Employer-funded occupational pension: Your guide to a secure future
28 May 2025
7
Minutes
Katrin Straub
CEO at nextsure
Employer-funded occupational pension schemes (bAV) are more than just a benefit – they are a crucial component for financial security in retirement. Many employees still underestimate the potential of this form of pension, which comes with attractive government incentives. Discover how you as an employee can benefit and what employers need to know.
The topic in brief and concise terms
The employer-funded occupational pension scheme provides financial benefits for both employees and employers through tax and social security savings.
Employers often have to provide a fifteen percent subsidy for deferred compensation if they save on social security contributions.
Claims from salary conversion are immediately vested; purely employer-financed commitments are usually vested after three years and from the age of 21.
Understanding the basics of employer-funded occupational pension schemes
The employer-funded occupational pension scheme (bAV) is a promise from the employer to provide their employees with financial benefits for retirement, in case of disability, or for surviving dependents. These benefits can be fully covered by the employer or co-financed through salary conversion by the employee. Since 2019, with new contracts, the employer often has to contribute at least fifteen percent if social insurance contributions are saved. The legal foundation is the Occupational Pensions Act (BetrAVG). There are five different implementation options the employer can choose from. This flexibility allows the bAV to be tailored to the needs of the company and the employees. The significance of bAV as the second pillar of retirement provision is constantly growing.
Quick Facts: The essentials of employer-funded occupational pension schemes at a glance
For a quick overview, we have summarized the key points of employer-funded occupational pensions. Employers are not generally required to offer purely employer-funded occupational pensions, but they must enable salary conversion. Contributions are tax-free up to eight percent of the contribution assessment ceiling (BBG) of the pension insurance (7,728 euros in 2025) and exempt from social security up to four percent (3,864 euros in 2025). In the case of salary conversion, an employer contribution of fifteen percent is common when social security contributions are saved. Claims from salary conversion are immediately vested. Purely employer-funded commitments are typically vested after three years of service and upon reaching the age of 21. The benefits for employers are diverse.
Tax and social contribution savings for employees and employers.
Employer's obligation to contribute to salary conversion (usually fifteen percent).
Five implementation methods: direct insurance, pension fund, pension plan, support funds, direct commitment.
Vesting of claims after certain periods or immediately with salary conversion.
State support and improved conditions through the Occupational Pension Strengthening Act (BRSG).
These facts demonstrate the attractiveness of employer-funded occupational pensions as an instrument for retirement provision. We will look more closely at practical aspects below.
Practical Section: How Employer-Financed Occupational Pension Schemes Work in Detail
In practice, the employer chooses one of the five implementation paths for the occupational pension scheme (bAV). For direct insurance, for example, the employer takes out a pension insurance policy for the employee. The contributions can be financed entirely by the employer or through salary conversion by the employee, whereupon the employer often provides a subsidy of fifteen percent. A calculation example: If an employee converts 100 euros of their gross salary, they save taxes and social security contributions. The employer adds 15 euros, resulting in a total of 115 euros flowing into the contract. The exact savings and net expense depend on the individual's tax class and income. The contributions flow directly from the gross salary into the pension contract. The question of whether an occupational pension scheme is worthwhile depends on such details.
The payout at retirement age can be as a lifelong pension, a one-time capital payment, or in installments. These payouts are then taxable, although the personal tax rate is often lower in retirement. Furthermore, contributions to health and long-term care insurance apply to benefits from the bAV, with an exemption since 2020 (187.25 euros in 2025 for health insurance). The exact conditions and options should always be examined individually. The ability to carry over the occupational pension scheme when changing jobs is another important aspect.
Expert Depth: Legal Frameworks and Design Tips
The Occupational Pensions Act (BetrAVG) forms the key legal basis for occupational pensions. It regulates, among other things, the entitlement to salary conversion (§ 1a BetrAVG), the non-forfeitability of accrued benefits (§ 1b BetrAVG), and insolvency protection (§ 7 ff. BetrAVG). Recent court rulings, such as those concerning the amount of employer contributions during salary conversion or adjustments to occupational pensions, continuously shape the legal landscape. Employers should design their pension schemes in a clear and understandable manner and take their information obligations to employees seriously. Our expert tip: Careful documentation of all agreements regarding occupational pensions avoids future ambiguities and possible legal disputes. The tax treatment of contributions and benefits is regulated in the Income Tax Act (EStG), particularly § 3 No. 63 EStG for the contribution phase and § 19 as well as § 22 No. 5 EStG for the benefits phase. It is advisable to seek expert advice when setting up and managing an employer-funded occupational pension to optimise all legal and tax advantages and avoid pitfalls. This also concerns the question of how to claim tax relief on occupational pensions.
Important aspects for employers are:
Choosing the appropriate implementation method, taking into account costs, administrative effort, and liability risks.
Fulfilling the obligation to provide a fifteen percent subsidy in the case of salary conversion, provided that social security contributions are saved.
Observing the non-forfeitability periods (three years of employment and completion of the 21st year of life for purely employer-financed commitments).
Ensuring insolvency protection via the Pension Protection Association (PSVaG) for certain implementation methods.
Clear communication of occupational pension regulations to employees.
These points help to implement a solid and attractive employer-funded occupational pension. The question of what happens to the pension upon termination is also relevant.
The Role of the Employer: Duties and Benefits
Employers are not obliged to offer a purely employer-financed occupational pension scheme (bAV). However, they must enable their employees to have a bAV through salary conversion upon request (§ 1a BetrAVG). If an employee chooses this, the employer must, since 2019 for new contracts (and since 2022 for old contracts), contribute a flat-rate supplement of fifteen percent of the converted salary, provided this saves social security contributions. This supplement is to be paid through the implementation methods of direct insurance, pension funds, and pension schemes. A well-designed bAV can increase employee retention by up to thirty percent and enhance employer attractiveness. Additionally, contributions to bAV can be claimed as business expenses, reducing the company's tax burden. The occupational pension provision is thus a strategic tool in personnel management. The option of a group insurance for employers can also play a role in this.
Tax aspects and social contributions: What employees need to know
For employees, employer-funded occupational pension schemes are particularly attractive because contributions up to certain limits are tax and social security exempt. In 2025, up to €7,728 (eight percent of the BBG West) can be paid into certain occupational pension contracts tax-free and up to €3,864 (four percent of the BBG West) social security exempt. This leads to a direct saving on net salary. An example: With a salary conversion of €200 per month, the net savings due to tax and social security savings can exceed €80, depending on the tax class. The deferred taxation in retirement is an important point: The occupational pension paid out must be taxed. However, the personal tax rate in retirement is often lower. In addition, contributions to health and long-term care insurance are payable on the occupational pension, with an exemption of €187.25 (as of 2025) applying to health insurance. Considerations regarding termination and payout of the occupational pension should be carefully considered, as this usually entails disadvantages.
Vesting and Portability: Your Entitlements When Changing Jobs
An important aspect of occupational pension schemes (bAV) is the non-forfeitability of entitlements. Contributions that employees make through salary conversion are immediately non-forfeitable. This means the entitlement remains even if one leaves the company. For purely employer-financed contributions, since 2018: the entitlement becomes non-forfeitable if the employee is at least 21 years old when leaving and the commitment has existed for at least three years. When changing jobs, the capital saved can, under certain conditions, be transferred to the new employer (portability). This often requires the new employer's consent and depends on the implementation method. Alternatively, the contract can be made non-contributory with the old employer or continued privately if the implementation method allows. The exact rules for transferring the bAV should be clarified on a case-by-case basis.
Conclusion and Outlook: Employer-funded occupational pension as a future model
More useful links
Wikipedia provides comprehensive information on occupational pensions (bAV).
The Federal Ministry of Labour and Social Affairs (BMAS) offers detailed information on occupational pensions.
A publication by the Federal Government deals extensively with occupational pensions.
The German Pension Insurance offers a brochure on occupational pensions.
The Federal Ministry of Finance explains the term pension provision in its glossary.
The Federal Statistical Office (Destatis) publishes press releases on the topic of pension provision.
PwC offers up-to-date information on occupational pensions for the year 2024.
FAQ
What are the tax-free contributions to employer-funded occupational pensions?
In 2025, contributions up to 7,728 euros (eight percent of the contribution assessment ceiling West) can be paid tax-free into certain implementation methods of occupational pension schemes. Of this, up to 3,864 euros (four percent of the contribution assessment ceiling West) are also exempt from social security contributions.
When do my entitlements from an employer-funded occupational pension scheme become vested?
Claims from salary conversion (the employee's own contributions) vest immediately. Purely employer-funded commitments generally vest if you are at least 21 years old upon leaving the company and the commitment has been in place for at least three years.
What implementation options are available for employer-funded occupational pension schemes?
There are five implementation methods: direct insurance, pension funds, pension funds, support funds, and direct commitments (pension commitments). The employer chooses the implementation method.
Do I have to pay taxes and social contributions on the payout of my employer-funded occupational pension scheme?
Yes, benefits from occupational pensions are generally fully taxable in retirement (deferred taxation). Additionally, contributions to statutory health and long-term care insurance apply, with a tax-free allowance for health insurance (187.25 euros in 2025).
What is the employer's contribution to occupational pension schemes?
When employees pay into a direct insurance, pension fund, or pension scheme through salary conversion and this saves the employer social security contributions, the employer is usually required to provide a supplement of fifteen percent of the conversion amount.
Can I terminate my employer-funded occupational pension and have it paid out to me?
An early termination and payout of the occupational pension scheme are generally not intended and often come with disadvantages. The occupational pension scheme is designed for long-term retirement savings and is normally only paid out upon retirement.
