Occupational retirement provision includes all retirement benefits, disability benefits and provisions for surviving dependants granted by an employer to their employee as a result of their employment relationship. Occupational retirement provision schemes are characterised by the following three elements:

• the employer promises to provide the relevant benefits,
• this promise is related to a biological event such as ageing, disability or death,
• and it is granted on the basis of the employment relationship between the employee and employer.

As a general rule, employers are not obliged to make commitments to finance employees benefits. However, some employers may be obliged to provide such benefits on the basis of a collective agreement (Tarifvertrag) where the employer is covered by such a collective agreement or where the collective agreement is declared to be generally binding. As a general principle, the employer is free to decide

• whether the company’s or institution’s funds are to be granted to employees for the purposes of occupational retirement provision,
• how much is to be granted,
• how the funds are to be granted, and
• how it is determined which groups of employees are to receive benefits.

However, these freedoms are restricted by the employee’s right to deferred compensation. Employees have a legally enforceable right to occupational retirement provision financed by their employer in the form of deferred compensation.

There are various legally defined ways for employers to provide occupational retirement benefits. The employer determines the type of investment that is used and organises the implementation of occupational retirement provision for their employees. Occupational retirement provision can be arranged directly by the employer or via a pension provider specified by law. Liability for the payment of benefits rests with the employer even if they are not directly responsible for implementation.

How can occupational retirement provision be implemented?

Direct insurance

In the case of direct insurance, the employer as policyholder takes out a life insurance or pension insurance policy for the benefit of the employee. The beneficiaries are the employee and, if applicable, their surviving relatives. Direct insurance contracts are supervised by BaFin as part of its overall supervision of life insurers.

Pensionskasse

Pensionskassen are legally independent insurance undertakings that are supervised by BaFin. They grant employed workers, and in some cases their surviving relatives, an entitlement to retirement benefits. Pensionskassen provide protection against loss of income.

Some supplementary benefit funds (Zusatzversorgungskassen) are also Pensionskassen. The benefits they provide are based on the employer’s obligation under a collective agreement (Tarifvertrag). For public sector workers and employees, one such supplementary benefit fund is the Pension Institution of the Federal and State Governments (Versorgungsanstalt des Bundes und der Länder – VBL).

Pensionsfonds

Pensionsfonds are legally independent pension institutions that are supervised by BaFin. They are not insurance undertakings. Pensionsfonds grant employed workers, and in some cases their surviving relatives, an entitlement to retirement benefits.

Direct pension commitment

A direct pension commitment (Direktzusage) is not a form of insurance, rather it is a direct commitment by an employer to its employees to provide occupational retirement benefits. The employer grants the employees a legal right to the promised benefits without the involvement of a pension facility. Direct pension commitments are not subject to supervision by BaFin.

Unterstützungskassen (support funds)

Unterstützungskassen (support funds) are legally independent pension institutions. They are not insurance undertakings and they are not supervised by BaFin.

Unterstützungskassen do not grant employees entitlement to retirement benefits. Employees only have rights vis-à-vis their employer. In order to meet its obligations to provide benefits, the employer makes use of an Unterstützungskasse, which normally pays the benefits to the beneficiary.

What is deferred compensation?

With deferred compensation, a portion of the employee’s gross salary is deducted from the remuneration they receive and this sum, which is then tax-free, is used by the employer to purchase entitlement to occupational retirement provision that is equivalent in value to the sum deducted. This allows for savings on taxes and social security contributions during the deferral phase. Taxes and social security contributions are only payable during the payout phase.

Under the provisions of the Occupational Pensions Act (Betriebsrentengesetz – BetrAVG), employees can request that their employer deduct up to 4% of the applicable income limit for the assessment of contributions in general pension insurance (Beitragsbemessungsgrenze in der allgemeinen Rentenversicherung) from the remuneration the employees receive in order to use this portion for the employee’s occupational retirement provision. Where deferred compensation arrangements result in social security savings for employers, they must as a general rule pay 15% of the amount of deferred compensation in the form of employer contributions. Employer contributions are only payable where occupational retirement provision is implemented via a Pensionsfonds, a Pensionskasse or through direct insurance.

How are occupational pensions protected?

Protection via a pension security association

The Pensions-Sicherungs-Verein Versicherungsverein auf Gegenseitigkeit (PSVaG) provides protection for occupational pensions and vested entitlements to occupational retirement provision that are dependent on the employer’s solvency.

If an event occurs at the employer that is covered by the protection of the PSVaG (such as insolvency proceedings over the assets of the employer), then the PSVaG steps in and pays the benefits using the method of implementation Direktzusage (direct pension commitment) or Unterstützungskasse (support fund) within the scope provided for by law.

In the case of direct insurance, the PSVaG provides protection within the scope provided for by law where the employee’s entitlement to receive benefits is subject to revocation. Insolvency protection is also provided if the benefits resulting from direct insurance cannot be paid because they have been assigned to third parties (Abtretung) or pledged as collateral (Beleihung) and the employer fails to meet its obligation under the Occupational Pensions Act to compensate the insured person due to an event that is covered by the protection of the guarantee scheme.

As a general rule, occupational retirement provision commitments that are implemented via Pensionskassen and Pensionsfonds are protected by multi-level guarantee schemes.

At the first level, employers are liable for all commitments they have made in accordance with the Occupational Pensions Act (subsidiary liability). If an event occurs at the employer that is covered by the protection of the PSVaG, then the PSVaG steps in and pays the benefits.

The PSVaG is generally liable to pay only the difference between the employer’s commitment and the lower benefits provided by the Pensionskasse or Pensionsfonds.

Insolvency protection does not cover any claims to benefits that are promised by a Pensionskasse or Pensionsfonds and extend beyond the commitment based on the employment contract, that the employee continues to accumulate voluntarily following the termination of their employment contract (Fortführungsbeiträge), or that are not vested at the time of the event that is covered by the insolvency protection.

There may be additional limitations to the benefits provided within the statutory scope (for example a maximum amount for current benefits).

If occupational retirement provision is implemented via a Pensionskasse and in the case of insured events occurring at the employer before 1 January 2022, a claim may only be made against the PSVaG if the Pensionskasse curtails the intended benefit under the employer’s pension commitment by more than one half, or if the income received by the former employee falls, because of a curtailment, below the at-risk-of-poverty threshold defined for Germany by Eurostat.

Pensionskassen belonging to the Protektor guarantee scheme or that are run as joint bodies of the parties to collective agreements (gemeinsame Einrichtung der Tarifvertragsparteien) are not covered by the insolvency protection of the PSVaG. Protection by the PSVaG for occupational pensions provided by Pensionskassen also does not apply to public service supplementary benefit funds (Zusatzversorgungseinrichtungen).

Since no benefits are guaranteed under defined contribution schemes, neither subsidiary liability on the part of the employer nor insolvency protection by the PSVaG applies for this type of commitment.

The PSVaG is financed by mandatory employer contributions.

The Protektor guarantee scheme

In the case of direct insurance, the guarantee scheme for life insurance protects policyholders from the consequences of the insolvency of a German life insurer. The German Federal Ministry of Finance (Bundesfinanzministerium – BMF) has entrusted Protektor Lebensversicherungs-AG with the duties and powers of the guarantee scheme for the life insurance industry.

Pensionskassen can voluntarily join the guarantee scheme provided certain conditions are met.

Further information can be found on the Protektor website. There you will also find lists of members of the guarantee scheme for life insurance.

Which occupational retirement schemes are subject to Riester subsidies?

In the context of occupational retirement provision, only deferred compensation can be subject to Riester subsidies, which comprise state subsidies in addition to tax deductions.

The contributions must be used for direct insurance, or paid to a Pensionskasse or a Pensionsfonds and must be derived from individual salary payments subject to social security payments and taxes under German income tax law. The benefits subsequently provided must comprise either a life-long pension or a payment plan with subsequent annuity payments. Benefits can also be paid in the event of disability. Furthermore, in the event of the insured’s death, benefits can be paid to their surviving relatives. When the insured reaches retirement, one-time payments of up to 30% of the capital available at the start of the payout phase are permissible.

Riester subsidies are not possible where retirement provision is implemented via direct pension commitments or Unterstützungskassen.