Germany-USA Career Center

Hiring in Germany: Company Pensions FAQ

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• Is there any obligation for Employers in Germany to provide company pensions and - if so - how can this obligation best be fulfilled?

Company Pensions

• The employer can choose an implementation way and a provider which have to be used by all employees for their salary conversion.

German law knows five different ways to implement a pension scheme: one "direct" way, the book reserve scheme (the employer directly promises a pension to the employee, without using an external pension provider and establishes book reserves for the future pension obligations [Direktzusage]) and four "indirect" ways which all include external pension provider. These "indirect" ways mainly differ with regard to the tax treatment of contributions and paid-out pensions, investment restrictions and administrative issues; they are support fund (Unterstützungskasse), pension fund (Pensionsfonds), pension fund society (Pensionskasse) and direct insurance (Direktversicherung). For salary conversion, usually one of the "indirect" implementation ways is chosen, often a direct insurance or a pension fund society. These are basically life insurances concluded by the employer on the life of the employee; the provider therefore will be an insurance company.

 

If a large number of employees are expected to conduct salary conversion and if the employer wants to encourage salary conversion, offering one implementation way and one provider - with which the employer normally concludes a group insurance agreement - usually is the preferred approach as it facilitates the administration for the employer (that only needs to communicate with one provider); also, it renders salary conversion more attractive for the employees as the group insurance agreement offers more favourable conditions than an individual insurance agreement would do (of course, the employer can also offer several implementation ways and providers but this would make the administration more complicated).

• The employer can also ask the employees to choose an implementation way and a provider themselves. This approach is usually chosen by employers that do not want to encourage salary conversion. It can lead to a number of different implementation ways and providers having to be handled by the payroll department.

• Under German law, the employer always is subsidiarily liable for the promised pension; i.e. in case the external provider is unable to make the promised pension payments, the employer has to meet the respective liability. However, as most external providers are linked to insurance companies and as these are subject to state supervision, this risk is a rather theoretical one.
• Depending on the chosen implementation way, contributions to the State Pension Securing Association (Pensionssicherungsverein auf Gegenseitigkeit - PSVaG) might be payable once the employees' pension entitlements become statutorily vested. However, if the salary conversion is conducted via a pension fund society, no contributions to the PSVaG are payable; the same is usually true for salary conversions conducted via a direct insurance.
• Recent case-law by the regional Labour Court Munich makes the employer liable, under certain circumstances, for any difference between the amount of salary converted and the surrender value paid by the external pension provider. However, this case-law is currently under review by the Federal Labour Court; also, the underlying insurance law has changed for all insurance agreements as of 1 January 2007, so we would assume that this liability does not materialise for insurance agreement concluded after this date.