Company Pension Scheme: All About Implementation Methods, Advantages & Disadvantages
5 Jun 2025
11
Minutes
Katrin Straub
CEO at nextsure
Company pension schemes (bAV) are an important component of retirement planning in Germany. They offer advantages to both employees and employers. But what options are available, how does implementation work, and what should you consider when choosing the right implementation method?
The topic in brief and concise terms
Occupational pension schemes as a supplement to the state pension.
Five implementation methods offer flexibility.
Advantageous for both employees and employers.
1. What is occupational pension provision (bAV)?
Occupational pension provision, or bAV for short, is an additional pillar of retirement provision based on the employment relationship. The employee saves for retirement through their employer. A portion of the salary is invested in a retirement provision either directly by the employee (salary conversion) or through employer contributions. These funds receive tax and social security incentives. The goal is to close the gap left by the declining performance of the statutory pension insurance.
2. Forms of Occupational Pensions (Implementation Methods)
Occupational pensions offer various implementation methods to organize and finance retirement provisions. Each method has specific characteristics regarding responsibilities, securities, and design possibilities. Here are the five most common implementation methods:
2.1. Direct Commitment (Pension Commitment)
The direct commitment, also known as pension commitment, is the oldest form of occupational pension provision. The employer promises the employee a direct benefit upon retirement and makes provisions for it in the balance sheet. The employer remains the sole bearer of the promise and is responsible for fulfilling the benefit. This form offers high flexibility in designing the benefits and can be tailored to the needs of the company. Employees benefit from a strong connection to the company, as the promise comes directly from the employer. However, insolvency insurance of the promise through the Pension Protection Association (PSVaG) is required.
2.2. Support Fund
A support fund is a legally independent provision institution that regulates occupational pension provision for several companies or a single corporation. It pays the promised benefits to employees while the companies contribute to the fund. Contributions are social security-free and tax-advantaged for employees. The support fund is not an insurance company and is not subject to insurance supervision. The insolvency protection is also provided through the PSVaG.
2.3. Direct Insurance
Direct insurance is the most commonly used implementation method. 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 stem from the employee's gross income (salary conversion) or from employer subsidies. Direct insurance offers the advantage of high transparency and a direct promise through an insurance company. Benefits are secured 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 provision institution that provides occupational pension benefits. Unlike the support fund, it is subject to state insurance supervision. Pension funds can be supported by one or more companies and are similar to life insurance companies in their operation. Contributions are made by employers or employees and are typically paid out in the form of a lifetime pension. Pension funds are known for their high security as they adhere to strict legal regulations.
2.5. Pension Funds
Pension funds are relatively new implementation methods of occupational pension provision, existing since 2002. They are legally independent entities that invest capital for occupational pensions. Compared to pension funds, pension funds have greater freedom in capital investment, which can offer higher returns, but also entails higher risks. They are also subject to insurance supervision. Pension funds are particularly suitable for companies that desire an opportunity-focused investment strategy and are willing to take on higher risks for potentially higher returns.
3. Advantages and Disadvantages of Occupational Pension Schemes for Employees
Company pension schemes offer employees various advantages, but also some disadvantages that should be considered when making a decision.
Advantages for Employees:
Tax and Social Security Savings: Contributions to the occupational pension scheme are tax and social security-free during the savings phase up to certain limits. This means a larger portion of the gross income flows directly into pension savings, resulting in lower taxes and social security contributions.
Employer Contribution: Since 2019, employers are legally required to provide a contribution of at least 15% for salary conversion, provided they save on social security contributions through this method. Many employers even offer higher contributions, making the occupational pension scheme even more attractive.
Lower Impact on Net Income: Salary conversion reduces the taxable gross income, leading to a lower tax burden and reducing the net impact for retirement savings.
Security Through Legal Regulations: The occupational pension scheme is protected by the Company Pensions Act (BetrAVG). This includes, among other things, rules on the vesting of entitlements and insolvency protection through the Pension Protection Association (PSVaG).
Easy to Manage: Contributions are deducted directly from the salary and managed by the employer, resulting in minimal administrative effort for employees.
Disadvantages for Employees:
Later Taxation of Payouts: Pension payments from the occupational pension scheme are fully taxable during retirement. Although tax rates are often lower in retirement, this should be taken into account in long-term financial planning.
Lower Social Security Benefits in Retirement: Since contributions to the occupational pension scheme are exempt from social security, lower claims may arise from statutory health and nursing care insurance during retirement.
Less Flexibility in Capital Withdrawal: Early capital withdrawal is generally not possible. The accumulated capital is primarily intended for retirement.
Tied to the Employer: Although entitlements are vested, changing employers can involve administrative effort or complicate the continuation of the occupational pension scheme, depending on the new employer and their offerings.
4. Advantages and disadvantages of occupational pension schemes for companies
For companies, occupational pension schemes present both opportunities and challenges.
Advantages for Companies:
Employee Retention and Motivation: An attractive occupational pension scheme is a powerful tool for attracting and retaining skilled professionals. It demonstrates appreciation and fosters loyalty.
Tax Benefits: Employer contributions to the occupational pension scheme are tax-deductible as business expenses. Additionally, salary conversion can result in savings on social security contributions.
Image Enhancement: A company that looks after its employees' retirement provision improves its social image and is regarded as a responsible employer.
Reduced Ancillary Wage Costs: With salary conversion, lower social security contributions are incurred by the employer because the taxable gross income of the employee is reduced.
Fulfilment of Legal Obligation: Employers are legally required to enable salary conversion for their employees and provide a subsidy of at least 15% if social security contributions are saved.
Disadvantages for Companies:
Administrative Effort: Setting up and managing occupational pension contracts, as well as communication with employees and pension providers, can entail a certain amount of administrative work.
Costs: Although there are tax benefits, companies incur costs through employer subsidies and, possibly, administration.
Liability Risk: In some implementation routes, such as direct commitment, the company bears the immediate liability for the promised benefits. Even in other implementation routes, a subsidiary liability of the employer may remain if the pension provider becomes insolvent.
Long-term Commitment: The occupational pension scheme is a long-term commitment that remains for decades and requires careful planning.
5. Employee and employer obligations in occupational pensions
Occupational pension schemes are a complex area with clear obligations for both parties.
Employer obligations:
Information duty: Employers must inform their employees about the option of salary conversion and the associated benefits.
Implementation duty: Every employee has the right to salary conversion. The employer must facilitate this by offering a suitable means of implementation.
Contribution duty: In cases of salary conversion, employers have been required since 2019 to pay a contribution of at least 15% on the converted amount if they save on social security contributions through the conversion.
Liability: The employer is secondarily liable for the fulfilment of the promised benefits, even if an external route of implementation is chosen.
Employee obligations:
Payment of contributions (in case of salary conversion): If an employee opts for salary conversion, they are responsible for the regular payment of contributions, which are directly deducted from their wages.
Selection of implementation route (limited): Typically, the employer specifies the offered implementation routes. Employees can then choose one of these routes.
Notification duty (in case of job change): When changing jobs, the employee should inform their new employer about an existing occupational pension scheme to discuss continuation or transfer.
6. When does an occupational pension scheme make sense?
The attractiveness of occupational pension schemes largely depends on individual factors.
Employer contribution: The higher the contribution from the employer, the more attractive the occupational pension is. A contribution of 20% or more often makes the occupational pension more rewarding than many other forms of saving.
Individual tax burden: For individuals with higher incomes who have a higher marginal tax rate, the occupational pension is particularly advantageous because the tax savings during the accumulation phase are greater.
Salary development: If you expect that your income in retirement will be lower than during your working life, the later taxation of occupational pension payouts becomes less problematic.
Duration of payment: The longer you contribute to the occupational pension, the greater the compound interest effect and thus the accumulated capital. Starting early is therefore always advisable.
Other pension forms: The occupational pension should be seen as a supplement to other pension forms (state pension, private retirement savings). It is rarely the sole solution but an important component in the overall concept.
Health status: Since the occupational pension is often associated with an insurance component, better conditions can be achieved if you are in good health.
In summary: The occupational pension is almost always worthwhile if the employer makes a contribution and you are willing to save for the long term for retirement. It is an excellent instrument for building an additional pension with state support and employer assistance.
7. Important Changes and Laws Regarding Occupational Pensions
The Betriebsrentenstärkungsgesetz (BRSG), which came into effect on 1 January 2018, has significantly reformed and enhanced the attractiveness of company pension schemes. The key changes are:
Employer Mandatory Contribution: Since 1 January 2019, employers are required to contribute 15% to salary conversion if they save on social security contributions. This has been applicable to new contracts since 2019 and to existing contracts since 1 January 2022.
Social Partner Model (Target Pension): The BRSG allows for the introduction of a social partner model, also known as pure contribution commitment or target pension. In this model, social partners (employers and unions) no longer guarantee a fixed pension amount, only the level of contributions. The return opportunities are higher, but the risk is more on the employee. This enables a more flexible and potentially high-yield retirement provision, although it requires a collective agreement.
Exemption in Basic Security: Retirees who receive basic security can obtain an exemption from their company pension before the pension benefit is credited to the basic security. This aims to increase motivation to invest in company pensions even with low income.
Increase in Tax-Free Limits: The limits for tax and social security-free contributions to company pensions have been raised, allowing for higher savings amounts.
8. Conclusion on Company Pension Schemes
9. FAQ: Frequently Asked Questions about occupational pension schemes
More useful links
Das Bundesministerium für Arbeit und Soziales provides comprehensive information on occupational pensions and their legal foundations.
On Gesetze im Internet, you can find the full text of the BetrAVG, which regulates the framework conditions of occupational pensions.
The Gesamtverband der Deutschen Versicherungswirtschaft (GDV) provides up-to-date statistics on occupational pension contracts in Germany.
Statista offers a collection of relevant data and facts about occupational pensions in Germany.
The Arbeitsgemeinschaft für betriebliche Altersversorgung e.V. (aba) explains the different ways of implementing occupational pensions in its glossary.
The Deutsche Rentenversicherung offers an informative brochure on occupational pensions.
A publication by the Federal Government offers further insights into the topic of occupational pensions.
Wikipedia provides a comprehensive overview of occupational pensions.
FAQ
What is the difference between occupational and private pensions?
Occupational pension schemes (bAV) are organized through the employer and often supported by employer contributions, as well as tax and social security benefits during the savings phase. Private retirement provisions (e.g., Riester pension, Rürup pension, private pension insurance) are concluded independently and directly supported by the state or also offer tax advantages. In the case of bAV, the employer is usually the contractual partner, whereas in private pension schemes, you are the contractual partner yourself.
Is an occupational pension scheme mandatory for companies?
No, an occupational pension scheme (bAV) is not mandatory for companies in the sense that they have to offer a bAV to every employee. However, employees have a legal right to salary conversion. This means that the employer must allow their employees the option to use part of their salary for the bAV. Additionally, since 2019, employers are required to provide a minimum contribution of 15% if they save on social security contributions through salary conversion.
What happens to my occupational pension scheme when I change jobs?
Your occupational pension scheme is fundamentally non-forfeitable, meaning that the accrued entitlements are retained. When changing jobs, there are several options: The scheme can be continued with the new employer, provided they offer the same method of implementation or allow for a transfer. Alternatively, it can be put on hold without contributions and remain inactive until retirement age is reached. A payout of the accrued capital is generally not possible.
Can I cash out my occupational pension early?
Normally, an early payout of occupational pension schemes is not possible. The capital is intended for retirement provision and is to be paid out as a pension or a one-off capital payment in retirement. There are only a few exceptions, such as very small amounts (small entitlements), which can be permitted by the legislator in individual cases.
How much occupational pension is sensible?
The appropriate amount depends on your individual situation. It is important that the employer provides an attractive contribution (ideally over 15%). Check your personal pension gap and how the occupational pension scheme can help close it. Also consider that allocating too high a proportion of your income to the occupational pension scheme can lead to lower social security benefits in retirement.
What is the difference between direct insurance and pension fund?
Both are implementation methods of occupational pension schemes (bAV). A <b>direct insurance</b> is a traditional insurance contract that the employer takes out for the employee with an insurance company. The employee is usually the policyholder. A <b>pension fund</b> is an independent, legally autonomous pension institution (similar to a small life insurance company) that manages the bAV for several companies. Both are subject to insurance supervision, but pension funds are often more flexible in terms of investment.
