Employer-funded occupational pension: Your guide to a secure future
21.04.25
5
Minutes
Katrin Straub
Managing Director at nextsure
The employer-funded company pension scheme (bAV) is an important building block for your financial security in retirement. However, many employees underestimate the complexity and the long-term impact of their decisions. This article highlights the benefits, points out potential drawbacks and gives you practical recommendations for action.
The topic in brief and concise terms
The employer-financed occupational pension scheme offers tax advantages and a mandatory employer contribution of at least fifteen per cent in the case of salary conversion and the employer's social security savings. [3,1]
There are five implementation routes (direct insurance, pension fund, pension scheme, support fund, direct commitment), whose choice significantly influences occupational pension provision (bAV). [1]
Claims from occupational pension provision (bAV) can, under certain conditions, become vested and be transferred or adjusted when changing employer. [1,1]
Understanding the basics of employer-funded occupational pensions
Employer-funded occupational pension provision (bAV) is an employer commitment to provide the employee with benefits for retirement, disability or survivors' pensions. [2] These benefits supplement the statutory pension and private pension arrangements. [4] Since 2002, employees have had a legal entitlement to salary conversion, whereby parts of gross salary flow directly into the bAV. [3]
Employers can claim contributions to the bAV as business expenses and thus reduce their tax burden. [3] For employees, this often means savings on tax and social security contributions during the accumulation phase. [3] The importance of the bAV has steadily grown in recent years. The detailed rules can be found in the Occupational Pensions Act (BetrAVG). [5] This law forms the basis for all five implementation routes of the bAV. [1] The choice of implementation route has a significant impact on the structure and flexibility of the provision.
The five routes for occupational pension provision at a glance
Employers have five different implementation routes available for occupational pension provision. [1] These are direct insurance, the pension fund, the pension fund, the support fund and direct commitment (also called pension commitment). [1,2]
The most popular option, especially in companies without a collective agreement, is direct insurance. [5] Here, the employer takes out a pension insurance policy for the employee. [4] Pensionskassen and Pensionsfonds are legally independent pension institutions. [2,4] Support funds are also legally independent, but do not grant a legal entitlement to benefits. [2] Direct commitment is the only immediate promise by the employer to provide benefits directly from the company's assets. [1] Each implementation route has specific advantages and disadvantages in terms of flexibility, costs and insolvency protection, which need to be weighed up. A comparison of company pension solutions is therefore essential. The complexity of the choice underlines the need for good advice.
Maximise benefits for employees and employers
Employer-funded occupational pension provision offers numerous advantages for both sides. Employees benefit from tax and social security contribution savings during the accumulation phase, as contributions are deducted directly from gross salary. [3] In addition, since 2019 (for new contracts) or 2022 (for existing contracts), the employer has been obliged to pay a subsidy of at least fifteen per cent if they save on social security contributions through salary conversion. [1,2]
For employers, the advantages of the bAV lie in employee retention and motivation. [3] They can also claim the contributions as business expenses for tax purposes. [3] A well-designed bAV can be a decisive factor in the competition for qualified specialists. It is important to assess the individual situation to determine whether a bAV makes sense. [1] The following list shows key advantages for employees:
State support through tax and social security contribution savings during the contribution phase. [5]
Mandatory employer subsidy of at least fifteen per cent in the case of salary conversion (where the employer saves on social security contributions). [1]
Building up additional retirement provision alongside the state pension. [3]
Insolvency protection for contributions in most implementation routes. [2]
Option of survivor and disability cover. [4]
These advantages make bAV an attractive model, although its details should be examined carefully.
Consider tax aspects and social security contributions
The tax treatment of employer-funded occupational pension provision (bAV) is a key aspect. In the accumulation phase, contributions of up to eight per cent of the statutory pension insurance contribution assessment ceiling are tax-free (in 2025: EUR 7,728 per year or EUR 644 per month). [2,5] Contributions of up to four per cent of this ceiling are exempt from social security contributions (in 2025: EUR 3,864 per year or EUR 322 per month). [4,2]
In the payout phase, bAV benefits are subject to deferred taxation. [1] However, the individual tax rate in retirement is usually lower than during working life. [1] Those covered by statutory health insurance must pay full contributions to health and long-term care insurance on occupational pensions (approx. eighteen per cent), although there is an allowance. [1] Our expert tip: Check carefully how the tax burden looks in the retirement phase and whether a tax-efficient direct insurance policy is right for you. The precise calculation of deductions is crucial for the net return on your provision. Careful planning helps to avoid surprises in retirement.
Ensure vesting of entitlements
Vesting of entitlements under employer-funded occupational pension provision is an important protection for employees. [1] Vested means that the entitlements are retained even if you leave the company early. [1] Since 2018, the rule has been: employer-funded commitments become vested if the commitment has existed for at least three years and the employee has reached the age of 21. [5,4]
In the case of salary conversion, the entitlements are vested immediately. [4] Vesting underlines the remuneration character of the bAV: it is part of pay for work performed. [2] The exact deadlines and conditions are regulated in the Company Pensions Act (§1b BetrAVG). [1] It is advisable to know your own entitlements and the applicable deadlines precisely. This is especially important in the event of a possible change of employer.
Handling occupational pension when changing employer
An employer change does not have to mean the end of your employer-funded occupational pension scheme. [1] In principle, vested entitlements can be taken with you. [4] There are various ways in which an existing contract can be handled. Transferring the capital to the new employer is an option if they agree and offer a suitable pension arrangement. [4] This is often possible with direct insurance policies, pension funds and pension schemes if the contract was concluded after 2004 and the capital is below the contribution assessment ceiling. [3]
Alternatively, the contract can be continued privately or made paid-up. [3] The new employer is obliged to offer a form of occupational pension provision, usually a direct insurance policy through salary sacrifice. [3] Our expert tip: Clarify the options for your occupational pension scheme with your former and new employer at an early stage. The following list shows your options for termination and occupational pension scheme:
Transfer of the contract to the new employer (portability). [4]
Private continuation of the existing contract with your own contributions. [3]
Paid-up status of the contract (dormancy). [3]
Taking out a new occupational pension scheme contract with the new employer. [3]
The right decision depends on many individual factors and should be carefully considered.
Law on occupational pension provision is subject to constant change. Recent judgments, for example those of the Federal Labour Court (BAG), can have an impact on existing commitments. [1,3] In 2024 and 2025, the BAG ruled several times on deviations from the statutory obligation to provide a subsidy under older collective agreements. [2,3] The adjustment of pension commitments within the group was also the subject of court decisions. [1]
For 2025, further changes are planned, for example to contribution assessment ceilings and tax relief amounts. [5] It is therefore important to keep yourself regularly informed about the current legal position so that you do not suffer any disadvantages or miss any opportunities for optimisation. The complexity of the subject matter often makes expert advice essential. [4] Many employers also ask themselves, which insurance contributions they have to pay, which includes occupational pension provision. Continuous monitoring of legal developments is crucial for long-term secure retirement provision.
Conclusion and your next step towards optimal retirement provision
Employer-funded occupational pension provision is a valuable tool for securing your standard of living in retirement. It offers attractive benefits for both employees and employers, from tax savings to staff retention. [1,3] However, choosing the right implementation route and taking account of all tax and legal aspects are crucial to success. [1,1] With the mandatory employer contribution of at least fifteen per cent, the bAV has become even more attractive. [1]
Take advantage of the opportunities offered by employer-funded bAV, but make sure you inform yourself thoroughly. An individual analysis of your situation is the first step towards a tailored solution. nextsure supports you as a digital insurance portal in finding the cover that is right for you. We help you make sense of the complexity and make an informed decision for your future. Careful planning of your retirement provision pays off in the long term.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific recommendations for optimisation.
More useful links
Wikipedia provides a comprehensive overview of occupational pensions.
The German Pension Insurance provides a brochure on occupational pensions.
The Federal Ministry of Labour and Social Affairs (BMAS) provides detailed information on occupational pensions.
A publication by the Federal Government sheds light on occupational pensions.
The Federal Statistical Office (Destatis) publishes a press release on occupational pensions.
The Federal Ministry of Finance provides information on the tax treatment of occupational pensions.
The Occupational Pensions Act (BetrAVG) is available on the website of the Federal Ministry of Justice.
The IHK Munich provides information on occupational pensions.
Mercer presents retirement provision solutions.
FAQ
What is the tax-free amount for an employer-funded occupational pension scheme?
In 2025, up to EUR 7,728 per year (eight per cent of the contribution assessment ceiling) can be paid into an occupational pension scheme tax-free. Up to EUR 3,864 per year (four per cent of the BBG) are exempt from social security contributions. [2,5,4]
What implementation routes are available for employer-funded occupational pension provision?
There are five implementation routes: direct insurance, pension fund, pension fund, support fund and direct commitment (pension commitment). [1]
When do my entitlements under the occupational pension scheme become vested?
For salary sacrifice, immediately. For purely employer-financed commitments, usually after three years’ service and upon reaching the age of 21 (rule since 2018). [5,4]
Will I later have to pay taxes and social security contributions on my company pension?
Yes, occupational pensions are subject to deferred taxation. Those with statutory health insurance also pay full contributions towards health and long-term care insurance on their occupational pension, although there is an allowance. [1,1]
Can I cancel my employer-financed occupational pension scheme and have it paid out to me?
An early termination and payout of the capital is generally not предусмотрed, as the occupational pension scheme (bAV) is earmarked for retirement provision. Exceptions are very rare and tightly regulated by law.
What is the difference between an employer-funded and an employee-funded occupational pension scheme?
In the employer-financed occupational pension scheme (bAV), the employer pays the contributions. In the employee-financed occupational pension scheme (salary conversion), the employee pays the contributions from their gross salary, with the employer often providing a subsidy. [4,1]
