- 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.
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
I. GERMAN PENSIONS: OVERVIEW
Traditionally, most workplace pension schemes in Germany are defined benefit (DB) plans. In recent years, contributionbased pension schemes have become more popular (please see the Glossary: DB and DC benefits below).
A key feature of both DB and contribution-based workplace plans is that the employer remains ultimately liable for the payment of benefits, even where an external pension arrangement is used. Some employers have been reluctant to establish workplace pension arrangements for their staff, because of concerns about liability.
Until now, there have been no "pure" defined contribution (DC) plans in Germany. On 1 January 2018, the BRSG brought in a legal framework for the establishment of pure DC plans. For more details, please see below.
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