Pension Adjustment Under § 16 BetrAVG

Pension adjustment under § 16 BetrAVG: the short answer

Pension adjustment is one of the most significant cost drivers in German occupational pensions. Under § 16(1) of the Occupational Pensions Act (Betriebsrentengesetz, BetrAVG), an employer must review every three years whether current pension payments should be increased, and decide at its reasonable discretion, taking into account in particular the interests of the pensioners and the employer's economic situation. The duty is deemed fulfilled if the increase is not lower than the rise in the consumer price index for Germany or in the net wages of comparable employee groups of the company over the review period (§ 16(2) BetrAVG).

After the sharp rise in inflation in 2022 and 2023, many employers face adjustment demands of a magnitude they had not budgeted for.

The obligation applies to direct pension promises, support funds and, in many cases, pension funds. It does not apply where the employer has committed to increase pensions by at least 1% per year, or where certain insurance-based vehicles distribute all surplus shares to pensioners. An employer may refuse or limit an increase only if its economic situation does not permit it, and the burden of proof for that lies with the employer.

The three-year review cycle

The review obligation arises for each pension in payment every three years from the start of payment. In practice, the Federal Labour Court allows employers to bundle the reviews of all pensions to a common annual review date, provided that no pensioner waits more than three years plus a short period for the first review. Most employers therefore carry out one pension adjustment review per year, or every three years for all pensioners together, and document the decision collectively.

The review period is the time since the start of the pension or since the last adjustment. The measure for the pensioners' interest in preserving purchasing power is the increase in the consumer price index over that entire period, not just over the last three years, unless an earlier adjustment was rightly omitted. If an employer has granted increases in the past that were lower than inflation without a justified reason, the gap can be claimed at the next review.

Measuring the required pension adjustment

The two benchmarks in § 16(2) BetrAVG are alternatives. The consumer price index published by the Federal Statistical Office is the usual measure. The employer can instead rely on the lower increase in net wages of comparable employee groups in the company over the same period, the so-called real wage cap. This option is attractive when wage increases have lagged behind inflation, as happened in several sectors in 2022 and 2023. Using it requires a robust definition of the comparison group, for example employees in the pay grades from which most pensioners retired, and reliable payroll data on net wage development.

Where neither benchmark is met, the employer must show that it decided at its reasonable discretion, which in practice means demonstrating that its economic situation did not permit a full adjustment. Partial adjustments are possible: an employer may grant an increase that it can afford, even if it falls short of inflation, provided it can justify the remaining shortfall.

Illustration: a pensioner's monthly pension of EUR 1,000 started in January 2023. At the review in January 2026, consumer prices have risen by, say, 7% since the start, while net wages of comparable active employees have risen by 5%. If the employer relies on the real wage cap, a 5% increase to EUR 1,050 satisfies the safe harbour. If it grants only 3%, it must justify the shortfall by reference to its economic situation.

The employer's economic situation

The central defence against a pension adjustment is the employer's economic situation. According to the case law of the Federal Labour Court, the question is whether the employer will probably be able to finance the increases from the company's earnings and the growth of its assets in the period up to the next review date, without endangering its substance. The analysis is forward-looking but based on the company's actual development in the preceding years, typically the last three financial years, as shown in the commercial-law financial statements.

Two tests are combined. First, the employer must be able to earn an appropriate return on equity; the court compares the actual return with a benchmark based on the yield of long-term government bonds plus a risk premium. Second, the company's equity must not be eroded; if past losses have reduced equity below the share capital, the employer may first rebuild its capital before adjusting pensions. Extraordinary items, such as one-off gains from asset sales, are generally eliminated, while taxes on income are deducted from the profit figures.

The economic situation is assessed at the level of the employer, meaning the legal entity that made the pension promise. In a group, that is often an operating subsidiary rather than the parent company. For holding companies, service companies and entities that only manage pensions after a business has been sold, this rule has major consequences, discussed below.

Group considerations

Because the review is based on the employer's own economic situation, a financially weak subsidiary may refuse an adjustment even if the group as a whole is profitable, and a profitable subsidiary must adjust even if the group is struggling. The Federal Labour Court has recognised only narrow exceptions under which the economic situation of another group company can be attributed to the employer, the so-called calculation pass-through (Berechnungsdurchgriff). Its case law has become more restrictive over time, particularly in relation to domination and profit-and-loss transfer agreements. Each constellation needs a careful analysis.

Restructurings raise particular issues. If pension obligations are transferred to a pensioner company (Rentnergesellschaft) in a spin-off or asset deal, that company has no operating business from which to finance adjustments. The case law requires the transferring employer to equip such a company with sufficient assets to fund not only current pensions but also future adjustments; otherwise the former employer can face damages claims. Profit-and-loss transfer agreements also affect the analysis, since the subsidiary's profits flow to the parent. These issues are central to pension liabilities in M&A deals.

Rightly omitted adjustments and communication with pensioners

If an employer refuses or limits an adjustment because of its economic situation, it is not obliged to make up for the omission later, provided the adjustment was rightly omitted (§ 16(4) BetrAVG). An adjustment is deemed rightly omitted if the employer explained its economic situation to the pensioner in writing, the pensioner did not object in writing within three calendar months of receiving the explanation, and the employer pointed out the consequences of failing to object in time.

This procedure is often underused. A clear, written explanation with a summary of key figures and the reasons for the decision, sent to every pensioner affected, protects the employer against catch-up claims at the next review date. Without it, a pensioner can argue at the next review that the earlier refusal was unjustified, and the comparison period will extend back to the last proper adjustment. Claims for the monthly increase amounts are subject to the general three-year limitation period, but the right to the adjustment itself is assessed over the full review period.

A practical review process

1. Identify all pensions in payment and the vehicles through which they are paid, and check whether any exemptions under § 16(3) or (5) BetrAVG apply.
2. Set a common review date and calculate the CPI increase and, where helpful, the net wage increase of the comparison group for each pensioner cohort.
3. Prepare the economic situation analysis with financial statements, forecasts and, in groups, an assessment of any attribution issues.
4. Decide on the adjustment, document the reasoning and inform the works council where co-determination rights in relation to pension distribution are involved.
5. Send written explanations under § 16(4) BetrAVG where adjustments are refused or limited, with a reference to the three-month objection period.
6. Reflect the result in the pension provisions under commercial and tax law and in the actuarial reports.

Accounting and funding effects

Every pension adjustment increases the present value of the pension obligation, and the expectation of future adjustments must already be reflected in the provisions. Under commercial law, pension provisions are measured at the necessary settlement amount, including expected future increases, and discounted with an average market interest rate published by the Bundesbank (§ 253(2) of the Commercial Code). An adjustment decision above the assumptions in the actuarial report therefore leads to additional expense.

For tax purposes, pension provisions are measured under § 6a of the Income Tax Act, which does not anticipate future adjustments, so the gap between commercial and tax balance sheets can widen. CFOs should involve actuaries before the decision and plan liquidity for the increased payments, especially where pensions are paid directly by the company rather than through an external vehicle.

Further background on pension vehicles, vesting and insolvency protection is available on our occupational pensions page.

How TRW & Co helps with pension adjustment

We advise employers on pension adjustment reviews under § 16 BetrAVG: structuring review cycles, analysing the economic situation with the employer's finance team and actuaries, and drafting the written explanations to pensioners that secure the effect of § 16(4) BetrAVG. In groups and transactions, we assess attribution issues, the funding of pensioner companies and the impact of profit-and-loss transfer agreements. We defend employers against pensioner claims in the labour courts and negotiate collective solutions with works councils. To discuss your next review, contact us. This article provides general information and is not legal advice.