Company pension schemes in Germany

One of the most important decisions when setting up a company pension scheme is which kind of implementation to take. The differences between the individual variants are significant and can have a huge impact on the quality of the retirement. The most suitable for the individual employee and the company always depends on the individual case. There are also possible supplements. A pure bAV only serves to provide for old age, but it can be expanded with other components. The inclusion of disability insurance, supplementary health insurance or accident insurance widen the scope of the contract and completes the protection for employees. Both topics will be presented and discussed briefly below. Questions will probably remain or even arise. Horizon65 has other articles and information material for this purpose, in which all aspects are explained in more detail. Everyone is invited to use them! Of course, we always look forward to direct contact and a personal conversation.

The modes of implementation

There are a total of 5 implementation methods for the bAV. They can be roughly divided into two groups: In the case of “Direktzusage” and “Unterstützungskasse”, the employee is entitled to a pension that is directly paid by the employer, who has great leeway to organize this commitment. In the case of “Direktversicherung”, “Pensionsfund” and “Pensiosnkasse”, the institution granting the contract is responsible for fulfilling the promised pension. The company is decoupled from the actual process of old-age provision here, which reduces its own liability risks.

Employee funded

An important detail that should be mentioned is the various options for financing a bAV. The actual legal entitlement of the employee relates to the so-called “Entgeltumwandlung”. Part of the gross salary is not taxed and paid out, but transferred directly to the contract. In the case of a “Direktversicherung”, “Pensionsfund” and “Pensionskasse”, the most common sum is up to 4% of the contribution assessment limit of the state pension (BBG). Up to this limit, the employee not only saves taxes and social security contributions, the employer is even obliged to grant a further subsidy of 15% of the sum. This is the compensation for the saved social security contributions on the part of the entrepreneur. If desired, the annual contribution can be increased by a further 4% of the BBG to a total of 8% (approx. €7,000). However, you only save taxes. All contributions above this will no longer be funded under the listen implementation methods. However, “Direktzusage” and “Unterstützungskasse” allow unlimited tax-free contributions.

Mixed financing

Some employers want to support their employees in their pension provision and voluntarily pay a higher subsidy than required. The employer can claim the payments as business expenses. With comparatively low costs, they can significantly improve the employee’s remuneration and strengthen employee loyalty.

Employer funded

If the employer wants it, they could take over the costs of the bAV in full and pay the entire contribution. This would be a way for them to increase the employee’s salary and pay less taxation and social security costs on that part of the salary. In addition, the employer could choose to delay the earning of these contributions through vesting. With vesting you earn your pension entitlement over time and the employee could lose a part of it if they resign before the period is completed. This is a common mechanism used to increase employee retention.

Direktversicherung

The Direktversicherung is the least administrative and is particularly popular with smaller companies. In this case, the employer concludes a pension contract with an insurance company that has the employee as a beneficiary. The exact terms of the contract are defined upon conclusion, the responsibility for the pension lies solely with the provider.

As an entrepreneur, you benefit from being able to hand over the administration and liability for the bAV to an external partner. After setting it up, you no longer have to deal with it and can use its capacities differently. The employee, on the other hand, entrusts his provision to a professional financial company.

“Pensionskasse”

The “Pensionskasse” is closely related to direct insurance. The procedure is the same, except that the pension contract is concluded with a “Pensionskasse” and not an insurance company. Originally, these funds were linked to individual large companies and invested primarily in bonds and interest-bearing securities. But nowadays the market is open and the differences to the “Direktversicherung” are blurring.

“Pensionsfund”

The “Pensionsfund” is allows riskier and higher growth investments as the government imposes less restrictions. The pensionskasse and Direktversicherung are restricted by the requirement that the original investments should at least be fully returned. A requirement that does not allow for an equity-only investment strategy. You can therefore get a higher pension with pension funds, but you can also get a lower pension if the markets do not maintain their historical performance. It is often said that a pension fund can only be paid out as an annuity, but this is not entirely correct. A one-off payment is also possible here if the provider agrees but do note that the lump sum payment has no exception regime and is taxed fully as income tax.

“Direktzusage”

In the case of a “Direktzusage”, the employer commits to pay the employee a pension from business assets. In order to finance this, mandatory reserves are created and secured with the pension insurance association. The biggest advantage of this scheme is that there are no limits on tax-deductible contributions and there are no restrictions on where the money is invested. The employer may even invest the funds in their own companies and thus boost the growth of the company. It is therefore the most complex to administer, but it also gives the employer the most options. Since it cannot be taken to a new employer by the employee, it also serves as a tool to create a special bond with the company; it is a popular way to compensate and retain executives and managing directors.

“Unterstützungskasse”

A variation of the “Direktzusage” is the “Unterstützungskasse”. The most important difference is that the assets are transferred to a specially created fund. In terms of restrictions and advantages, it is similar to the balance-sheet commitment, but separating the reserves from the actual assets makes managing the liability easier.

Supplements

Supplements and additional modules are insurances that can be combined with a bAV. The payment is then deducted from the bAV contributions. However, it is also possible to take out some company insurance without bAV, but then the contributions must be paid separately.

Company disability insurance

This is a different type of pension insurance. Instead of paying out in old age, it becomes due if you turn unable to work due to illness or an accident. The rule is to allow this payment to continue until the scheduled start of the old-age pension. It is therefore a risk insurance. By including this benefit, you can demonstrate to employees that your care extends to ex-employees who have been forced to leave.

Company health insurance

Another popular additional benefit, which is particularly valuable when recruiting new employees, is the company health insurance. It gives discounted access to supplemental insurance that also reimburses public health insurers for services and expenses normally left to private insurers. The exact typed is based on the individual contract. Dentures, single rooms or daily sickness benefit would be conceivable. The real special feature, however, is the extensive waiver of a health check! Even people with pre-existing medical conditions can get insurance through them that they would otherwise refuse.

Company accident insurance

In fact, every employee is protected against accidents at work by the statutory accident insurance. However, what happens in his free time is another matter, and the benefits provided are rather small. Occupational accident insurance can close these gaps and provide more comprehensive protection. Similar to company health insurance, contracts are concluded for the entire company, which enable better conditions. As said, this is just an overview and a brief treatment. Out of necessity, the description of the implementation routes and supplements is somewhat superficial. All the details that are considered important have been mentioned, but it may well be that the ones that are kept secret are the relevant ones! A face-to-face meeting is still the quickest, easiest, and best way to find out. Our experts at Horizon65 are happy to help with any questions. Because with us, you get all the information you need to make a good decision!