The next stage of the German Act to Strengthen Workplace Pension Schemes [Betriebsrentenstärkungsgesetz] is now in force
Since January, employees can by law compel their employers to participate in a workplace pension scheme. This provision applies to new contracts signed as of 1 January 2019 and for existing contracts as of 1 January 2022. This provision will apply if it is demonstrated that the employer saves on national insurance contributions as a result of the ‘deferred compensation’ [Entgeltumwandlung].
We already have a statutory retirement pension scheme – what exactly is the workplace pension scheme about?
The workplace pension scheme is a supplemental pension in addition to the statutory retirement pension. If an employee and his/her employer agrees a supplemental pension, the contributions are paid in the form of ‘deferred compensation’: this means that employees surrender part of their monthly gross salary to the workplace pension scheme. The advantage of this scheme is that the fixed contributions are exempt from tax and national insurance contributions up to a maximum amount, which facilitates the accumulation of capital. The disadvantage is that the taxes and national insurance contributions will be deducted in full as soon as the savings are paid out. Hence, deductions are deferred only until the time of payment.
As a rule, the employer selects the insurance provider for their company and arranges the agreements. Hence, the employer is also responsible for the contributions and will therefore deduct the payments from the employee’s gross salary. In the past, this allowed employers to save on their share in the national insurance contributions.
What does the Act to Strengthen Workplace Pension Schemes provide for?
Employers are now required to pass this previously saved share on to the employee’s respective insurance provider at a flat rate of 15 per cent of the amount of the deferred compensation. The Act to Strengthen Workplace Pension Schemes entered into force on 1 January 2018 and comprises various measures in relation to employment law, national insurance and tax law. The aim of the Act is to make workplace pension schemes in general more attractive and accessible for employees. According to forecasts, the demographic change in Germany means that the statutory pension fund will no longer be sufficient to provide financial security for old age in the coming decades (source: BMAS). The federal government is therefore seeking to expand supplemental pension schemes in order to achieve a better level of cover for employees in Germany (source: BMAS). The focus is particularly on small-income earners and employees in small and medium-sized enterprises. Currently, around 47% of employees earn less than EUR 1,500 per month and do not participate in a workplace pension scheme or in a ‘Riester’ pension scheme (source: BMAS). At the same time, only about 28% of small companies with less than 10 employees have applied for a workplace pension scheme (source: BMAS).
Who could benefit from a workplace pension scheme?
This is a tricky question, because the pension scheme may differ from one employer to the next. In general, an employee must actively approach the HR department in this regard. Employees in Germany are not obliged to join a workplace pension scheme through their employers. There is no obligation to do so as in the case of the statutory pension fund.
If you work in Germany, pay contributions to the statutory pension fund and are thinking about joining a supplemental workplace pension scheme, you should first make the following two calculations:
a) Model for workplace and statutory pension scheme
b) Model for statutory pension scheme only
The first model should offer a clear advantage as far as tax savings and deferred pay-out is concerned, otherwise it is generally not worthwhile.
For further information [in German], please see https://www.aok-business.de/fachthemen/sozialversicherungsrecht/arbeitsentgelt/betriebliche-altersversorgung/