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employer-funded pension plan
Employer-funded occupational pension: Your guide to a secure future
The employer-funded occupational pension scheme (bAV) is more than just a benefit – it is an important pillar for financial security in retirement. Many employees still underestimate the potential of this form of provision, which comes with attractive government incentives. Discover how you can benefit as an employee and what employers need to know.
The topic in brief and concise terms
The employer-funded occupational pension scheme offers financial advantages for both employees and employers through tax and social security contribution savings.
Employers often have to provide a subsidy of fifteen percent for salary conversion if they save on social security contributions.
Claims from salary conversion are immediately vested; employer-financed commitments usually after three years and from the age of 21.
Understanding the basics of employer-funded occupational pensions
The employer-financed company pension scheme (bAV) is a promise by the employer to provide employees with financial benefits for retirement, in cases of disability, or for survivors. These benefits can be fully covered by the employer or co-financed through salary conversion by the employee, with the employer often required to contribute at least fifteen percent since 2019 for new contracts if they save on social insurance contributions. The legal basis for this is the Occupational Pensions Act (BetrAVG). There are five different implementation routes that the employer can choose from. This flexibility allows the bAV to be tailored to the needs of the company and its employees. The significance of the bAV as the second pillar of retirement provision is steadily growing.
Quick Facts: The most important information about employer-funded company pension schemes at a glance
For a quick overview, we have summarised the key points of employer-funded occupational pensions. Employers are not generally obliged to offer a purely employer-funded occupational pension, but they must enable salary conversion. Contributions are tax-free up to eight percent of the contribution assessment ceiling (Beitragsbemessungsgrenze, BBG) of the pension insurance (7,728 euros in 2025) and exempt from social insurance contributions up to four percent (3,864 euros in 2025). In the case of salary conversion, an employer subsidy of fifteen percent is common if social insurance contributions are saved. Claims from salary conversion are immediately vested. Purely employer-funded commitments generally become vested after three years of service and reaching the age of 21. The benefits for employers are diverse.
Tax and social security savings for employees and employers.
Employer's obligation to contribute to salary conversion (usually fifteen percent).
Five implementation methods: direct insurance, pension fund, pension scheme, support fund, direct commitment.
Vesting of claims after certain periods or immediately in the case of salary conversion.
Government incentives and improved framework conditions through the Occupational Pensions Strengthening Act (Betriebsrentenstärkungsgesetz, BRSG).
These facts demonstrate the attractiveness of employer-funded occupational pensions as a means of provision. In the following, we take a closer look at the practice.
Practical Part: How Employer-Financed Occupational Pensions Work in Detail
In practice, the employer chooses one of the five implementation methods for the occupational pension scheme (bAV). With direct insurance, for example, the employer takes out a pension insurance policy for the employee. The contributions can be either entirely employer-financed or made through salary conversion by the employee, with the employer often providing a fifteen percent subsidy. A calculation example: If an employee converts 100 euros of their gross salary, they save on taxes and social security contributions. The employer adds 15 euros, so a total of 115 euros goes into the contract. The exact savings and net cost depend on the individual's tax class and income. The contributions flow directly from the gross salary into the pension contract. 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 instalments. These payouts are then subject to tax, 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, with an exemption threshold since 2020 (187.25 euros in 2025 for health insurance). The exact conditions and options should always be checked individually. The ability to transfer the bAV when changing jobs is another important aspect.
Expert Depth: Legal Frameworks and Design Tips
The Occupational Pensions Act (BetrAVG) forms the central legal foundation of occupational pension schemes (bAV). It governs, among other things, the entitlement to salary conversion (§ 1a BetrAVG), the vesting of pension rights (§ 1b BetrAVG), and insolvency protection (§ 7 ff. BetrAVG). Current rulings, such as those regarding the level of employer contributions in salary conversion or the adjustment of company pensions, continuously shape the legal landscape. Employers should design the pension scheme clearly and understandably and take their information duties towards employees seriously. Our expert tip: Careful documentation of all agreements regarding bAV prevents future uncertainties and potential legal disputes. The tax treatment of contributions and benefits is regulated by 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 professional advice when setting up and managing an employer-funded occupational pension to optimally leverage all legal and tax advantages and avoid pitfalls. This also applies to how one can tax-deduct bAV.
Key aspects for employers include:
Choosing the appropriate implementation method while considering costs, administrative effort, and liability risks.
Meeting the obligation of a fifteen percent subsidy in salary conversion if social security contributions are saved.
Paying attention to vesting periods (three years of service and completion of the 21st year of life for purely employer-funded commitments).
Ensuring insolvency protection via the Pension Protection Association (PSVaG) for certain implementation methods.
Clear communication of bAV regulations to employees.
These points help to implement a solid and attractive employer-funded bAV. The question of what happens to the bAV upon termination is also relevant.
Tax Aspects and Social Contributions: What Employees Need to Know
For employees, employer-funded occupational pension schemes (bAV) are particularly attractive, as contributions up to certain limits are exempt from tax and social security contributions. In 2025, up to €7,728 (eight percent of the BBG West) can be invested tax-free and up to €3,864 (four percent of the BBG West) without social security contributions in specific bAV contracts. This results in a direct saving on net salary. An example: With a salary conversion of €200 per month, the net saving through tax and social security savings can be over €80, depending on the tax class. The deferred taxation in retirement is an important point: The paid-out occupational pension must be taxed. However, the personal tax rate in retirement is often lower. In addition, contributions to health and long-term care insurance are due on the occupational pension, with an allowance of €187.25 (as of 2025) for health insurance. Considerations regarding the cancellation and payout of the bAV should be carefully thought out, as this often brings disadvantages.
Vesting and Portability: Your Rights When Changing Jobs
An important aspect of occupational pension schemes (bAV) is the vesting of entitlements. Contributions that employees make themselves through salary conversion are immediately vested. This means that the entitlement remains even if the employee leaves the company. For contributions financed solely by the employer, since 2018, the entitlement becomes vested if the employee is at least 21 years old upon leaving and the commitment has existed for at least three years. When changing jobs, the accumulated capital can be transferred to a new employer under certain conditions (portability). This often requires the new employer's consent and depends on the form of implementation. Alternatively, the contract can be made non-contributory with the old employer or continued privately if the form of implementation allows it. The exact regulations for the transfer of bAV should be clarified on a case-by-case basis.
Conclusion and Outlook: Employer-Funded Occupational Pension as a Future Model
The employer-financed occupational pension scheme is a valuable tool for closing the pension gap and motivating employees. Through government subsidies, tax and social security savings, both employees and employers benefit. The various implementation routes offer flexibility but also require careful selection and design. The ongoing adjustment of legal frameworks, as seen with the Betriebsrentenstärkungsgesetz, highlights the growing importance of occupational pensions. For employees, this means an opportunity for higher retirement provision often with little net effort. Employers can position themselves as attractive employers and strengthen employee loyalty. Early and informed engagement with the topic is advisable for both parties. The employer-financed occupational pension remains a central pillar of retirement provision in Germany.
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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 of 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 provides up-to-date information on occupational pensions for the year 2024.
FAQ
What are the tax-free contributions to employer-funded occupational pension schemes?
In 2025, contributions of 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 BBG West) are also exempt from social security contributions.
When do my entitlements from an employer-funded occupational pension scheme become vested?
Entitlements from salary conversion (employee contributions) are immediately vested. Purely employer-funded promises generally become vested when you leave the company at least 21 years old and the promise has existed for at least three years.
What implementation methods are there for employer-funded occupational pension schemes?
There are five implementation methods: direct insurance, pension funds, pension plans, support funds, and direct commitments (pension commitments). The employer selects 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 the occupational pension scheme are generally fully taxable in retirement (deferred taxation). In addition, contributions to statutory health and long-term care insurance apply, although there is an allowance for health insurance (187.25 euros in 2025).
What is the employer's contribution to the occupational pension scheme?
If employees pay into direct insurance, pension funds, or a pension fund through salary conversion and the employer saves social security contributions as a result, they usually have to contribute fifteen percent of the conversion amount.
Can I cancel my employer-funded occupational pension scheme and have it paid out?
An early termination and payout of the occupational pension scheme is generally not provided for and is often associated with disadvantages. The occupational pension scheme is intended for long-term retirement provision and is usually only paid out upon retirement.
