This article is adapted from the business magazine Capital and is available here for ten days. Afterwards it will only be available to read at www.capital.de. Like stern, Capital belongs to RTL Deutschland.
The company pension scheme (bAV) is quite convenient because the employer takes care of it. He selects possible contracts, manages everything and also adds money. Nevertheless, not even every second employee in this country has such a contract – although politicians have been trying for years to stimulate the spread of company pension schemes because they can later fill part of the pension gap. So what is that about? And should you conclude a company pension contract if your employer offers it?
Under no circumstances should you sign hastily, but rather seek independent advice. Because what sounds good has some pitfalls for employees.
What you basically need to know: With the bAV you are usually offered a more or less classic pension insurance. Even if the policies may contain fund shares or index participation, they are still mostly contracts that are concluded with an insurance company for an extremely long term. Because employers are obliged to offer at least one insurance contract as part of the company pension scheme – for employees with an interest in safety. And usually the companies only offer this one option. The employer acts as the client of the contract, so to speak, and the employee is the beneficiary.
If you’re not careful, you’ll get a bad deal with your company pension – even though it’s supported by your employer. This is mainly because annuity insurance contracts have quite high costs and relatively low returns. They have shrunk due to years of low interest rates and make new contracts very unlucrative if you look at the pure income side – which you should definitely do when saving for retirement.
Now one can reply: But the employee benefits from the “compensation conversion” with the company pension scheme, i.e. from the fact that he pays an amount of the gross wage into the contract, which is then not burdened by taxes and social security contributions. The net wage is only reduced very slightly. The employee can therefore save significantly more than he could from pure net wages. In addition, since 2022, companies have been obliged to support company pension payments: they must add 15 percent of the amount paid. At 300 euros a month, that’s 45 euros, which is 540 euros a year. There’s still a catch to the whole thing:
“Especially if the company only contributes the minimum share, it may not be enough if the contracts are bad,” says Theodor Pischke, pension provision expert at Stiftung Warentest. “The company pension scheme doesn’t actually deserve this name if the employees pay for it themselves.”
In general, the more the employer pays in, the more worthwhile it is. There are even employers who pay the entire company pension plan contributions for their employees. And only if the employer pays significantly more than the 15 percent minimum amount should employees definitely use such company pension plans, advises financial expert Niels Nauhauser from the Baden-Württemberg Consumer Advice Center.
Then they get the “gift” from the employer that they wouldn’t get without the company pension plan and can, so to speak, ignore the tiny returns on the contracts. According to the motto: Don’t look a gift horse in the mouth.
But the employee should also know that if the deferred compensation reduces their gross income and social security contributions, then they will of course also pay less into the statutory pension. Therefore, his retirement pension may be slightly lower later. The difference can hardly be quantified in advance. However, it also contributes to ensuring that the overall balance of the company pension plan over a lifetime is not too generous, or can even become a zero-sum game. Especially since there is also the taxation of the payouts:
Although payments into the company pension plan are subsidized, there are no taxes or social security contributions on the contributions, provided the payments do not exceed certain limits. This means that a significantly higher amount flows into the contract than is ultimately missing from the net wage. Insurance representatives also like to tell employees this in order to promote the offer. But in the end the tax authorities get the savings back: both taxes and social security contributions are due on the pension payment – even if the tax burden in retirement is usually lower due to the lower pension income.
With relatively low company pension payments, no health insurance contributions are due. The legislature has recently made improvements: since then, company pensions of around 150 euros have remained without a health insurance deduction. And in very many cases, the BAV amounts paid are also below this amount. The statistical average of the company pension contributions paid out is higher, but that is because very few high company pensions raise the overall average. In contrast, the median company pension paid out for women was recently less than 200 euros and for men less than 300 euros.
In addition, the company pension support has a negative impact elsewhere: employees pay less into the social security funds, and – in addition to the expected pension – their entitlement to corresponding social benefits, such as unemployment insurance, sickness or parental benefit, also decreases. “So the company pension plan has to recoup this deduction first. The employees have to be aware of that,” says Pischke. However, no one calculates what impact taxes and social contributions really have on employees when they take out the deal. Because that can hardly be determined across the board.
It can also become problematic if someone changes employers. There is no guarantee that the existing contract can simply be continued with the new company. On the one hand, this is due to the so-called implementation method that the respective company chooses for its company pensions: If savings are made through direct commitment or the money goes into a support fund, then the pension provision cannot be transferred. Then it is tied to the employer.
The situation is different with direct insurance, pension funds or pension funds. There is a transfer agreement there that most insurance companies have signed, explains Pischke: “But the new company has the final say. This is only possible if it is prepared to take over the contract or the capital from it. Otherwise, the current contract must shut down and a new one completed.” Alternatively, you can have the contract transferred to yourself and discuss it privately. But then from the net salary that has already been taxed. This of course means that the advantage of deferred compensation is gone.
Anyone who changes jobs several times – which is common practice these days – runs the risk of not always being able to take their company pension contracts with them. In the end, he may have concluded several contracts, each of which he only saved small amounts. In such cases, the high costs of insurance contracts are particularly noticeable. The payouts will be correspondingly small.
There can also be disadvantages in the contractual conditions, which sometimes simply arise from errors. Michael Diedrich, managing director of the pension consulting company bbvs, has reviewed existing contracts for the German Institute for Retirement Provision for years and knows that errors often occur. “But they are primarily a problem for employers,” he says, “if documents are missing, information is incorrect or agreements are incorrect, then the employers usually have to be liable for the damage caused.”
However, there are clauses that employees should read carefully: What does the contract provide for retirement? Is there a fixed date from which the pension is paid out or is there a flexible collection period? This becomes important, for example, if employees want to take early retirement. “Especially with older contracts, it is often not possible for the company pension to be paid out a few years earlier. If the contract is terminated early, insured people may only receive the surrender value instead of a pension payment – which is significantly lower,” says Diedrich. If, on the other hand, the company pension is paid out too early, it is paid in addition to employment income – this increases taxes and duties.
One advantage of the company pension plan is that relatives can also be protected with a company pension. If the insured person dies, spouses, registered partners and children can receive payments from it. Life partners only receive payouts if their names are included in the contract. The same applies if you want to benefit parents or siblings. “Many employees, especially those who are unmarried, have not made any arrangements for this. Then their relatives have to go through the hassle of proving with an inheritance certificate that they are entitled to the money,” warns Diedrich. If you haven’t entered anyone, you should do so and name your partner, parents or children. And update the data regularly afterwards if the family situation changes again, for example due to a separation.