Not everyone has the opportunity to make private provision for old age. For this reason, the German state has introduced an entitlement for employees to occupational pension provision.
Employees have a legal right to so-called deferred compensation and to pay into a company pension scheme. This entitlement exists for all employees, regardless of the form of the employment contract. Thus, employees can demand from their employer that parts of their salary or one-off payments be paid into pension funds, occupational pension funds or direct insurance.
These forms of occupational pension provision are encouraged by the fact that they are partially exempt from tax and contributions. For the employer, these expenses are fully deductible as business expenses.
If employees choose deferred compensation as a company pension, the employer is obliged to make a subsidy, provided that he saves social security contributions through deferred compensation.
The subsidy amounts to 15 per cent of the employee’s contribution and is to be granted if a “direct insurance”, a “Pensionskasse” or a “Pensionsfonds” is provided.
In addition, low-income earners are to be induced with subsidies to opt for this pension model. Of particular interest to low earners is a special tax incentive. Low earners are defined as those who earn a maximum of 2,575 euros gross per month.
Provided they receive at least 240 euros per year from their employer towards their company pension, 30% of this is paid by the state. This means that companies pay correspondingly less wage tax. This additional contribution by the employer is tax-free for the employee.
Forms of German BAV
Any product can be chosen for the occupational pension scheme.
Five forms are possible in Germany:
– the “direct insurance”,
– the “Pensionskasse”,
– the “Pensionsfonds”,
– the “Unterstützungskasse” and
– the “Direktkzusage”.
Provision via a direct insurance, a Pensionskasse or a Pensionsfonds is referred to as an insurance-based path. The employer issues a promise of benefits and commissions one of these pension providers to implement it. In principle, these contracts must meet certain criteria in order to be used as occupational pension schemes.
The respective retirement provision paths are as follows:
Direct insurance is offered either in the form of endowment or pension insurance or unit-linked life insurance. Here, the employer becomes the policyholder and the premiums for the insurance are paid by converting the employee’s salary.
Contributions to a direct insurance policy are tax-free up to eight per cent of the income threshold for the West German pension insurance (this is 568 euros per month in 2021, resulting in a maximum tax-free amount of 6,816 euros per year).
At the end of the term, the employee can either be granted a lifelong pension or the saved capital as a one-off payment from the insurance company.
Employers can take out their own Pensionskasse provision for their companies or they can join an industry-specific group contract. Legally, the Pensionskasse is an independent pension institution. Accordingly, the pension benefits are not granted directly by the employer. The solvency is guaranteed by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht).
Pension funds invest the money that is paid in in shares, so that this can result in a higher return than with the pension products mentioned so far. This also results in a significantly higher risk for the amount of the pension to be paid out later.
For this reason, there are strict regulations to ensure that the pension is paid out later:
1. if the fund fails to pay the minimum benefit, the employer is liable.
2. if the employer becomes insolvent, the Pensions-Sicherungsverein (pension guarantee association) steps in.
3. pension funds are also controlled by the Federal Financial Supervisory Authority.
4. just like the Pensionskasse, it is legally an independent pension institution.
At the beginning of retirement, up to 20% of the existing capital can be paid out.
The provident fund is a variant of the occupational pension scheme that is particularly interesting for higher-earning employees and executives because unlimited portions of the salary can be paid in free of wage tax. In addition, provident funds can freely choose their capital investments.
Support funds are financed by one or more companies. They thus represent an indirect and inter-company pension institution acting on behalf of the employer.
However, provident funds are not subject to insurance supervision. For this reason, many companies take out reinsurance to cover possible uncovered claims from company pensions. Vested benefit claims are covered by the pension guarantee association.
With a direct commitment, the employer undertakes to pay pension payments directly to the employee, depending on the agreement, on retirement age, in the event of occupational disability or in the event of death. This is the company’s own occupational pension. This type of occupational pension is particularly interesting for senior employees and allows them to be tied to the company in the long term. The payment is tax-free for an unlimited period.
For this purpose, pension provisions are formed in the employer’s balance sheet and, as a rule, a matching insurance policy is taken out to cover the risk.
The insolvency risk is also covered by the pension guarantee association.