The Pension Landscape Germany

For the employed population in Germany, the statutory pension scheme is the main source of retirement income.

It is an earnings-related and mainly pay-as-you-go financed system. Occupational pension provisions are also widespread, however, the coverage is intended to grow. Employers have the choice between five different vehicles. Of course voluntary private pension savings are possible, such as life insurances or private equity investments.

Provider/ Institution: German Statutory Pension Insurance Scheme – Deutsche Rentenversicherung (DRV)
State Pension for employees Compulsory insurance generally mandatory by law for people in employment.
Financing: Financed on a pay-as-you-go basis, federal subsidies of 27% (2017).
Contribution of 18.6% up to a monthly contribution assessment ceiling of EUR 7.100 (2021) in West-Germany and EUR 6.700 in East-Germany (2021), employers and employees are charged with half of the contribution.
Old-age benefits: The minimum qualifying period for an old-age pension is 5 years.
Main retirement income for the majority of today’s retirees, earnings-related calculation, 45 years cont./average income result in approx. EUR 1,418 (gross) in 2018. Social Assistance for pensioners with low income.
Coverage rate: Active insured persons in 2011: 3,687.263; pensioners in 2011: 1,062. 931
Mandatory/ voluntary: Non-obligatory by law
Compulsory insurance for the public sector based on the collective bargaining agreement; additional voluntary insurance available.
  • Deferred compensation (Entgeltumwandlung) is obligatory on demand of the employee.

According to the Occupational Pensions Act there are different vehicles to provide occupational pensions for employers:

  • Book reserves (Direktzusagen): The employer commits to paying retirement benefits itself in predefined events. The capital value of the pension provisions is formed in its balance sheet and the employer bears the resulting risks. Therefore a contribution has to be paid into PensionsversicherungsVerein.
  • Pension fund (Pensionskasse)
  • Pension fund (Pensionfonds)
  • Support funds (Unterstützungskassen)
  • Direct insurance (Direktversicherung)

In the past, the German Occupational Pensions Act (Betriebsrentengesetz – BetrAVG) solely allowed defined-benefit schemes (guaranteed benefits) and the employer is liable for the later payment of a defined benefit amount to the employee, even if the provision is implemented via one of the above mentioned external vehicles; for example a Pensionskasse, a Pensionsfonds or a life insurance undertaking (sponsoring body).

In 2017 a further vehicle was introduced as part of the Act to Strengthen Occupational Pensions (Betriebsrentenstärkungsgesetz - BRSG). The BRSG introduced a new, purely defined-contribution (DC) scheme as a possible scheme type. According to the new DC-model, the employer is only liable to pay the contributions into the system which must not guarantee employees any benefits. The new system can only be established under the condition of a corresponding collective agreement. If the parties agree to this specific labour law framework, the Social partner Model, they must participate in its implementation and management and thus take long-term responsibility for the scheme.

(Source: BaFin website)

The reform also includes

  • Auto-enrolment options
  • Employer contributions mandatory in new DC schemes
  • Extending the EET system (increasing the tax free amount to 8% of the assessment ceiling)
  • Employers who contribute to their employees' occupational pension, gross income of up to EUR 2.200, will receive a tax incentive. (Support for low income workers.)
Tax incentives: Depending on the vehicles, there are different tax incentives available. With the so-called ‘Riester’ contracts, (used in occupational pension saving and in private pension saving) there are products eligible for state support such as state allowances and tax-deductible special expenses (Sonderausgabenabzug).
Products Life insurance products,
bank saving plans,
fond investment.
Tax incentives

Approx.16 Mio ‘Riester’ contracts (used in occupational pension saving and in private pension saving). 

The above mentioned reform also includes an increase to the basic allowance for ‘Riester’ contracts – state-subsidised private pensions – from EUR 165 to EUR 175, and an extension of the tax incentives for employers contributing to low income earners’ occupational pension provision.