Concept and fundamentals of occupational pension schemes
Die occupational pension scheme (bAV) refers to the system of financial security provided by the employer for employees in case of old age, disability, or death. In Germany, it is a central component of the three-pillar retirement system, consisting of statutory pension insurance, occupational, and private provision. The legal framework and regulations for bAV are set out in particular in the Betriebsrentengesetz (BetrAVG – German Company Pension Act).
Legal basis of occupational pension schemes
Betriebsrentengesetz (BetrAVG)
Das Betriebsrentengesetz (BetrAVG) forms the central legal framework for occupational pension schemes. It defines terms such as pension commitment, pension candidate, and benefit criteria. Important provisions govern in particular:
- Creation and implementation of pension commitments
- Entitlement to occupational pension schemes
- Scope and duration of pension benefits
- Vesting of entitlements
- Transfer, adjustment, and insolvency protection
Other relevant legal sources
In addition to the BetrAVG, other laws play a role, such as the Income Tax Act (EStG) for tax-related matters, Social Code VI (SGB VI) regarding coordination with statutory pension insurance, as well as employment law provisions like the German Civil Code (BGB) for civil law structuring. Collective agreements and works agreements often contain supplementary provisions.
Forms of occupational pension schemes
Occupational pension schemes can be implemented in various ways that differ in terms of legal, financial, and tax aspects.
Implementation routes of occupational pension schemes
There are five classic implementation routes:
Direct commitment (pension commitment)
In the case of direct commitment the employer undertakes to pay the employee a company pension directly in the event of a pension claim. The benefit is reported in the employer’s balance sheet as a pension provision.
Support fund
Die Support fund is a legally independent pension facility that can act for several employers. It provides benefits to employees, financed by employer contributions.
Pension fund
Die Pension fund is an external pension institution with insurance characteristics. The employer or employee pays contributions, and the pension fund grants the pension benefits independently.
Direct insurance
In the case of Direct insurance the employer takes out a life insurance policy for the employee. The employee or their dependants are entitled to the benefits.
Pension fund
Der Pension fund is similar to the pension fund but offers greater flexibility in capital investment and is subject to specific statutory regulations. A pension fund can serve several employers and is permitted in Germany if it meets minimum requirements for securing benefits.
Legal nature of the claims
The employee’s entitlement to benefits from the occupational pension scheme arises from the respective pension commitment. As a rule, it constitutes a distinct legal claim derived from the employment relationship, which can be enforced in court.
Entitlement, creation, and vesting of occupational pension schemes
Creation of entitlement
Occupational pension schemes arise through a written commitment from the employer (pension commitment) or by virtue of general provisions, such as from collective agreements or works agreements. The commitment must meet the requirements of the BetrAVG.
Vesting of entitlements
Vesting means that an acquired pension entitlement remains in place even after termination of the employment relationship. According to § 1b BetrAVG, vesting takes effect if the employment ends after completion of the 21st year of life and at least three years after the grant of the pension commitment, or after five years regardless of age (regardless of the cut-off date from 1 January 2018).
Contributions, funding, and financing
Employer and employee financing
Financing of occupational pension schemes may be carried out solely by the employer (employer-financed), solely by the employee (employee-financed, e.g., via salary conversion), or as a mixed form.
Salary conversion
Employees are entitled to convert part of their salary into contributions to an occupational pension scheme (§ 1a BetrAVG). These contributions are tax- and social security-exempt within certain maximum limits (§ 3 No. 63 EStG).
Tax and social security treatment
Contributions to bAV are often tax and social security privileged. The tax incentives depend on the implementation route chosen and the form of financing.
Types of benefits and eligible beneficiaries
Old-age pensions
The core benefit is the retirement pension, which is usually paid as a lifelong pension upon reaching a certain age limit.
Disability and survivor benefits
In addition to the old-age pension, many systems provide disability pensions in the event of permanent incapacity for work as well as survivor pensions for spouses, civil partners, and orphans.
Lump-sum payment
Instead of a monthly pension payment, a one-time lump-sum payment is also possible under certain conditions (such as a low pension entitlement or contractual arrangement).
Adjustment, transfer, and claiming
Pension adjustment
According to § 16 BetrAVG, the employer is obliged to review and, if necessary, adjust ongoing company pensions every three years, taking into account the interests of the pension fund and the employer’s economic situation.
Transferability and settlement
The transfer of occupational pension entitlements when changing employer is regulated by the Company Pension Act (§ 4 BetrAVG). In certain cases, there is also a right to a settlement.
Claiming benefits
Benefits can be claimed under certain conditions, for example, when reaching retirement age or upon the occurrence of a reduced earning capacity.
Insolvency protection and protection arrangements
Protection by the Pensions-Sicherungs-Verein
In the event of employer insolvency, vested entitlements and ongoing company pensions are protected by the Pensions-Sicherungs-Verein (PSVaG) in accordance with § 7 BetrAVG.
State guarantees and additional forms of security
Some systems provide additional security, for example, through reinsurance or specific fund investments.
Information obligations and transparency
Employers must inform employees regularly and comprehensively about their entitlement, amount, structure, and development of their occupational pension scheme (§ 4a BetrAVG).
Significance and current developments
The significance of occupational pension schemes is increasing against the backdrop of demographic change and declining statutory pension benefits. Legal amendments and reforms aim to strengthen and expand the bAV, for example by introducing pure defined contribution plans within the framework of the Company Pension Strengthening Act.
Summary: Occupational pension schemes are a central pillar of old-age provision, whose legal framework is primarily determined by the BetrAVG. The wide range of implementation routes, regulations on financing, vesting, tax treatment, and insolvency protection makes bAV a complex but important subfield of labor and social law. The ongoing development of statutory requirements aims to strengthen occupational pension provision as an attractive and secure supplement to the statutory pension.
Frequently Asked Questions
Who is legally entitled to an occupational pension scheme?
Employees are generally entitled under § 1a BetrAVG (Company Pensions Act) to have part of their current earnings converted into an occupational pension scheme by way of deferred compensation. The entitlement relates to up to 4% of the contribution assessment ceiling in the statutory pension insurance scheme. The company is obliged to offer an occupational pension scheme according to the employee’s request. Minor employees and specific groups such as controlling shareholder-managers are excluded. However, the employer is not obliged to pay additional subsidies as long as no collective agreement, works agreement, or the statutory minimum subsidy from 2019 (or 2022 for old contracts) in the case of salary conversion applies, which requires 15% of the converted earnings to be paid on top if social security contributions are saved due to the salary conversion.
To what extent can company pension claims lapse or be reduced?
Occupational pension entitlements of employees who have not left the company enjoy extensive protection. Nevertheless, they may be reduced or lapse under certain conditions pursuant to § 1b BetrAVG: Vesting occurs if the employment ends before completion of the 21st year of life or before the end of the three-year waiting period. Upon later departure, a claim to a vested portion of the entitlement remains. However, company pensions may be reduced due to adjustment reservations in the pension promise, for instance, in case of financial difficulties of the company (keyword ‘adjustment obligation’ according to § 16 BetrAVG). Other pension benefits may also be set off, or reductions may occur for certain beneficiaries due to insolvency scenarios and the involvement of the Pensions-Sicherungs-Verein. Early benefit claims, such as so-called actuarial reductions, may also result in cuts.
What statutory incentives exist for occupational pension schemes?
The Company Pensions Act and the Income Tax Act (EStG) contain a range of incentive measures for occupational pension schemes. For salary conversion, contributions are tax-free up to 8% of the contribution assessment ceiling (§ 3 No. 63 EStG), and up to 4% are also exempt from social security (§ 1a BetrAVG). Additionally, the 2018 Company Pension Strengthening Act introduced the so-called incentive allowance for low earners (§ 100 EStG), granting employers a tax refund if they pay additional contributions for low-income employees on top of salary conversion. There are also separate regulations for Riester-subsidized occupational pensions, providing allowances and, where applicable, further tax advantages.
What happens to bAV in the case of a change of employer or employment interruption?
Occupational pension entitlements that are vested generally remain in place when changing employer. Upon leaving the employer, the entitlement can be ‘taken along’ (“preservation”), ‘transferred’ to a new employer (portability under § 4 BetrAVG), or left with the previous employer. Since the 2018 Company Pension Strengthening Act, transfer has been simplified but is restricted to certain implementation routes (direct insurance, pension fund, pension plan). During longer interruptions, such as parental leave or sabbatical, existing entitlements remain, but new claims may be suspended if no contributions are paid. Upon resumption of contributions, the occupational pension scheme can be continued if the scheme regulations provide for this.
What adjustment obligations exist during the pension payment phase?
According to § 16 BetrAVG, the employer is obliged to review every three years whether an adjustment of ongoing company pensions needs to be made to reflect loss of purchasing power. In doing so, the company’s economic situation and the interests of the beneficiaries must be weighed against each other. Linking the pension to cost-of-living developments or specific increase rates can be set out in the pension scheme. Under certain conditions, for example if an adjustment is already provided by an insurance or is excluded (e.g., in direct insurance with minimum benefit), this obligation does not apply. If the employer fails to comply with this obligation, former employees and pension recipients may take legal action.
How is an occupational pension scheme protected in case of employer insolvency?
In the event of employer insolvency, protection is provided by the Pensions-Sicherungs-Verein (PSV aG) in accordance with § 7 BetrAVG. The PSV covers the obligations arising from promised and vested occupational pension benefits, as far as they are not based on funded plans (e.g., direct commitment, support fund). Exceptions apply to pension funds and direct insurance, as these are already protected by insurance assets. In case of benefit default, employees are entitled to benefits from the PSV, but there may be waiting periods, reductions for certain types of commitments, and, in individual cases, subsequent taxation.
What information and advisory obligations does the employer have towards employees?
The employer is legally obliged to provide employees with comprehensive information about existing options and terms of the occupational pension scheme (§ 4a BetrAVG). This includes, in particular, information on incentives, the company’s chosen implementation method, amount of contributions, implementation route, any risks, and any available options. In addition, changes and adjustments (e.g., transition to non-contributory or contributory plans, amendment of pension arrangements) must be communicated in a timely and understandable manner. Breaches of these information obligations can result in claims for damages by the employee in case of loss.
