Company pension scheme: its importance and how you can make the most of it
18.06.25
5
Minutes
Katrin Straub
Managing Director at nextsure
The state pension alone is often no longer enough to secure your standard of living in retirement. Occupational pension provision (bAV) is therefore becoming significantly more important. Find out how you can use bAV to your advantage and which aspects are crucial.
The topic in brief and concise terms
Occupational pension provision (bAV) is an important supplement to the state pension, made attractive through salary conversion and employer contributions.
Employees benefit from tax and social security contribution savings during the saving phase; contributions are tax-free up to €7,248 per year (2024).
There are five implementation routes (e.g. direct insurance, pension fund), and the choice has an impact on returns, security and flexibility.
Quick Facts: Company pension scheme at a glance
Occupational pension provision (bAV) refers to benefits provided by an employer for old age, disability or death. It is an important part of the German three-pillar model of retirement provision. Since 2002, employees have had a legal right to salary sacrifice. This means that parts of gross salary go directly into the bAV. Since 2019, employers have had to pay a 15 per cent contribution for new contracts if they save on social security contributions. This rule makes the bAV more attractive for many employees. The bAV is therefore a tool for employee retention and for closing the pension gap. Find out more about the three layers of retirement provision.
Practical section: This is how occupational pension provision works in everyday life
Occupational pension provision (bAV) becomes reality through various implementation methods chosen by the employer. There are five main forms: direct insurance, pension scheme, pension fund, support fund and direct commitment. In direct insurance, for example, the employer takes out a life insurance policy for you. In 2021, there were 5.29 million active direct insurance contracts in Germany. Contributions of up to eight per cent of the contribution assessment ceiling (BBG West 2024: EUR 90,600) can be contributed tax-free; this amounts to EUR 7,248. You save social security contributions of up to four per cent of the BBG, i.e. up to EUR 3,624 per year (as at 2024). A calculation example: with EUR 100 of monthly salary sacrifice and a 15 per cent employer contribution, EUR 115 flows into your contract. Many employees underestimate the compounding effect over decades. The tax deductibility of direct insurance is a clear advantage. These practical aspects illustrate the direct benefit of occupational pension provision for your retirement planning.
Calculation example for salary sacrifice
Suppose an employee converts EUR 200 of their gross salary each month. The employer adds the legally required subsidy of 15 per cent (EUR 30), as it saves social security contributions. This means EUR 230 flows into the occupational pension contract each month. Over a term of 30 years and assuming an annual return of three per cent, capital of over EUR 100,000 could be generated. This illustrates the potential.
Comparison of implementation methods
The choice of implementation method affects costs, flexibility and investment options. Here is a brief overview:
Direct insurance: Widely used, easy to manage, often with guaranteed benefits. In 2023 there were 8.78 million such contracts.
Pension scheme: Legally independent pension institution, similar to an insurance policy. Around 3.41 million contracts existed in 2023.
Pension fund: Offers higher return opportunities through greater investment freedom, but also higher risks. Around 0.65 million contracts in 2023.
Support fund: Often used by larger companies, with no direct legal claims against the fund. Around 4.99 million insured persons (together with direct commitments) in 2021.
Direct commitment (pension commitment): Employer builds up provisions internally and pays the pension directly.
Each route has specific advantages and disadvantages that must be weighed up in each individual case. The advantages for employers are also numerous. The complexity of the options underlines the need for good advice.
In-depth expertise: legal basics and design tips
The Occupational Pensions Act (BetrAVG) has formed the legal basis of occupational pensions since 1974. Among other things, it regulates eligibility requirements and the vesting of entitlements. Employer-financed promises generally vest after three years of service and when the employee reaches the age of 21. Contributions from salary sacrifice vest immediately. An important aspect is insolvency protection: in most implementation methods, your entitlements are protected by the Pensions-Sicherungs-Verein (PSVaG). Our expert tip: Check the options for taking your occupational pension with you when changing jobs. Often, a transfer of the capital is possible if the value does not exceed the contribution assessment ceiling. For low earners (up to EUR 2,575 gross monthly in 2024), there is the occupational pension subsidy: the state tops up employer contributions of at least EUR 240 per year by 30 per cent, up to a maximum of EUR 288. This can significantly increase returns. A precise understanding of the provisions, such as Section 1a BetrAVG (salary sacrifice) or Section 3 no. 63 EStG (tax exemption), is essential for optimal structuring. The tax treatment of occupational pensions therefore offers significant advantages. Careful planning and use of these rules is crucial to the success of your retirement provision.
Current judgments and developments
Case law on occupational pensions is evolving continuously. For example, the Federal Fiscal Court (BFH) has repeatedly commented on deferred taxation and the application of the one-fifth rule to lump-sum payments. It is important to keep an eye on current judgments, as they can affect contract design and payment. It has, for instance, been clarified that strict criteria apply to the one-fifth rule in the case of partial lump-sum payment. Politics is also planning further adjustments to make occupational pensions more attractive, especially for low earners and in small companies. A draft bill provides for raising and indexing the income threshold for low-earner support.
Structuring tips for employees
Make use of your entitlement to salary sacrifice and the employer subsidy. Here are some tips:
Start early: The earlier you start an occupational pension, the more you benefit from compound interest. Even small contributions over 30 to 40 years can add up to a substantial sum.
Use the maximum support framework: If possible, make full use of the tax- and social security-free maximum amounts. In 2024, that is up to EUR 7,248 tax-free and EUR 3,624 free of social security contributions.
Claim the employer subsidy: Insist on the statutory subsidy of 15 per cent if your employer saves on social security contributions.
Check contract details: Pay attention to the costs, guaranteed benefits and flexibility of the contract, particularly if you may change employer.
Seek advice: Occupational pensions are complex. Professional advice helps you find the optimum solution for your individual situation.
These tips will help you set the course for a solid additional retirement provision. The question of whether a company pension scheme makes sense can usually be answered positively. However, the exact design is decisive.
Weigh up the advantages and disadvantages of occupational pension provision
The company pension scheme offers numerous advantages. Employees benefit from tax and social security savings during the accumulation phase. The employer contribution of at least 15 per cent further increases the return. Entitlements are often protected against insolvency, and there are simplified medical assessments for additional components. For employers, the bAV is a tool for retaining employees and can reduce ancillary labour costs. There are also disadvantages: net pay during the contribution period is lower. The later pension is fully taxable and, for those in statutory health insurance, subject to contributions to health and long-term care insurance, although allowances apply. Access to the capital before retirement begins (from age 62 at the earliest) is usually not possible. When changing employer, transferring the contract may present hurdles if the capital exceeds EUR 96,600 (as of 2025) or if the change was more than twelve months ago. Careful weighing up of these aspects is important before signing the contract. The bAV for entrepreneurs has its own nuances. A well-founded decision secures long-term benefits.
Your path to the ideal occupational pension scheme
An occupational pension scheme is a valuable instrument for your financial future. Despite its complexity, the advantages outweigh the disadvantages for many employees, particularly thanks to government incentives and employer contributions. An uptake rate of around 53.9 per cent among employees subject to social insurance contributions in 2019 shows its relevance. Nevertheless, the occupational pension scheme (bAV) covers on average only around eight per cent of retirement income. To fully realise its potential, personalised advice is essential. At nextsure, we help you find the right solution for your needs and set the course for a worry-free retirement. Make use of our expertise for your retirement provision. As a digital insurance portal, we offer you comprehensive and easy-to-understand insurance solutions.
Request your personalised risk analysis now: Have your insurance situation reviewed free of charge and receive specific suggestions for improvement.
More useful links
Wikipedia offers a comprehensive overview of occupational pensions in Germany.
The GDV (German Insurance Association) provides statistics on occupational pension contracts in the German insurance industry.
The ABA (Working Group for Occupational Pensions) offers statistics on the prevalence of occupational pensions in Germany.
The ABA (Working Group for Occupational Pensions) provides statistics on the benefits and payouts of occupational pensions.
The Federal Ministry of Labour and Social Affairs (BMAS) provides information in a press release on a survey about the prevalence of occupational pensions.
The Federal Ministry of Labour and Social Affairs (BMAS) offers information on retirement income and additional provision options.
The German Pension Insurance provides a brochure on occupational pensions.
Statista offers a topic page with comprehensive statistics and data on occupational pensions.
Deloitte presents a study on occupational pensions (bAV).
Wikipedia offers information on the German Occupational Pensions Act.
FAQ
What role does a company pension scheme play in my retirement?
Occupational pension provision is an important second pillar alongside the state pension and private retirement provision. It helps to close the pension gap in old age and secure your standard of living, as the state pension is often not sufficient.
What is the employer's contribution to the occupational pension scheme?
Employers must pay a subsidy of 15 per cent of the converted remuneration if they save social security contributions through the employee’s salary conversion. This obligation has applied to new contracts since 2019 and to existing contracts since 2022.
What tax advantages does occupational pension provision offer?
Contributions to occupational pension schemes are tax-free via the direct insurance, pension fund and pension scheme routes up to eight per cent of the pension insurance contribution assessment ceiling (2024: EUR 7,248). Up to four per cent (2024: EUR 3,624) are also exempt from social security contributions.
What happens to my occupational pension scheme if I change employer?
There are several options when changing employer. Entitlements from salary sacrifice are immediately vested. The policy can often be made paid-up, continued privately or, under certain conditions, transferred to the new employer (portability). A transfer is possible if the value does not exceed the BBG and the change was not too long ago.
What types of occupational pension scheme are there?
There are five implementation routes: direct insurance, pension fund, pension scheme, support fund and direct commitment (also known as a pension commitment). The employer selects the implementation route.
Is the capital in the occupational pension scheme secure if the employer becomes insolvent?
Yes, in most cases claims under the occupational pension scheme (bAV) are protected by the Pensions-Sicherungs-Verein (PSVaG) in the event of the employer’s insolvency. This applies in particular to direct commitments, support funds and, under certain conditions, also to pension funds and pension schemes.
