In Germany, in addition to the statutory pension system and private pensions, employees can be promised company pensions by employers. Such pensions are subject to strict regulations. The Company Pension Act has, for example, not yet allowed pure defined contribution schemes, but changes are coming. The Act to Strengthen Company Pensions entered into force on January 1 2018. In particular, introducing so-called 'pure defined contribution schemes' will lead to a change in the system regarding company pension schemes, which the legislature hopes will bring the German market closer to the defined contribution systems known in common law countries. However, pure defined contribution schemes must still be put to the test as soon as the necessary basis in terms of collective bargaining agreements has been established. The legislation has placed the design and introduction of contribution schemes into the hands of the parties to collective bargaining agreements and thus the trade unions. As of January 1 2018 numerous statutory changes now also apply to traditional forms of occupational pension scheme affecting most employers.

Mandatory employer contribution to deferred compensation

A crucial change is the introduction of a mandatory employer contribution within the context of deferred compensation:

"The employer must pay 15 percent of the deferred compensation amount as an additional employer contribution to the pension fund (Pensionsfonds), retirement fund (Pensionskase) or direct insurance (Direktversicherung) if the employer saves social security contributions due to the conversion into deferred compensation."

This introduces a mandatory employer contribution, which concerns not only the newly introduced pure defined contribution schemes, but all employers whose employees exercise their statutory entitlement to deferred compensation and with regard to whom compensation is deferred by way of pension funds, retirement funds or direct insurances. According to the legislature's express will, this employer contribution must not be paid if compensation is deferred by way of a benevolent fund or even a direct pension commitment.

The employer contribution must be paid if the employer saves social security contributions due to deferred compensation. If the employer does not save social security contributions, because, for example, compensation is deferred only with regard to income exceeding the contribution calculation limits, the employer does not have to pay the employer contribution. However, in practice, it may be difficult to determine the exact amount of social security contributions that are saved, as calculating the employer contribution may involve considerable effort. Moreover, it remains unclear whether contributions to the statutory accident insurance scheme are to be taken into account when determining possible savings in social security contributions.

The employer contribution is an integral part of an employee's contribution financed by way of deferred compensation. It shares the fate of deferred compensation and vests immediately. However, questions regarding the employer contribution remain unanswered and unclear. For instance, it has not yet been determined whether and to what extent employer contributions already promised to deferred compensation can be deducted from the statutory contribution that will be mandatory in future.

The employer contribution generally applies to all employers. In this respect, the obligation to pay the employer contribution will apply with immediate effect to deferred compensation agreements concluded after January 1 2019. A three-year transition period will apply to deferred compensation agreements concluded before January 1 2019. In this respect, the employer contribution will not become a statutory requirement before January 1 2022. However, it is likely that employee representatives will request the payment of the employer contribution as of January 1 2019, on the grounds of the principle of equal treatment.

Pure defined contribution schemes

The Act to Strengthen Company Pensions introduces a pure defined contribution scheme for the first time. This means that employers will not promise specific or calculable retirement benefits, but merely undertake to pay specific contributions to an external pension provider. No specific (minimum) amount is guaranteed with regard to the payment of any future retirement benefit (guarantee prohibition). Pension providers can reduce or increase retirement benefits during the pay-out phase, depending on the performance of the capital market. The employer's obligation is limited to the proper payment of contributions (pay and forget).

Pure defined contribution schemes may be implemented only by way of direct insurances, pension funds and retirement funds; it is not possible to implement such a scheme as a direct pension commitment or benevolent fund. Moreover, rights to future pension benefits resulting from a pure defined contribution scheme will always vest immediately, irrespective of whether they are based on contributions paid by the employer or employee. In the event that a pure defined contribution scheme is financed by way of deferred compensation, the employer will in future also be obliged to pay an additional employer contribution of 15% of the converted income to the pension provider, provided that the employer saves social security contributions due to deferred compensation.

The legislature has left the decision regarding how to structure the pure defined contribution scheme to the parties to the collective bargaining agreement (the so-called 'social partner model'). The pure defined contribution scheme may be introduced only by way of:

  • a collective bargaining agreement or a works agreement based on a collective bargaining agreement; or
  • a reference to a relevant collective bargaining agreement included in a works agreement or employment contract.

Pure defined contribution schemes must always be based on a collective bargaining agreement. Consequently, it will still take time before pure defined contribution schemes will be tested in practice. The reason for this is that the parties to the collective bargaining agreement (unions and employers' associations) must first negotiate and conclude the relevant collective bargaining agreements.

Opt-out model for deferred compensation

This model is intended to further spread company pension schemes by offering an opt-out option with regard to deferred compensation. In future, it will be possible to set out in a collective bargaining agreement or a works agreement based on a collective bargaining agreement that the employer will introduce mandatory deferred compensation for employees. So as not to participate in such a deferred compensation scheme, the employee would have to object to this within a specific period (opt out). By introducing such a system, the legislature hopes that numerous employees will not object to deferred compensation, which will help to spread company pension schemes.

Tax law changes

Thus far, employees have been able to pay contributions of up to 4% of the contribution calculation limits of general pension insurance to a company pension scheme without having to pay tax and social security contributions (the so-called 'support framework'). The Act to Strengthen Company Pensions has expanded the support framework from 4% to 8% of the contribution calculation limits. The contributions' exemption from payment of social security contributions is still limited to 4% of the contribution calculation limits.

In addition, company pension schemes low-income employees will be state subsidised (maximum gross income of €2,200 per month). If employers contribute between €240 and €480 per year to such employees' company pension funds, the wage tax to be withheld will be reduced by 30% of the additional employer contribution, but not by more than €144.

The abovementioned changes are already significantly flawed, which could hamper the successful start of the pure defined contribution scheme. According to the current wording of the Income Tax Act, contributions to a pure defined contribution scheme would be neither tax free nor eligible for subsidy. This was not intended by the legislature and thus must be clarified.

Social security law changes

In terms of social security law, the subsidy for low-income employees will be accompanied by an advantage with regard to old-age social benefits. Voluntary additional pension benefits of up to €202 per month will no longer be deducted from the old-age social benefits. This serves to reward the effort to build up additional company retirement benefits even if the statutory pension received after having reached the statutory retirement age is not enough and must thus be topped up by the state by way of basic social benefits.

With regard to employees, there have also been changes to the so-called 'Riester subsidies' granted in the context of occupational pension schemes. As of January 1 2018 no social security contributions must be paid on benefits received during retirement with regard to Riester agreements concluded in the context of occupational pension schemes. In addition, the Riester allowance paid by the state has been increased from €154 to €175 per year.


It remains to be seen whether the legislature has managed to strengthen and further spread company pension schemes as intended based on the Act to Strengthen Company Pensions. However, employers should familiarise themselves with the changes implemented by the act in due time. Owing to the mandatory employer contribution with regard to deferred compensation, the legislature has further increased the complexity of company pension schemes and burdened employers. Internal processes, for example, must be adjusted to the mandatory employer contribution to deferred compensation, which has to be paid as of January 1 2019.

For further information on this topic please contact Andreas Hofelich, Michael Rein or Michael Weth at CMS Hasche Sigle by telephone (+49 711 9764 248) or email (, or The CMS Hasche Sigle website can be accessed at

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