Working Life > Retirement Arrangements > Company Pension

Company Pension or Pension for Employees

Definition, Explanation

Company pension is defined by the Employer’s Retirement Benefits Law. According to this regulation employees generally are entitled to company pension. One requirement is the collective agreement which includes this form of deferred compensation. This compensation, also called sacrificed compensation, makes it possible to use a part of the gross income for retirement arrangements. Minimum contribution is 1/160 of the reference figure of the pension scheme. Capital-forming payments or extra payments such as a 13th monthly salary or Christmas benefit can also be included in a sacrificed compensation.

Furthermore, company pension belongs to the voluntary parts of income which can be granted to specialists, managers (or above the general pay scale) by the company, defined in an employment contract. In this case the employer provides pars of the contribution payments of the company pension, or even pays all contributions. Service is included for the old-age and will be paid at invalidity or after death.

The employer manages the company pension process. This is a regulation defined by the union rate or company agreement. These include the choice of pension type, appropriate financial service provider and the payment of contributions.

Types of company pension

• Direct Insurance
• Pension Plan
• Pension Fund
• Pension promises
• Benevolent fund

Tax and Social Insurance

Since Jan 1st, 2005, downstream taxation is valid, that is, the contributions are free of taxation, but the pension payments will be subject to full taxation. Company pension is therefore generally free of taxation and payments to the Social Insurance. Requirements are:

• Maximum amount of 4 percent of the assessment ceiling
• Payment of direct insurance, pension plan or pension fund
• With new contracts that were concluded after Jan 1st, 2005, another EUR 1.800 are free of taxation but subject to social insurance
• Tax exemption is applied to the overall contribution which can be paid through employer’s payments and compensation

For direct insurances and pension plans hat have been contracted before Jan 1st, 2005, the flat-rate tax is valid: All contributions will be taxed by 20 percent – the payments remain free of taxation.

Pension Promises and Accountability

This bears two alternatives:

• Guarantee of Performance
  The employer is completely liable for promised services and the amount of payments. This is also valid at bankruptcy of the provider or with lower returns
• Guarantee of minimum performance
  The employer is completely liable for the availability of pension payments at a minimum of the overall amount of contributions. This guarantee is not possible with forms of benevolent funds or pension promises

Employer’s Bankruptcy

With forms of pension funds, pension promises and benevolent funds, the claims for company pension are secured by the Pensions-Sicherungs-Verein (PSV aG). Direct insurance or pension plan are services paid by the insurance agency. In such cases, your company pension remains the same. Direct insurances and pension plans are subject to observation by the Bundesanstalt für Finanzdienstleistungen (BaFin).

Cancellation or change of employer

If you are going to leave your current employer (due to cancellation or change of job), your compensation claims remain valid. If your employer has financed the contribution, you will have to be over 30 years of age and will have paid pension contributions for at least 5 years to receive monthly payments at retirement. With a change of your job you will have a legal claim to transfer your entitlements of direct insurance, pension plan or pension fund onto your new employer, if the current pension has been valid since Jan 1st, 2005.

Payment of Company Pension

As an employee you have a right to claim pension payments – even with the employer being financially involved. If you have chosen the form of compensation you will have to pay contributions for Health Insurance and Nursing Insurance. With a private form of pension such as Riester-Rente, this is not the case.

Tips, Checklist

• Utilize the chance of company pensions as a part of your private retirement provision
• Check if a company pension or private pension insurance is more suitable for you. This decision should include the criteria of group contributions, administration efforts, freedom of decision, costs and social security payments
• Agree with your employer on the amount of contribution payments which you are going to pay to the company pension
• Make sure your company pension meets the criteria of Riester-benefits
• Consider whether it would be sensible to insure invalidity or death in your company pension
• When changing job you should check with your new employer if and under which financial circumstance it is possible for you to transfer your entitlements
• If your current employer has paid contributions, you may adopt these contribution payments yourself when starting a new job
• Make sure that low entitlements will be given to you in one single payment. This is valid for approximately 1 percent of the monthly reference figure of the legal pension insurance
• Check annually if your estimated pension payments are sufficient or if they will be exhausted by your costs of living – in such cases you should increase your contribution payments
• Watch out for pension adjustments. Complain within 3 months if the pension payment application has been rejected. The employer has to check your company pension payments in terms of adjustment every 3 years

Last update: 06/18/2010