the conditions under which a flat-rate adjustment clause providing for an annual 1% increase in ongoing pension benefits may replace the statutory adjustment review under Section 16(1) of the German Occupational Pensions Act („Betriebsrentengesetz“, BetrAVG)—and thus, ultimately, any adjustment in line with the development of the consumer price index.
In this respect, the BAG made clear that a provision replacing the statutory adjustment review is permissible only in pension commitments newly granted after December 31, 1998. It is not sufficient for a legacy commitment merely to be transferred into a new system or amended accordingly. In particular, legacy commitments cannot be modified in this respect, meaning that employers remain subject to the statutory adjustment review under Section 16(1) BetrAVG and therefore, as a rule, to adjustments reflecting changes in purchasing power.
In the case underlying the decision, a pension commitment dating from 1998 had been transferred to a new pension system as of 1 January 1999, with the accrued entitlement or vested expectancy credited as an opening component under the new scheme. This did not constitute a new, independent commitment but, in economic terms, merely a modified continuation of the existing arrangement. Following this argument there was no genuine new commitment, so that the adjustment review under Section 16 (1) BetrAVG continued to apply. The BAG also noted, in passing, that the legal character of a pension commitment cannot subsequently be changed by protocol notes or similar instruments of the works council parties or the pension obligor, unless such instruments contain normative amending provisions.
In practice, existing pension regulations should therefore be reviewed carefully with regard to the applicable adjustment provisions. In some cases, a flat-rate annual adjustment of 1% introduced at a later stage may be invalid, potentially giving rise to significant legal and financial risks. If the adjustment obligation imposes an unreasonable burden on a pension obligor, other options for effectively amending these provisions—such as granting a genuine new commitment—should be considered.
Federal Labour Court judgment of 28 October 2025 – 3 AZR 35/25
The BAG’s decision from October 2025 also concerned the adjustment of pension benefits. The Court held that, in the case of a pension commitment containing a so-called split pension formula—put simply, this is a commitment within which different calculation methods apply to the portions of the pension below and above the social security contribution assessment ceiling—an adjustment of the portion above the contribution assessment ceiling that is to be made “in due course” at the employer’s discretion must be made in accordance with equitable discretion. The clause therefore contains a reservation of unilateral performance determination within the meaning of Section 315 (1) of the German Civil Code (Bürgerliches Gesetzbuch, BGB). Employers are therefore not free to exercise their discretion without limits.
According to the BAG, the preferential treatment of income above the contribution assessment ceiling must also be preserved when adjustments are made. In particular, it would be impermissible to omit the adjustment altogether. The BAG further set out criteria for determining when equitable discretion can still be assumed and when it is no longer satisfied. If employers fail to exercise the equitable discretion granted to them and do not make a corresponding determination, the court may substitute that determination.
For practical purposes, this means in particular that any exercise of discretion by the employer should be sufficiently documented. Ideally, the documentation should also set out whether and to what extent the pension provider took account of the purpose of the commitment and the interests of the parties. There is no automatic indexation, for example by linking the benefit to the contribution assessment ceiling. Care must also be taken to ensure that the portion of the commitment above the contribution assessment ceiling is not ultimately eroded.
Have we sparked your interest in occupational pension schemes? In the second part of our review, we examine further key decisions by the Federal Labour Court (BAG) in the field of occupational pensions from 2025 and highlight their practical implications for employers.
Do you have further questions on this topic?
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