Employer-funded occupational pension: Your guide to a secure future
28.05.25
6
Minutes
Katrin Straub
Managing Director at nextsure
The employer-financed occupational pension scheme (bAV) is more than just a benefit – it is an important building block for financial security in retirement. Many employees still underestimate the potential of this form of provision, which comes with attractive government subsidies. Discover how you can benefit as an employee and what employers need to know.
The topic in brief and concise terms
The employer-funded company pension scheme offers financial advantages for employees and employers through tax and social security contribution savings.
Employers often have to make a top-up contribution of fifteen per cent when salary conversion is used, if they save on social security contributions.
Entitlements from salary conversion are immediately vested; purely employer-funded commitments are usually vested after three years and from the age of 21.
Understanding the basics of employer-funded occupational pension schemes
The employer-financed occupational pension scheme (bAV) is a commitment by the employer to provide employees with financial benefits for retirement, in the event of disability or for surviving dependants. These benefits can be funded entirely by the employer or co-financed through salary conversion by the employee, whereby since 2019 the employer has often had to make a contribution of at least fifteen per cent for new contracts if it saves on social security contributions. The legal basis is the Act to Improve Occupational Pensions (BetrAVG). There are five different implementation routes that the employer can choose from. This flexibility makes it possible to tailor the bAV to the needs of the company and its employees. The importance of the bAV as the second pillar of retirement provision is growing steadily.
Quick Facts: The key facts about employer-financed company pension schemes at a glance
For a quick overview, we have summarised the key points of the employer-financed occupational pension scheme (bAV). Employers are not generally obliged to offer a purely employer-financed bAV, but they must make salary conversion possible. Contributions are tax-free up to eight per cent of the contribution assessment ceiling (BBG) for statutory pension insurance (EUR 7,728 in 2025) and exempt from social security contributions up to four per cent (EUR 3,864 in 2025). Where salary conversion is used, an employer contribution of fifteen per cent is customary if social security contributions are saved. Entitlements from salary conversion are vested immediately. Purely employer-financed commitments usually become vested after three years of service and upon reaching the age of 21. The advantages for employers are many.
Tax and social security savings for employees and employers.
Employer’s obligation to make a contribution in the case of salary conversion (usually fifteen per cent).
Five implementation routes: direct insurance, occupational pension fund, pension fund, support fund, direct commitment.
Vesting of entitlements after certain periods or immediately in the case of salary conversion.
State support and improved framework conditions through the Occupational Pensions Strengthening Act (BRSG).
These facts show how attractive employer-financed bAV can be as a retirement provision instrument. In the following, we take a closer look at the practical side.
Practical section: How the employer-financed company pension scheme works in detail
In practice, the employer chooses one of the five implementation methods for occupational pension provision (bAV). With direct insurance, for example, the employer takes out a pension insurance policy for the employee. The contributions can be funded entirely by the employer or through the employee's salary conversion, in which case the employer often makes a contribution of fifteen per cent. An example: if an employee converts 100 euros of gross salary, they save tax and social security contributions. The employer adds 15 euros, so that a total of 115 euros goes into the contract. The exact savings and net cost depend on the individual tax bracket and income. The contributions flow directly from gross salary into the retirement savings contract. The question of whether bAV is worthwhile depends on such details.
Payout in retirement can take the form of a lifelong pension, a one-off lump-sum payment or instalments. These payments are then taxable, although the personal tax rate in retirement is often lower. In addition, contributions to health and long-term care insurance are due on benefits from the bAV, although there has been an allowance since 2020 (187.25 euros in 2025 for health insurance). The exact terms and options should always be assessed individually. The option of taking the bAV with you when changing jobs is another important aspect.
Expert depth: legal framework and design tips
The Occupational Pensions Act (BetrAVG) forms the central legal basis for occupational pension provision. It regulates, among other things, the entitlement to salary conversion (§ 1a BetrAVG), the vesting of entitlements (§ 1b BetrAVG) and insolvency protection (§ 7 ff. BetrAVG). Current rulings, for example on the level of the employer contribution in salary conversion or on the adjustment of occupational pensions, continuously shape the legal landscape. Employers should design the pension scheme clearly and understandably and take their information obligations towards employees seriously. Our expert tip: Careful documentation of all agreements relating to occupational pension provision avoids later uncertainty and possible legal disputes. The tax treatment of contributions and benefits is governed by the Income Tax Act (EStG), in particular § 3 no. 63 EStG for the contribution phase and § 19 as well as § 22 no. 5 EStG for the benefit phase. It is advisable to seek expert advice when setting up and managing an employer-funded occupational pension scheme to make the best use of all legal and tax advantages and avoid pitfalls. This also concerns the question of how to deduct occupational pension provision for tax purposes.
Important aspects for employers include:
Selecting the appropriate implementation route, taking into account costs, administrative effort and liability risks.
Meeting the 15 per cent top-up obligation in salary conversion, where social security contributions are saved.
Observing the vesting periods (three years of service and having reached the age of 21 for purely employer-funded commitments).
Ensuring insolvency protection via the Pension Protection Association (PSVaG) for certain implementation routes.
Clear communication of the occupational pension rules to employees.
These points help to implement a robust and attractive employer-funded occupational pension scheme. The question of what happens to the occupational pension scheme in the event of termination is also relevant.
The employer’s role: duties and benefits
Employers are not obliged to offer a purely employer-funded occupational pension scheme. However, they must allow their employees, on request, to make provision for an occupational pension scheme through salary sacrifice (§ 1a BetrAVG). If an employee opts for this, the employer has been required since 2019 for new contracts (and since 2022 for existing contracts) to pay a top-up of a flat rate of fifteen per cent of the converted remuneration, provided that this results in savings on social security contributions. This top-up is to be paid via the implementation channels of direct insurance, pension scheme and pension fund. A well-designed occupational pension scheme can increase employee retention by up to thirty per cent and enhance attractiveness as an employer. In addition, contributions to the occupational pension scheme can be claimed as business expenses, which reduces the company's tax burden. The occupational pension provision is therefore a strategic instrument in HR management. The option of group insurance for employers can also play a role here.
Tax considerations and social security contributions: What employees need to know
For employees, employer-funded bAV is particularly attractive, as contributions up to certain limits are exempt from tax and social security contributions. In 2025, up to 7,728 euros (eight per cent of the BBG West) can be paid into certain bAV contracts tax-free, and up to 3,864 euros (four per cent of the BBG West) can be paid in free of social security contributions. This leads to a direct saving on net pay. For example, with a salary sacrifice of 200 euros per month, the net saving through tax and social security savings can be over 80 euros, depending on the tax bracket. Taxation in retirement is an important point: the occupational pension paid out must be taxed. However, the individual 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 allowance of 187.25 euros (as at 2025) applying for health insurance. Considerations regarding termination and payout of the bAV should be carefully considered, as this usually involves disadvantages.
An important aspect of the company pension scheme (bAV) is the vesting of entitlements. Contributions that employees make themselves through salary sacrifice are vested immediately. This means the entitlement remains in place even if they leave the company. For purely employer-financed contributions, the following has applied since 2018: the vested 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 accumulated capital can, under certain conditions, be transferred to the new employer (portability). This often requires the consent of the new employer and depends on the implementation route. Alternatively, the contract can be made paid-up with the former employer or continued privately, if the implementation route allows this. The exact rules on transferring the company pension scheme should be clarified in each individual case.
Conclusion and outlook: Employer-financed occupational pension provision as a model for the future
The employer-funded occupational pension scheme is a valuable tool for closing the retirement gap and motivating employees. Thanks to government incentives and savings on tax and social security contributions, both employees and employers benefit. The various implementation routes offer flexibility, but also require careful selection and design. The continuous adjustment of the legal framework, such as through the Occupational Pensions Strengthening Act, shows the growing importance of occupational pension provision. For employees, this means an opportunity for a higher retirement income, often with only a small net outlay. Employers can position themselves as attractive employers and strengthen employee retention. Early, well-informed engagement with the topic is recommended for both sides. The employer-funded occupational pension scheme remains a central pillar of retirement provision in Germany.
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More useful links
Wikipedia provides comprehensive information on occupational pension provision (bAV).
The Federal Ministry of Labour and Social Affairs (BMAS) provides detailed information on occupational pension provision.
A publication by the Federal Government deals in detail with occupational pension provision.
The German Pension Insurance offers a brochure on occupational pension provision.
The Federal Ministry of Finance explains the term retirement provision in the glossary.
The Federal Statistical Office (Destatis) publishes press releases on the topic of retirement provision.
PwC provides up-to-date information on occupational pension provision for 2024.
FAQ
How much are the tax-free contributions to employer-funded occupational pension schemes?
In 2025, contributions of up to EUR 7,728 (eight per cent of the Western contribution assessment ceiling) can be paid tax-free into certain implementation routes of the bAV. Of this amount, up to EUR 3,864 (four per cent of the Western contribution assessment ceiling) are also exempt from social security contributions.
When do my entitlements from an employer-financed occupational pension scheme become vested?
Entitlements from salary sacrifice (employee contributions) are immediately vested. Purely employer-financed commitments generally become vested if, when you leave the company, you are at least 21 years old and the commitment has existed for at least three years.
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). The employer chooses the implementation route.
Do I have to pay taxes and social security contributions on the payout of my employer-financed occupational pension scheme?
Yes, benefits from occupational pension provision (bAV) are generally fully taxable in retirement (taxation on a deferred basis). In addition, contributions to statutory health and long-term care insurance are due, although there is an allowance for health insurance (EUR 187.25 in 2025).
What is the employer contribution to occupational pension provision?
If employees make contributions via salary conversion into a direct insurance policy, pension fund or pension scheme, and the employer thereby saves social security contributions, the employer must usually pay an allowance of fifteen per cent of the conversion amount.
Can I cancel my employer-financed occupational pension scheme and have it paid out to me?
An early cancellation and payout of the occupational pension provision (bAV) is generally not intended and is often associated with disadvantages. The bAV is designed for long-term retirement provision and is usually paid out only when retirement begins.
