Occupational Pensions (bAV)

Occupational pensions in Germany: what employers need to know

Occupational pensions in Germany (betriebliche Altersversorgung, bAV) are governed by the Company Pensions Act (Betriebsrentengesetz, BetrAVG). An occupational pension exists where an employer promises an employee old-age, disability or survivors' benefits on the occasion of the employment relationship (§ 1(1) BetrAVG). The employer remains liable for the promised benefits even if it uses an external vehicle to deliver them. German law protects these promises strongly: entitlements vest after a few years, pensions in payment must be reviewed for adjustment every three years, and benefits are insured against the employer's insolvency through the Pension Security Association (Pensions-Sicherungs-Verein, PSVaG).

For many German companies, especially older industrial groups, pension liabilities are among the largest items on the balance sheet. They affect company valuations, financing, transactions and restructurings. For international employers, the German system differs from defined contribution arrangements common elsewhere: many existing schemes are defined benefit promises, often granted through direct promises funded from the company's own balance sheet, and changing them requires careful legal analysis because of the protection of accrued rights.

This page explains the implementation vehicles, employees' right to deferred compensation, vesting, adjustment, insolvency protection, the harmonisation of schemes after M&A, pension liabilities in transactions and restructurings, and the latest reform. It is written for HR directors, CFOs, general counsel and investors.

The five implementation vehicles

German law allows occupational pensions to be implemented through five vehicles (Durchführungswege), with different legal, tax and accounting consequences.

Contributions by the employer to a Pensionsfonds, a Pensionskasse or a direct insurance policy are tax-free up to 8% of the contribution assessment ceiling in the statutory pension insurance per calendar year (§ 3 no. 63 of the Income Tax Act, EStG), and part of this amount is also exempt from social security contributions. Direct promises and support funds are taxed only when benefits are paid, which makes them attractive for senior executives. Large companies often fund direct promises through a contractual trust arrangement (CTA), in which assets are transferred to a trustee and can be netted against pension provisions under IFRS and HGB.

Defined benefit and defined contribution

German law offers several benefit designs. A classic defined benefit promise specifies the pension amount, for example as a percentage of final salary. A contribution-oriented benefit promise converts contributions into benefits under a fixed formula. A contribution promise with minimum benefit guarantees at least the sum of contributions. Since 2018, a pure defined contribution model (reine Beitragszusage) is available only on the basis of a collective agreement (the "social partner model"), with no guarantee by the employer. The choice determines the employer's long-term risk.

Executive pensions

Senior executives and managing directors frequently have individual pension promises, often as direct promises with higher benefit levels and sometimes financed through deferred bonuses. Managing directors who are also controlling shareholders are not employees within the meaning of the BetrAVG, so the statutory protections, including PSVaG insolvency protection, may not apply to them, and the tax authorities scrutinise their promises for disguised profit distributions. Executive promises should be reviewed for appropriateness, financing, reinsurance (for example through pledged insurance policies) and their treatment in a sale of the company, where they are often settled or transferred.

Accounting for pension liabilities

Direct promises and indirect obligations through support funds lead to pension provisions in the employer's balance sheet. Under the German Commercial Code, provisions are discounted with an average market interest rate published by the Bundesbank, while IFRS uses current market rates for high-quality corporate bonds and tax law applies its own fixed rate. The resulting differences between commercial, tax and IFRS values can be significant, and changes in interest rates can move the provisions by large amounts. For investors and lenders, these figures influence valuations and covenant calculations, so the basis of valuation should be agreed explicitly in transaction documents.

Deferred compensation and employee rights

Every employee covered by the statutory pension insurance can demand that up to 4% of the contribution assessment ceiling be converted from future salary into an occupational pension (§ 1a(1) BetrAVG). If the employer offers a Pensionsfonds, Pensionskasse or a scheme under a collective agreement, the conversion is carried out there; otherwise the employee can demand a direct insurance. Where the employer saves social security contributions through deferred compensation, it must pass on 15% of the converted amount as an employer subsidy to the Pensionsfonds, Pensionskasse or direct insurance (§ 1a(1a) BetrAVG). Benefits from deferred compensation vest immediately, including any employer subsidy (§ 1b(5) BetrAVG).

Employer-funded entitlements vest if the employment ends after the employee has reached the age of 21 and the promise has existed for at least three years (§ 1b(1) BetrAVG). Vested entitlements are preserved when the employee leaves and are calculated pro rata based on service. Employees can, within limits, take entitlements to a new employer. Employers must provide information on vested entitlements on request, and transfers of entitlements are possible only under the conditions of § 4 BetrAVG.

Collective agreements and industry schemes

In many industries, collective agreements govern occupational pensions, for example through industry-wide Pensionskassen or schemes for specific sectors. Employers bound by such agreements must offer the agreed scheme, and the agreements often determine how deferred compensation is implemented. The social partner model with pure defined contribution promises can only be introduced through a collective agreement, although non-unionised employers can join an existing social partner scheme in their sector if the agreement allows it. Employers should check their collective agreement position before designing a new pension offer.

Information duties and portability

Employers and pension vehicles must inform employees on request about the amount of their vested entitlements and the amount of a transfer value. Employees changing employers can, within one year after leaving, demand that the transfer value of entitlements from a Pensionsfonds, Pensionskasse or direct insurance be transferred to the new employer's vehicle, subject to statutory limits. Clear communication about the scheme, including in employment contracts and onboarding documents, reduces disputes and increases the perceived value of occupational pensions for employees.

Adjustment and insolvency protection

Employers must review the adjustment of pensions in payment every three years and decide at their reasonable discretion, taking into account in particular the interests of the pensioner and the economic situation of the employer (§ 16(1) BetrAVG). The obligation is generally met if the adjustment is not less than the increase in the consumer price index or the net wages of comparable employees. The obligation does not apply where the employer has committed to an annual increase of at least 1% from the outset or, for certain insurance-based vehicles, where all surpluses are used to increase benefits.

An employer whose economic situation does not allow an adjustment can refuse it, but bears the burden of proof, and the courts examine the situation closely. Adjustment litigation is one of the largest sources of pension disputes in Germany.

Direct promises, support fund and Pensionsfonds benefits are protected against the employer's insolvency by the PSVaG (§ 7 BetrAVG). Employers pay annual contributions to the PSVaG based on their protected liabilities. In insolvency, the PSVaG pays the pensions and vested entitlements up to statutory limits and becomes a creditor of the insolvent employer. Pensionskassen and direct insurances are generally outside this system because they are separately supervised, although the protection has been extended in some cases for Pensionskassen.

Occupational pensions in M&A and restructurings

Occupational pensions play a major role in transactions. In a share deal, the target's pension liabilities remain with the target, and the buyer must assess them through actuarial due diligence: the valuation basis (HGB, IFRS, tax), the discount rate, the funding position, the adjustment risk and any PSVaG issues. In an asset deal, employees transfer under § 613a BGB together with their pension entitlements, while the liabilities for pensioners and former employees with vested entitlements remain with the seller unless transferred separately. The purchase price is usually adjusted for pension liabilities, often treated as debt-like items.

After an acquisition, employers often want to harmonise different pension schemes. Changes to existing promises are restricted by the protection of accrued rights: the Federal Labour Court applies a three-stage test that protects accrued amounts most strongly, gives intermediate protection to dynamic increases based on past service, and allows changes to future accruals for objective reasons. Changes to schemes based on works agreements require the works council's involvement, and changes to collective agreement schemes require negotiation with unions. Our page on works councils explains co-determination in this area.

Pension liabilities can also be transferred out of a company. Options include transferring pensioner liabilities to a pension company (Rentnergesellschaft), transferring liabilities to a Pensionsfonds, or buying out benefits from an insurer. Each requires attention to the requirements on adequate funding, PSVaG notifications and the consent of employees where required. In restructurings and insolvency, pension liabilities are frequently a decisive factor; the PSVaG becomes an important creditor and pension claims cannot be amended under a StaRUG plan. See StaRUG restructuring.

• Inventory all pension promises, including individual and historical arrangements.
• Obtain actuarial valuations on consistent bases for transactions.
• Review adjustment practice and documentation every three years.
• Plan harmonisation within the three-stage test and with the works council.

Pensions on termination and retirement

When employment ends before retirement, the employer must calculate the vested entitlement and inform the employee. Small vested entitlements can, within statutory limits, be settled by a lump-sum payment without the employee's consent, but larger ones cannot be bought out unilaterally, which is why settlement agreements in dismissals often address pensions specifically. At retirement, the employer or the vehicle must pay the benefits as promised, apply the agreed adjustment mechanism and, for direct promises, deduct wage tax and social security contributions where applicable. Pensions paid as a lump sum or as an annuity have different tax and social security consequences.

Internationally mobile employees

Employees seconded to or from Germany raise questions about which scheme applies, whether contributions remain tax-favoured and how entitlements under different systems are coordinated. Groups often keep seconded employees in their home scheme for a limited period and use international pension plans for long-term globally mobile staff. Within the EU, the Portability Directive and the coordination of social security systems provide some protection, but supplementary pensions are not fully portable. See our page on immigration and global mobility.

The Second Company Pensions Strengthening Act

The legislator has continued to reform occupational pensions in Germany. The Second Company Pensions Strengthening Act (Zweites Betriebsrentenstärkungsgesetz) was adopted by the Bundestag on 5 December 2025, and the Bundesrat gave its consent on 19 December 2025, according to the Bundesrat's resolution (BR-Drs. 724/25 (Beschluss)).

The reform aims to spread occupational pensions more widely, in particular among small and medium-sized enterprises and lower earners, and to make the social partner model and other scheme designs more usable. Employers should check the amended provisions of the BetrAVG and the tax rules as they enter into force, review their deferred compensation offers and assess whether new scheme designs are attractive for their workforce. As details and effective dates vary between provisions, we recommend checking the consolidated text before implementation.

Alongside legislation, the case law of the Federal Labour Court continues to shape occupational pensions, for example on equal treatment of part-time employees, on age limits and late-marriage clauses, and on the information duties of employers. Employers with older schemes should review them regularly against current case law, because clauses that were common decades ago, such as exclusions of part-time staff or rigid age limits for joining a scheme, may now be invalid and can lead to claims by many employees at once. A periodic legal review of scheme documents, combined with an actuarial review of costs, is the most effective way to keep occupational pensions manageable.

How TRW & Co helps

We advise employers, investors and pension vehicles on occupational pensions in Germany. We design and document pension schemes and deferred compensation programmes, review existing promises and adjustment practice, and advise on harmonisation after acquisitions within the limits of accrued-rights protection. In transactions we conduct pension due diligence with actuaries, negotiate purchase price mechanisms and transfer arrangements, and structure transfers of liabilities to pension companies or Pensionsfonds. We represent employers in pension disputes and advise on pensions in restructurings and insolvency. To discuss a pension question, please contact us.