Company pension schemes – retirement savings with your employer
reading time: ca. 6 minutes
- The company pension scheme is a voluntary benefit granted by the employer. The conditions vary from company to company.
- There are different advantages and disadvantages. Employees should weigh these up individually.
- Employers can choose between five options when offering company pension schemes to their employees.
Is it possible to keep the standard of living even in retirement? The state pension will probably not be sufficient to do so. Company pension schemesare one possibility or component to provide for one’s old age.
To privately put aside for retirement, there are various options. In addition to company pension schemes, further options include, for example, an ETF savings plan, real estate or investing in funds. Each person needs to individually decide which private pension plan suits him or her best. This article addresses the following questions regarding company pension schemes: What is behind it? What are the advantages and disadvantages? What needs to be considered in the decision process?
Simply explained: Company pension schemes
The company pension scheme is an additional element for a person's pension. It is a voluntary benefit by the employer which differs from company to company. In the past, employers sometimes settled the payments of contributions fully. Today, they usually subsidise the company pension scheme and the employee pays the remaining amount. An employee's share of the contributions is called deferred compensation. In Germany, for example, the law requires employers to contribute 15 percent to new and old contracts since 2022.
When starting a career, it is useful to seek advice about company pension schemes. Depending on the income and the employer's subsidy, employees should take a closer look at the offer. They can save both, taxes and social security contributions. Primarily, the direct supervisor or the human resources department is responsible. The company pension scheme is paid out upon retirement as a one-off amount, a monthly pension, or a combination of both.
What are the advantages of a company pension scheme?
For employees, it is an attractive option as it is a subsidy for retirement planning offered by the employer. Since the contributions are deducted from the gross salary, they are exempt from tax and social security contributions up to a certain value – resulting in a tax advantage.
Additionally, the amount of contribution payments for a company pension scheme is flexible, just as the beginning of the pension’s payout. If an employee, for example, has less money available during a specific phase of life, he or she can reduce the contribution payment. In an emergency, it can also be switched to a non-contributory basis. Depending on the specific product, administrative or acquisition costs may be lower than with other forms of financial investment – or may not even apply at all. Exemplary products are a pension or life insurance policy.
Compared to other products, another advantage of the company pension scheme is the benefit in the event of invalidity. To effect an occupational disability insurance, a comprehensive health check is necessary. In the case of pre-existing conditions, a contract cannot be guaranteed. However, a company pension scheme is possible even with pre-existing conditions, including mental health. Why? Because the health check is simplified. However, disability benefits are not always a mandatory part of the company pension scheme contract.
And what are the disadvantages?
The company pension scheme is paid out as a monthly or one-off amount. In Germany, for example, it is important to note that both, the pension and the pay-out of the company pension scheme, are 100 percent subject to tax. The exact tax amount depends on one’s individual tax rate.
Furthermore, another disadvantage is that people who have statutory health insurance must pay health and long-term care insurance contributions on top of the taxes. This applies to both, the contribution paid by the employee and to the one paid by the employer.
Insight: The company pension scheme at OVB
As an employer, OVB offers its employees a company pension scheme. It is one of the company's corporate benefits and represents an attractive add-on. Petra Kuhlmann, Director People Management at OVB Holding AG, reveals the available options in our series »5 short questions to... «.
1. Ms Kuhlmann, first: How long have you been working for OVB and why?
»In February, it have been 30 years. During this time, I have worked in different areas and experienced a lot of new challenges. Along the way, I've always been able to develop myself and it has never been boring.«
2. Good to hear! Your department used to be called Human Resources. Why is it called People Management now?
»We wanted the department name to express the fact that people are our focus. After all, it is the employees who make a company.«
3. Now, let's talk about company pension schemes: What type of company pension scheme is offered by OVB?
»At OVB, a direct insurance is offered as deferred compensation. In addition, OVB promotes the company pension scheme with an employer's subsidy. Our employees can choose between three insurers, all of which are, of course, long-standing partner companies of OVB. At the same time, they can include their capital-forming benefits in the company pension scheme.«
4. It’s surely a difficult choice – especially for young employees. Are they supported in their decision-making process?
»Absolutely. After all, it’s about saving for the retirement. Our employees are given the opportunity to receive personal financial advice right from their start. Everyone can also get individual advice on the company pension scheme and find out which model fits best.«
5. One last question: What happens to the company pension scheme if someone decides to leave OVB?
»If people leave OVB, the company pension scheme is transferred to them. Of course, the contract can be taken up with a new employer. This is usually easy to do. As an alternative, employees can choose to make the company pension scheme non-contributory or continue it by paying their own contributions.«
What needs to be considered in a company pension scheme?
A company pension scheme is not suited for everyone. First of all, an employee must be eligible for this additional benefit. There are different forms in which a company pension scheme is offered – these are specified by the company. And there are also tax issues that need to be considered.
- Who is eligible for a company pension scheme?
All employees who pay into the statutory pensionscheme are eligible. It does not matter whether they work full- or part-time. Also trainees can take the opportunity. Moreover, the company pension scheme is not tied to an open-term contract. Also employees with a fixed-term contract can benefit from it.
- What types of schemes are available?
There are various ways in which company pensions are offered, depending on the country. In Germany, employers have five options to choose from when offering a company pension scheme. These are:
- The first option is a direct insurance. This is usually a life insurance or pension insurance policy provided by the employer.
- Besides this, there is the staff pension insurance (“Pensionskasse”), in which several companies form a special life insurance company. They are a legally independent company.
- Pension funds (“Pensionsfonds”), the third option, are independent pension providers. Employees are promised certain benefits and have a legal claim to them.
- In a company-based pension scheme with provisions for pensions (“Direktzusage”), companies commit to a promised pension which is paid out of the company's assets. Ergo: The company has to build up provisions which are paid out to the employee at retirement age.
- Finally, several companies can form a benefit fund (“Unterstützungskasse”) which is usually a registered association. In such cases, employees are not entitled to the benefit. They can only claim it from the employer.
In France, there is a supplementary occupational scheme with different benefits for employees and managers. It is an essential complement to the French basic pension as it covers about 70 percent of the gross salary. Therefore, it is critical for maintaining a certain life standard even in old age.
In Poland, an occupational pension can be financed by the employer with up to 8 percent of an employee’s gross salary. However, employees can increase their contributions voluntarily. The contributions are invested in funds selected by the employer.
- Which taxes need to be considered?
Taxes differ depending on the country in which the company pension scheme is drawn. In Germany, for example, full tax and social security contributions are due upon payment. Taxes also vary depending on the chosen scheme. By contrast, employer-financed benefits such as provisions for pensions (“Direktzusagen”) or benefit funds (“Unterstützungskassen”) are exempt from social security contributions. For pension funds, staff pension insurances and direct insurances, the following applies: Tax-free contributions of up to 4 percent are not subject to social security contributions.
To sum it up: The most important factors in the decision process for or against a company pension scheme are the personal situation of an employee and the concrete product with its specific benefits offered by the employer.