Update to German pension legislation sets out comprehensive reform

Dr. Andreas Schöberle and Felix Pickert, employment law experts at Pinsent Masons, were commenting following the publication of the draft bill (56 pages/516 KB PDF). The aim is to increase the prevalence of occupational pensions schemes, particularly in small and medium-sized enterprises and among low-income earners.

According to the draft bill, around 18.1 million employees were entitled to a company pension from their current employer at the end of 2023 – this corresponds to a prevalence rate of 52% of employees subject to social insurance contributions.

“Nevertheless, the momentum of occupational pension schemes has lagged behind the rapid rise in employment in recent years. The legislature now wants to counteract this by making changes to labour, financial supervision, and tax law,” said Schöberle.

At the heart of the reform is the amendment to the Occupational Pensions Act and a planned opening up of social partner models. Until now, this model has been reserved exclusively for companies bound by collective agreements.

Pickert said: “In future, employers not bound by collective agreements will also have access to social partner models if the social partners agree. This will make the social partner model more widely available without introducing a legal obligation to provide occupational pension schemes.”

The draft also provides that the introduction of opt-out ‘option systems’ for occupational pension schemes by way of deferred compensation will no longer require a collective bargaining agreement. Instead, it should also be possible to introduce these on the basis of a company or service agreement, provided that the employer subsidises the deferred remuneration by at least 20%. Since employees automatically participate in deferred compensation in the case of an option system until they actively object to it, the legislator hopes that this change will lead to higher participation in company pension schemes.

Additionally, the Pension Security Association, which is responsible for securing company pensions in the event of insolvency, is to be digitalised. Among other things, the association will in future be able to automatically record contribution notices without the need for manual processing. The aim is to achieve more efficient administration and faster processing of security cases.

The update to the legislation further includes tax incentives and improvements for low income earners. For instance, tax incentives for occupational pension scheme are set to be expanded. The tax-free maximum amount for contributions to direct insurance, pension funds, or pension schemes is to be increased from €960 per calendar year to €1,200. For low-income employees, the subsidy amount for occupational pension schemes will be increased. This is intended to motivate employers to make contributions to occupational pension schemes for this group as well.

Schöberle said: “The reform aims to create incentives for employers to offer voluntary occupational pensions. In particular, the legislator believes that opening up social partner and option models and extending tax incentives will contribute to this. It remains to be seen whether this idea will be realised.”