Occupational pension provision: Everything about implementation routes, advantages and disadvantages
05.06.25
11
Minutes
Katrin Straub
Managing Director at nextsure
Occupational pension provision (bAV) is an important component of retirement provision in Germany. It offers advantages for both employees and employers. But what options are there, how is it implemented, and what should you consider when choosing the right implementation route?
The topic in brief and concise terms
Occupational pension provision as a supplement to the state pension.
Five implementation routes offer flexibility.
Beneficial for both employees and employers.
1. What is a company pension scheme (bAV)?
Occupational pension provision, or bAV for short, is an additional pillar of retirement provision based on the employment relationship. In this arrangement, the employee saves for retirement via their employer. A portion of the salary is invested in a retirement provision benefit either directly by the employee (salary conversion) or through employer contributions. These funds receive tax and social security advantages. The aim is to close the pension gap created by the declining capacity of the statutory pension insurance scheme.
2. Forms of occupational pension provision (implementation routes)
In occupational pension provision, there are various implementation routes that determine how pension provision is organised and financed. Each route has specific characteristics in terms of responsibilities, guarantees and design options. Here are the five most common implementation routes:
2.1. Direct commitment (pension commitment)
The direct commitment, also known as a pension commitment, is the oldest form of occupational pension provision. The employer promises the employee a direct benefit in retirement and sets aside provisions in the balance sheet for this purpose. The employer remains solely responsible for the commitment and for meeting the benefit. This form offers a high degree of flexibility in designing benefits and can be adapted individually to the needs of the company. Employees benefit from a strong bond with the company, as the commitment comes directly from the employer. However, insolvency protection for the commitment via the Pension Protection Association (PSVaG) is required.
2.2. Support fund
A support fund is a legally independent pension institution that arranges occupational pension provision for several companies or a single group. It pays the promised benefits to employees, while the companies make contributions to the fund. Contributions are exempt from social security for employees and receive tax advantages. The support fund is not an insurance company and is not subject to insurance supervision. Protection in the event of insolvency is also provided via the PSVaG.
2.3. Direct insurance
Direct insurance is the most commonly used route. Here, the employer takes out a life or pension insurance policy for the employee. The employee is the policyholder and beneficiary of the benefits. Contributions can come from the employee's gross income (salary conversion) or from employer subsidies. Direct insurance offers the advantage of high transparency and a direct commitment by an insurance company. Benefits are protected in the event of death and disability. It is subject to state insurance supervision.
2.4. Pension fund
A pension fund is a legally independent pension institution that provides occupational pension benefits. Unlike the support fund, it is subject to state insurance supervision. Pension funds can be backed by one or more companies and operate similarly to life insurance companies. Contributions are paid by employers or employees and are usually paid out in the form of a lifelong pension. Pension funds are known for their high level of security, as they are subject to strict legal regulations.
2.5. Pension fund
Pension funds are relatively new implementation routes for occupational pension provision, having existed since 2002. They are legally independent entities that invest capital for occupational pension provision. Compared with pension funds, pension funds have greater freedom in capital investment, which can bring higher return opportunities, but also higher risks. They are also subject to insurance supervision. Pension funds are particularly suitable for companies seeking a return-oriented investment strategy and willing to take on higher risks in order to achieve potentially higher returns.
3. Advantages and disadvantages of occupational pension provision for employees
Occupational pension provision offers employees various advantages, but also some disadvantages that should be considered when making the decision.
Advantages for employees:
Tax and social security savings: Contributions to the occupational pension scheme (bAV) are tax-free and exempt from social security contributions during the accumulation phase up to certain limits. This means that a larger share of gross income flows directly into retirement provision, resulting in lower taxes and social security contributions.
Employer subsidy: Since 2019, employers have been legally required to contribute a subsidy of at least 15% in the case of salary conversion, provided they save social security contributions through salary conversion. Many employers pay even higher subsidies, making the bAV even more attractive.
Lower burden on net income: Through salary conversion, taxable gross income decreases, leading to a lower tax burden and reducing the net cost of retirement provision.
Security through statutory regulations: The bAV is protected by the Occupational Pensions Act (BetrAVG). This includes, among other things, vesting rules for entitlements and insolvency protection via the Pension Protection Association (PSVaG).
Simple handling: Contributions are deducted directly from salary and administered by the employer, which means little administrative effort for employees.
Disadvantages for employees:
Taxation of payments at a later date: Pension payments from the bAV are fully taxable in retirement. Although tax rates are often lower in later life, this should be taken into account in long-term financial planning.
Lower social security benefits in later life: Since contributions to the bAV are exempt from social security contributions, lower entitlements may arise in retirement under statutory health and long-term care insurance.
Less flexibility when withdrawing capital: Early withdrawal of capital is generally not possible. The accumulated capital is primarily intended for retirement provision.
Dependence on the employer: Although entitlements are vested, changing employer can involve administrative effort or make it more difficult to continue the bAV, depending on the new employer and their offerings.
4. Advantages and disadvantages of occupational pension schemes for companies
Even for companies, occupational pension provision brings both opportunities and challenges.
Advantages for companies:
Employee retention and motivation: An attractive occupational pension scheme is a strong tool for attracting and retaining qualified specialists. It shows appreciation and fosters loyalty.
Tax advantages: Employer contributions to the occupational pension scheme are deductible as business expenses. In addition, social security contributions can be saved through salary sacrifice.
Image enhancement: A company that cares about its employees' retirement provision improves its social image and is seen as a responsible employer.
Lower ancillary wage costs: With salary sacrifice, employer social security contributions are lower, as the employee's earnings subject to contributions decrease.
Fulfilling the legal obligation: Employers are legally required to allow their employees to salary sacrifice and to provide a subsidy of at least 15%, provided social security contributions are saved.
Disadvantages for companies:
Administrative effort: Setting up and managing the occupational pension contracts, as well as communicating with employees and pension providers, can involve a certain administrative effort.
Costs: Even though there are tax advantages, companies incur costs through employer subsidies and, where applicable, administration.
Liability risk: In some implementation routes, such as direct commitments, the company bears direct liability for the promised benefits. Even with other implementation routes, the employer may still retain subsidiary liability if the pension provider becomes insolvent.
Long-term commitment: Occupational pension provision is a long-term commitment that lasts for decades and requires careful planning.
5. Employee and employer obligations in occupational pension provision (bAV)
Company pension provision is a complex field with clear obligations for both sides.
Employer obligations:
Information obligation: Employers must inform their employees about the possibility of salary conversion and the associated benefits.
Implementation obligation: Every employee has the right to salary conversion. The employer must make this possible by offering a suitable implementation route.
Employer contribution obligation: In the case of salary conversion, the employer must pay a contribution of at least 15% on the converted amount since 2019 if they save on social security contributions through the conversion.
Liability: The employer is secondarily liable for fulfilling the promised benefits, even if an external implementation route was chosen.
Employee obligations:
Payment of contributions (in the case of salary conversion): If an employee opts for salary conversion, they are responsible for the regular payment of the contributions, which are deducted directly from their salary.
Selection of the implementation route (limited): As a rule, the employer specifies the implementation route or routes on offer. Employees can then choose one of these routes.
Notification obligation (when changing jobs): When changing jobs, the employee should inform their new employer about any existing company pension provision in order to clarify continuation or transfer.
6. When is occupational pension provision worthwhile?
The attractiveness of company pension schemes depends heavily on individual factors.
Employer contribution: The higher the employer contribution, the more attractive the occupational pension scheme is. A contribution of 20% or more often makes the occupational pension scheme more worthwhile than many other savings products.
Individual tax burden: For people on a higher income and therefore a higher marginal tax rate, the occupational pension scheme is particularly advantageous, as the tax savings during the savings phase are greater.
Earnings development: If you expect your income in retirement to be lower than during your working life, the later taxation of occupational pension scheme payouts is less problematic.
Contribution period: The longer you pay into the occupational pension scheme, the greater the compound interest effect and thus the accumulated capital. An early start is therefore always advisable.
Other forms of provision: The occupational pension scheme should be seen as a supplement to other forms of provision (state pension, private provision). It is rarely the sole solution, but an important component of the overall concept.
Health status: Since the occupational pension scheme is often linked to an insurance component, better terms may be available if you are in good health.
In summary: The occupational pension scheme is almost always worthwhile if the employer makes a contribution and you are prepared to provide for retirement in the long term. It is an excellent way to build up an additional pension with state support and employer backing.
The Occupational Pensions Strengthening Act (BRSG), which came into force on 1 January 2018, has significantly reformed occupational pension provision (bAV) and made it more attractive. The main changes are:
Employer mandatory contribution supplement: Since 1 January 2019, employers must pay a mandatory supplement of 15% on salary conversion if they save on social security contributions. For new contracts, this has applied since 2019; for existing contracts since 1 January 2022.
Social partner model (target pension): The BRSG makes it possible to introduce a social partner model, also known as a pure defined contribution arrangement or target pension. In this model, the social partners (employers and trade unions) no longer guarantee a fixed pension amount, but only the level of contributions. The potential returns are higher, but the risk lies more heavily with the employee. This enables more flexible and potentially higher-yield retirement provision, but requires collective agreement coverage.
Allowance in basic income support: Retirees who receive basic income support can receive an allowance from their occupational pension provision before the occupational pension benefit is taken into account in basic income support. This is intended to increase the incentive to invest in occupational pension provision even with low income.
Increase in tax-free limits: The maximum limits for tax-free and social security-free contributions to occupational pension provision have been increased, allowing higher savings contributions.
8. Conclusion on occupational pension provision
Occupational pension provision (bAV) is an important pillar of retirement provision in Germany. It offers both employees and employers attractive advantages through government support and statutory protection. For employees, it makes it possible to build up an additional pension with tax advantages and employer contributions, while companies benefit from employee retention and motivation. Despite some disadvantages, such as tax being levied later on pension payments or the administrative effort involved, the advantages generally outweigh them, especially where the employer contribution is generous. Making an early and informed decision about the right implementation route is crucial in order to make the best possible use of the opportunities offered by bAV.
9. FAQ: Frequently Asked Questions about bAV
In this section, we answer the most frequently asked questions about occupational pension provision.
More useful links
The Federal Ministry of Labour and Social Affairs offers comprehensive information on occupational pension provision and its statutory foundations.
On Laws on the Internet you will find the full text of the Occupational Pensions Act (BetrAVG), which regulates the framework conditions of occupational pensions (bAV).
The General Association of the German Insurance Industry (GDV) provides current statistics on occupational pension contracts in Germany.
Statista provides a collection of relevant data and facts on occupational pension provision in Germany.
The Working Group for Occupational Pensions e.V. (aba) explains the various implementation routes of occupational pensions in its glossary.
The German Pension Insurance offers an informative brochure on occupational pension provision.
A publication by the Federal Government offers further insights into the topic of occupational pension provision.
Wikipedia offers a comprehensive overview of occupational pension provision.
FAQ
What is the difference between occupational and private pension provision?
Occupational pension provision (bAV) is organised through the employer and is often supported by employer contributions as well as tax and social security advantages during the accumulation phase. Private pension provision (e.g. Riester pension, Rürup pension, private annuity insurance) is arranged independently and either receives direct state support or also offers tax advantages. With bAV, the employer is usually the contractual partner, whereas with private provision you are the contractual partner yourself.
Is an occupational pension scheme mandatory for companies?
No, a company pension scheme is not mandatory for companies in the sense that they must offer every employee a company pension scheme. However, employees have a statutory right to salary conversion. This means that the employer must give their employees the opportunity to use part of their salary for the company pension scheme. Since 2019, employers have also been required to pay a subsidy of at least 15% if they save on social security contributions through salary conversion.
What happens to my company pension if I change jobs?
Your occupational pension scheme is generally vested, i.e. the accrued entitlements remain in place. When changing jobs, there are several options: the occupational pension scheme can be continued with the new employer, provided that they offer the same implementation method or allow a transfer. Alternatively, it can be made paid-up and left dormant until retirement age is reached. A payout of the capital accumulated is generally not possible.
Can I have my occupational pension paid out early?
As a rule, early payment of the company pension scheme is not possible. The capital is intended for retirement provision and is to be paid out in retirement as a pension or one-off capital payment. There are only a few exceptions, for example in the case of very small amounts (small entitlements), which may be permitted by the legislator on a case-by-case basis.
How much occupational pension provision is sensible?
The appropriate amount depends on your individual situation. What is important is that the employer makes an attractive contribution (ideally more than 15%). Check your personal pension gap and how the bAV can help close it. Also bear in mind that too large a share of income paid into the bAV can lead to lower social security benefits in retirement.
What is the difference between direct insurance and a pension fund?
Both are methods of implementing occupational pension provision (bAV). A Direktversicherung is a classic insurance contract that the employer takes out with an insurance company for the employee. The employee is usually the policyholder. A Pensionskasse is an independent, legally autonomous pension institution (similar to a small life insurance company) that manages occupational pensions for several companies. Both are subject to insurance supervision, but pension funds are often more flexible in their investment strategy.
