Salary conversion, the compulsory subsidy and the five funding vehicles

A joinery with nine staff receives a short e-mail in spring: a journeyman wants to put 200 € of his gross pay into a company pension every month from July. The owner has never offered a pension scheme and treats the request as a favour she may refuse. The law sees it differently: she has to take part, she has to add 30 € a month, and the entitlement belongs to the journeyman from day one.

What the law means by a company pension

The Company Pensions Act, BetrAVG for short, opens with a broad definition. A company pension exists when the employer, on the occasion of the employment relationship, promises benefits for old age, for invalidity or for surviving dependants. Covering any one of these three risks is enough.

What matters is the occasion. A life policy that a business owner takes out privately for an employee who happens to be a friend does not count. The promise must arise from the employment. Once it does, every protective rule of the Act applies, whatever heading the parties chose to put on their agreement.

The single most important sentence for employers sits at the end of section 1(1). The employer remains liable for the promised benefits even where the pension is not delivered directly through the business. Bringing in an insurer or a fund shifts the administration, but it does not shift the responsibility.

Subsection 2 lists further arrangements that also count as a company pension. First comes the contribution-oriented defined benefit: the business undertakes to convert specified contributions into an entitlement. Next to it stands the contribution commitment with a minimum benefit, where at least the sum of the promised contributions must be available when the pension starts.

A special form is the pure defined contribution. It requires a collective agreement, or a works agreement based on one. The employer then owes only the contributions; the liability to stand behind the benefit and several protective rules, including insolvency insurance, expressly fall away. A small business outside collective bargaining cannot introduce it unilaterally.

Finally the Act names two routes on which the employee finances the pension. Number 3 is salary conversion, which the rest of this module mainly deals with. Number 4 covers contributions the employee pays out of his earnings to an external provider, where the employer's promise also includes the benefits from them.

Five vehicles, one promise

The way the promise is delivered is what the Act calls the funding vehicle. Section 1(1) sentence 2 allows delivery directly through the employer or through one of the providers that section 1b describes in its subsections 2 to 4. That gives five vehicles, two of them located inside the business or closely tied to it.

Under a direct promise the business later pays the pension itself, out of its own funds. That preserves liquidity, because no money leaves while the entitlement builds up, but it requires the company to still be solvent decades later.

The support fund is a separate legal entity that grants no legal claim to its benefits. That sounds weaker than it is: because the employer remains liable under section 1(1) sentence 3, the employee does end up with a claim, only it runs against the business.

Direct insurance is a life policy that the employer takes out on the employee's life. The employee or his dependants are wholly or partly entitled to the benefits. The business is the policyholder and pays the premiums. For small companies it is often the simplest way in, because the insurer carries the administrative work.

The Act deals with the Pensionskasse and the pension fund together. Both are legal entities that give the employee or his dependants a legal claim to their benefits.

The choice of vehicle has consequences well beyond administration. The tax exemption under section 3 no. 63 of the Income Tax Act, explained in the second module, applies only to pension funds, Pensionskassen and direct insurance. The employer's compulsory subsidy is likewise, by its wording, paid to those three providers.

The right to salary conversion

Section 1a BetrAVG gives every employee a right that the employer cannot refuse. He can demand that part of his future pay entitlements be used for his company pension. Whether the business has offered a pension scheme so far does not matter, and neither does its size.

The right is capped, and the cap moves. An employee can demand up to 4 percent of the current contribution ceiling of the general pension insurance. The Act therefore names no euro amount; it refers to a figure that is set afresh every year.

For 2026, section 4 of the Social Insurance Reference Values Ordinance 2026 puts the annual ceiling at 101,400 euros; per month that means 8,450 euros. Four percent of it is 4,056 euros a year or 338 euros a month. Up to that amount the employer must comply with a request for conversion.

More may be agreed voluntarily. The cap limits the right, not the freedom to contract. An employer who agrees to a larger conversion should know, however, that exemption from social insurance contributions, unlike tax exemption, also stops at 4 percent. The second module works this through.

Whoever exercises the right must also respect a floor. Each year at least one hundred-and-sixtieth of the reference value under section 18(1) of Social Code IV must be used. Under section 1 of the Ordinance this reference value is exactly 47,460 euros for 2026. One hundred-and-sixtieth of it gives 296.625 euros a year.

The floor protects the business from tiny contracts that would cost more to run than they yield. Someone converting 25 euros a month reaches 300 euros a year and sits just above it. At 20 euros a month, 240 euros a year, the employer can insist on a higher amount.

The employer decides on the provider first. If he is prepared to run the conversion through a pension fund, a Pensionskasse or a pension institution under section 22 BetrAVG, it must take place there. If he offers none of these, the employee can demand that the business take out a direct insurance for him.

One further power is useful for payroll. Where the employee uses parts of his regular pay, the employer may demand that the same monthly amount is converted throughout a running calendar year. He does not have to accept sums that keep changing.

Three more subsections complete the right. Where a pension financed by salary conversion already exists, the right is excluded to that extent. The employee can also demand that the conditions for Riester support under sections 10a and 82(2) of the Income Tax Act are met, where one of the three external providers is used.

This Riester option has a downside that the second module picks up: the tax exemption of section 3 no. 63 does not apply to such contributions. The allowances themselves are covered by the neighbouring course on taxing pensions. Finally, an employee without pay, for instance on parental leave, may continue the pension with his own contributions.

The 15 percent compulsory subsidy

Section 1a contains a subsection 1a that asks the employer to pay. He must pass on 15 percent of the converted pay as an additional employer subsidy to the pension fund, the Pensionskasse or the direct insurance.

The idea behind it is simple. When an employee converts pay that stays free of social insurance contributions, the business also saves its share of those contributions. That saving is not meant to stay with the employer; it is meant to flow, at a flat rate, into the employee's pension.

Hence the restriction at the end of the sentence. The duty exists only to the extent that the employer actually saves social insurance contributions through the conversion. Where a salary lies above the contribution ceilings, the saving disappears in whole or in part, and the duty with it.

In practice this test is tedious, because it can come out differently from month to month. Many businesses therefore simply pay 15 percent on every conversion, even where the saving would be lower. That is allowed, since the Act sets a floor and does not prohibit a more generous arrangement.

Older agreements are subject to a transitional rule. Under section 26a BetrAVG the subsidy applies to salary conversions agreed before 1 January 2019 only from 1 January 2022. In 2026 that grace period expired long ago: older contracts trigger the subsidy too.

Vesting: when the entitlement survives

What happens to the entitlement if the employment ends before the pension starts? Section 1b BetrAVG distinguishes by who financed the pension. An employer-financed promise is subject to a qualifying period; salary conversion is not.

Under a promise financed by the employer, the entitlement is kept when two conditions are met together. The employment ends after the employee has reached the age of 21, and the pension promise has existed for at least three years at that point.

If either condition is missing, the entitlement lapses. A 20-year-old apprentice with a four-year promise loses it, just as a 45-year-old master craftsman whose promise is only two years old does. Amending the promise, or its takeover by another employer, does not restart the clock.

For direct insurance, Pensionskasse and pension fund, the date of the promise is the start of the insurance, but no earlier than the start of employment with the business. For the support fund it is the day from which the employee belongs to the group of beneficiaries.

For direct insurance, subsection 2 draws a practical consequence. Once the conditions are met, the employer may no longer revoke the departed employee's right to the benefits. If he has assigned or borrowed against the policy, he must put the employee in the position he would be in had that never happened when the insured event occurs.

Salary conversion is governed by subsection 5, which is markedly stricter in the employee's favour. Anyone who converts pay keeps the entitlement if the employment ends before the pension event, with no age or waiting period at all. This expressly includes the employer subsidy under section 1a(1a).

With the three external providers, subsection 5 requires three further things. Surplus shares may only be used to improve the benefit. The departed employee must be allowed to continue the insurance with his own contributions. And the employer may neither pledge, assign nor borrow against the entitlements.

For direct insurance funded by salary conversion a fourth duty applies, to be dealt with at the very start. The employee must be given an irrevocable right to the benefits from the beginning of the conversion. A revocable right, common in employer-financed policies, is not enough here.

What the business has to organise

The provisions lead to a short list of decisions that an employer is best advised to take before the first request for salary conversion arrives. Being prepared means being able to respond within days, and it keeps the choice of provider in the employer's own hands.

• choose a Pensionskasse or a pension fund so that the conversion takes place there; otherwise the employee can demand a direct insurance
• record in the agreement that the same monthly amount is converted throughout a calendar year
• set up the 15 percent subsidy in payroll and decide whether it is paid at a flat rate or according to the actual saving
• for direct insurance, grant the irrevocable right to benefits from the first contribution
• rule out pledging, assigning or borrowing against the policies

One more point is often overlooked: the collective agreement. Only on its basis is the pure defined contribution possible, and section 1a expressly names pension institutions under section 22 alongside pension funds and Pensionskassen. A business bound by a collective agreement therefore reads it first, before building a solution of its own.