Occupational pension provision: Your guide to supplementary pension and financial security in retirement
26.05.25
7
Minutes
Katrin Straub
Managing Director at nextsure
The state pension alone is often no longer enough to secure your standard of living in retirement. An occupational pension can close this gap and also offers attractive benefits. Find out how to get the most out of your company pension.
Topics on this page
The topic in brief and concise terms
Occupational pension provision is an important supplement to the statutory pension, promised by the employer and offering tax advantages.
Employees have a legal right to salary conversion, and since 2019/2022 employers must contribute at least fifteen per cent if they save on social security contributions.
There are five implementation routes (direct commitment, support fund, direct insurance, pension scheme and pension fund) with different characteristics and legal frameworks.
Quick Facts: The key facts about company pension provision at a glance
An occupational pension benefit is a commitment from your employer to provide for your retirement, disability or surviving dependants. Since 2002, employees have had a legal right to salary conversion, whereby part of their gross salary is paid into an occupational pension scheme. During the savings phase, contributions are tax-free up to eight per cent of the contribution assessment ceiling and exempt from social security contributions up to four per cent. There are five implementation routes: direct commitment, support fund, direct insurance, pension scheme and pension fund. The benefits are taxed later in life, often at a lower personal tax rate at that time.
Practical part: How occupational benefits work in everyday life
Imagine you earn €3,500 gross per month and decide to invest €150 of that each month through salary conversion into a company pension scheme. Thanks to savings on tax and social security contributions, your net cost is often only about half, i.e. around €75. Since 2019, your employer has been legally obliged to contribute at least fifteen per cent of the converted amount as a top-up, provided they save on social security contributions. In this example, that would mean an additional €22.50 flowing into your contract. This helps your pension capital grow faster.
Another example: an employee aged 30 pays in €100 a month through salary conversion. Their employer adds the mandatory fifteen per cent top-up (€15). Assuming an annual return of three per cent, after 37 years they would already have accumulated over €90,000. The exact amount of the later pension depends on many factors, such as the return and the chosen implementation route. It is advisable to run through different scenarios. The tax treatment of contributions is a key advantage.
The five implementation routes offer different advantages and disadvantages:
Direct insurance: the employer takes out a life insurance policy for the employee; very common.
Pension fund: legally independent pension provider, often used by companies covered by collective agreements.
Pension fund: offers more flexible investment options, potentially higher returns, but also higher risks.
Support fund: pension provider financed by the employer; the employee has no direct legal claim against the fund.
Direct pension commitment (pension promise): the employer pays the pension directly from company assets; insolvency protection via the Pension Security Association (PSVaG).
The choice of implementation route is usually up to the employer. They must inform you about the chosen form and the conditions. The benefits for employers should not be underestimated, as they can retain employees and save on payroll-related labour costs. These basics help you better understand the different options.
Expert depth: Legal foundations and recent rulings on occupational pension provision
The legal basis for occupational pension provision is the Occupational Pensions Act (BetrAVG). It governs, among other things, the right to salary sacrifice (§ 1a BetrAVG), the vesting of entitlements (§ 1b BetrAVG) and the duty to review increases for ongoing benefits (§ 16 BetrAVG). Tax aspects are regulated primarily in the Income Tax Act (EStG), in particular § 3 No. 63 EStG on the tax exemption of contributions. Exact knowledge of these sections is essential for a deep understanding.
Recent judgments continue to shape the landscape of occupational pension provision. For example, the Federal Labour Court (BAG) has ruled several times on the employer’s obligation to stand in where benefits are reduced by pension funds (e.g. BAG, judgment of 14.03.2023, 3 AZ R 197/22). It was clarified that, in principle, the employer is liable for the promised benefit, even if implementation is carried out through an external provider. Another important topic is the conversion of pension commitments into lump-sum benefits, where the BAG sets requirements regarding proportionality and the protection of legitimate expectations (e.g. BAG, judgment of 20.06.2023, 3 AZR 231/22). Such judgments show how dynamic this area of law is and how important sound advice on occupational pensions is.
Our expert tip: when concluding a contract, pay close attention to the wording regarding the adjustment of pension benefits. Under § 16 BetrAVG, the employer is obliged to review every three years whether ongoing benefits should be adjusted and to decide on this at its fair discretion. The criteria are the interests of the beneficiary and the employer’s economic situation. A clear provision on this can prevent later disputes. Also find out what happens to your entitlements upon termination.
Design tips: How to optimise your occupational pension provision
To structure your occupational pension provision optimally, you should bear a few points in mind. Make full use of the maximum tax- and social security contribution-free allowance for your contributions. In 2025, up to 7,728 euros can be paid in tax-free and 3,864 euros in social security contribution-free. This significantly maximises your savings during the accumulation phase. Check with your employer how much the employer contribution is. Since 2022, this is also mandatory for older contracts (concluded before 2019) at a rate of at least fifteen per cent of the conversion amount, if the employer saves on social security contributions.
Check how flexible your contract is. Is a transfer of occupational pension provision possible when changing employer? Since 2005, there has been a statutory entitlement to portability for newly concluded contracts under certain implementation routes, if the transfer value does not exceed a certain threshold. Also clarify what options you have if you run into payment difficulties, for example a contribution holiday or reduction. Early planning as to whether an occupational pension provision is worthwhile pays off.
Our expert tip: do not let yourself be guided by high return promises alone. Also pay attention to the security of the investment and the cost structure of the chosen product. A transparent breakdown of all fees is crucial here. Compare different offers, provided your employer gives you a choice or you can obtain additional information through an external adviser. The cancellation and payout of an occupational pension scheme often comes with disadvantages and should be carefully considered.
You should consider the following aspects when making your selection and design:
Amount of your own contributions and employer contribution.
Flexibility with contribution adjustments and payment breaks.
Options when changing employer (portability).
Rules on survivor's and disability cover.
Cost structure and transparency of the offer.
Security and return opportunities of the capital investment.
Payout options (annuity, lump sum or a combination).
Careful consideration of these points leads to a pension solution tailored to your needs. You will then be well equipped to set the course for a financially secure future.
The path to an individual solution: consultation and next steps
Occupational pension provision is a complex topic with many individual facets. A blanket recommendation is hardly possible, as your personal situation, your financial goals and the benefits offered by your employer are decisive. Professional advice can help you develop the strategy that is optimal for you. At nextsure, we see ourselves as your partner for tailored and easy-to-understand insurance solutions. We support you in assessing the various options for occupational pension provision and making a well-founded decision. Seize the opportunity to actively shape your retirement planning and build financial security for the future.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive concrete suggestions for improvement.
More useful links
Federal Ministry of Labour and Social Affairs (BMAS) provides comprehensive information on occupational pension provision.
German Pension Insurance provides an informative brochure on occupational pension provision.
Laws on the Internet provides the full text of the Act on the Improvement of Occupational Pensions (BetrAVG).
Statista provides current statistics and data on occupational pension provision in Germany.
German Insurance Association (GDV) provides statistics on occupational pension contracts.
Wikipedia offers a comprehensive article on occupational pension provision with basic information.
ifo Institute publishes academic papers on retirement provision, including occupational pension provision.
Federal Agency for Civic Education (bpb) provides information on occupational pension provision in the context of pension policy.
Federal Ministry of Finance provides a definition of occupational pension provision in its glossary.
FAQ
How much are the tax-free contributions to occupational pension provision?
In 2025, contributions of up to eight per cent of the contribution assessment ceiling of the statutory pension insurance scheme (West) can be paid tax-free into a direct insurance policy, pension fund or pension scheme. This amounts to EUR 7,728 per year. Contributions of up to four per cent (EUR 3,864) are exempt from social security contributions.
What routes are available for occupational pension provision?
There are five implementation routes: direct commitment (pension promise), support fund, direct insurance, pension fund and pension scheme. Each route has specific characteristics regarding financing, liability and insolvency protection.
Is the employer contribution to the occupational pension scheme mandatory?
Yes, since January 2019 for new contracts and since January 2022 also for existing deferred compensation agreements (concluded before 2019), the employer must pay a subsidy of at least fifteen per cent of the converted remuneration, provided that it thereby saves social security contributions.
How are benefits from occupational pension provision taxed in retirement?
Benefits from occupational pension schemes are subject to the so-called deferred taxation. This means that the contributions are tax-advantaged during the savings phase, but the later pension payments or lump-sum withdrawals must then be taxed at the individual's personal income tax rate. In addition, contributions to health and long-term care insurance are payable.
What is the difference between a direct pension commitment and a direct insurance policy?
In the case of a direct commitment (pension commitment), the employer undertakes to pay the retirement benefits directly from the company's own assets. In the case of a direct insurance policy, the employer takes out a life or pension insurance policy on the employee's life with an external insurance company.
Can I cancel my occupational pension benefit and have it paid out to me?
An early cancellation and payout is generally not provided for and often comes with disadvantages, such as the loss of grants or tax consequences. The conditions depend on the specific contract and implementation route. An early payout is only possible within narrow limits.
