Employer-funded occupational pension: Your guide to a secure future
21 Apr 2025
12
Minutes
Katrin Straub
CEO at nextsure
The employer-funded occupational pension (bAV) is an important component for your financial security in retirement. However, many employees underestimate the complexity and long-term implications of their decisions. This article highlights the benefits, points out potential disadvantages, and provides you with concrete recommendations for action.
The topic in brief and concise terms
The employer-funded occupational pension scheme offers tax advantages and a mandatory employer contribution of at least fifteen percent with salary conversion and social security savings for the employer. [3,1]
There are five implementation methods (direct insurance, pension fund, pension fund, support fund, direct commitment), whose choice significantly influences the company pension scheme. [1]
Entitlements from occupational pension schemes (bAV) may be non-forfeitable under certain conditions and can be transferred or adjusted when changing employers. [1,1]
Understanding the basics of employer-funded occupational pension schemes
The employer-financed occupational pension scheme (bAV) is a commitment by the employer to provide the employee with benefits for old-age, disability or survivor's provision. [2] These benefits supplement the state pension and private retirement planning. [4] Since 2002, employees have been entitled to salary conversion, where parts of the gross salary are directly allocated to 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 taxes and social security contributions during the accumulation phase. [3] The importance of the bAV has steadily increased in recent years. The exact regulations can be found in the Occupational Pensions Act (BetrAVG). [5] This law forms the basis for all five implementation methods of the bAV. [1] The choice of implementation method significantly influences the design and flexibility of the provision.
Five implementation paths of occupational pension schemes at a glance
Employers have five different methods available for implementing occupational pensions. [1] These include direct insurance, pension funds, support funds, direct commitments (also known as pension commitments), and provident funds. [1,2]
The most commonly chosen form, especially in companies without a collective agreement, is direct insurance. [5] Here, the employer takes out an annuity insurance for the employee. [4] Pension funds and provident funds are independent legal entities providing pension schemes. [2,4] Support funds are also independent legal entities but do not grant any legal entitlement to benefits. [2] The direct commitment is the only direct employer commitment to provide benefits directly from the company's assets. [1] Each implementation method has specific advantages and disadvantages regarding flexibility, costs, and insolvency protection, which must be weighed. A comparison of pension solutions is therefore essential. The complexity of choosing highlights the need for good advice.
Maximize benefits for employees and employers
Employer-funded occupational pensions offer numerous advantages for both parties. Employees benefit from tax and social security savings during the accumulation phase, as contributions are deducted directly from the gross salary. [3] Additionally, as of 2019 (for new contracts) and 2022 (for existing contracts), employers are required to provide at least a fifteen percent subsidy if they save on social security contributions through salary conversion. [1,2]
For employers, the advantages of occupational pensions lie in employee retention and motivation. [3] Additionally, they can claim contributions as tax-deductible business expenses. [3] A well-designed occupational pension scheme can be a crucial factor in the competition for qualified professionals. It is important to assess the individual situation to determine whether an occupational pension is advisable. [1] The following list highlights key advantages for employees:
State incentives through tax and social security savings during the contribution phase. [5]
Mandatory employer subsidy of at least fifteen percent with salary conversion (if the employer saves on social security). [1]
Building additional retirement provision alongside the state pension. [3]
Protection of contributions against insolvency in most implementation methods. [2]
Possibility of survivor and disability insurance. [4]
These benefits make occupational pensions an attractive model, the details of which should be carefully examined.
Consideration of tax aspects and social security contributions
The tax treatment of employer-funded occupational pensions (bAV) is a central aspect. During the accumulation phase, contributions are tax-free up to eight percent of the contribution assessment ceiling of the statutory pension insurance (in 2025: 7,728 euros annually or 644 euros monthly). [2,5] Contributions are exempt from social security contributions up to four percent of this limit (in 2025: 3,864 euros annually or 322 euros monthly). [4,2]
During the payout phase, the benefits of the bAV are subject to deferred taxation. [1] However, the individual tax rate in retirement is usually lower than during working life. [1] Statutory health insured individuals must pay full contributions on company pensions to health and long-term care insurance (around eighteen percent), but there is a tax-free allowance. [1] Our expert tip: Carefully examine how the tax burden is structured during the retirement phase and whether a direct insurance is tax-optimal for you. The precise calculation of contributions is crucial for the net return of your pension. Careful planning helps to avoid surprises in retirement.
Ensure the vesting of claims
The non-forfeitability of entitlements from employer-funded occupational pensions is an important protection for employees. [1] Non-forfeitability means that the claims remain valid even if the employee leaves the company prematurely. [1] Since 2018, employer-funded commitments become non-forfeitable 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 claims are immediately non-forfeitable. [4] Non-forfeitability underscores the salary character of occupational pensions: It is part of the remuneration for work performed. [2] The exact deadlines and conditions are regulated in the Occupational Pensions Act (§1b BetrAVG). [1] It is advisable to be well aware of your own entitlements and applicable deadlines. This is especially true with regard to a possible change of employer.
Handling occupational pension schemes when changing employers
A change of employer does not have to mean the end of your employer-funded occupational pension scheme (bAV). [1] Essentially, non-forfeitable entitlements can be carried over. [4] There are various options for how an existing contract can be handled. Transferring the capital to the new employer is an option if they agree and offer a suitable pension scheme. [4] This is often possible with direct insurance, 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 exempt from contributions. [3] The new employer is obliged to offer a form of bAV, usually a direct insurance through salary conversion. [3] Our expert tip: Address the options for your bAV early with both your previous and new employers. The following list shows your options for action regarding termination and bAV:
Transfer the contract to the new employer (portability). [4]
Continue the existing contract privately with personal contributions. [3]
Set the contract to exemption from contributions (dormancy). [3]
Conclude a new bAV contract with the new employer. [3]
The right decision depends on many individual factors and should be carefully considered.
Keep an eye on current judgments and legal changes
The law on occupational pensions is subject to constant change. Current rulings, for example by the Federal Labour Court (BAG), can have effects on existing commitments. [1,3] In 2024 and 2025, the BAG has repeatedly ruled on deviations from the statutory subsidy obligation due to older collective agreements. [2,3] The adjustment of benefit commitments within a group has also been the subject of court decisions. [1]
Further changes are planned for 2025, such as the contribution assessment ceilings and tax subsidies. [5] It is therefore important to regularly inform oneself about the current legal situation in order not to suffer disadvantages or miss out on optimisation potential. The complexity of the matter often makes expert advice indispensable. [4] Many employers also wonder which insurances they must pay, including occupational pensions. Continuous monitoring of legal developments is crucial for a long-term secure retirement provision.
Conclusion and your next step towards optimal retirement planning
More useful links
Wikipedia provides a comprehensive overview of occupational pensions.
The Deutsche Rentenversicherung offers 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) releases a press statement on occupational pensions.
The Federal Ministry of Finance provides information on the tax treatment of occupational pensions.
The Occupational Pensions Act (BetrAVG) can be accessed on the website of the Federal Ministry of Justice.
The IHK Munich provides information on occupational pensions.
Mercer presents solutions for retirement provision.
FAQ
What is the tax-free amount for employer-funded occupational pension schemes?
In 2025, up to 7,728 euros annually (eight percent of the contribution assessment ceiling) can be paid into an occupational pension scheme tax-free. Up to 3,864 euros annually (four percent of the BBG) are exempt from social insurance. [2,5,4]
What implementation options are available for employer-funded occupational pension schemes?
There are five implementation methods: direct insurance, pension fund, pension fund, support fund, and direct commitment (pension commitment). [1]
When are my entitlements from the company pension scheme vested?
With salary conversion immediately. For commitments solely funded by the employer, typically after three years of service and reaching the age of 21 (regulation since 2018). [5,4]
Will I have to pay taxes and social security contributions on my company pension later?
Yes, occupational pensions are subject to subsequent taxation. Statutory health insurance members also pay full contributions to health and nursing care insurance on their occupational pension, although there is an allowance. [1,1]
Can I terminate my employer-funded occupational pension and have it paid out to me?
An early termination and payout of capital is generally not intended, as occupational pension schemes are specifically earmarked for retirement provision. Exceptions are very rare and strictly regulated by law.
What is the difference between employer-funded and employee-funded occupational pension schemes?
In an employer-funded occupational pension scheme, the employer pays the contributions. In an employee-funded occupational pension scheme (salary conversion), the employee pays the contributions from their gross salary, with the employer often providing a subsidy. [4,1]
