In Germany, paying contributions to the statutory (state) social security pension is compulsory for most employees and their employers.

In addition many companies, in particular large and international enterprises, choose to offer employer-financed (second tier) workplace pension schemes to help attract and retain staff.

Workplace pension arrangements may be set up using one of five different pension vehicles. Details of each type of vehicle are set out in this note.

Since 2002, employers must enable their staff to make employee contributions to a workplace pension scheme through salary sacrifice (Entgeltumwandlung), at the employee’s request. Salary sacrifice to a workplace pension arrangement has tax advantages for the employee.

Under all types of workplace pension arrangement (except for new “pure DC” arrangements – please see below), the employer remains ultimately liable for any shortfall in the funding of the benefits, even where the arrangement is nominally “contribution based”.

New legislation, the Occupational Pensions Strengthening Act (Betriebsrentenstärkungsgesetz)(BRSG) came into force on 1 January 2018. The BRSG is focussed on the following areas:

enabling the establishment of “pure” defined contribution (DC) arrangements, subject to certain conditions;

a new requirement for employers to contribute to a pension arrangement for their employees, where the employee converts (sacrifices) salary to make pension contributions;

allowing “auto-enrolment” into an employer’s salary sacrifice arrangement, with the employee having a right to opt out; and

increasing participation in workplace pension schemes, especially among lower paid workers.

CONTENTS

This note is divided into three sections.

An overview of German pension arrangements

Reforms under the Occupational Pensions Strengthening Act (BRSG)

Pension issues to consider when acquiring a German company or business

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