Company Pension Plan Calculator Germany: Is a bAV worth it?

What is my realistic net pension?

This 100 € contribution actually costs you only 47 €, as your employer also contributes, and you benefit from tax and social security savings. Starting at age 67, this company pension plan (bAV) is expected to provide a gross monthly pension of 209 €.

The bAV calculation is based on the Allianz KomfortDynamik 2024, which has a 2,5 % upfront fee and a 0,8 % yearly fee.

Insurance companies, like Allianz, often advertise optimistic predictions for gross pension amounts. However, we estimate a more realistic gross additional pension of just 150 €.

Why the discrepancy? It comes down to assumptions in the calculators. By default, the Allianz calculator includes church tax, which most people do not pay. More critically, it assumes a 4,5 % return, an optimistic figure given that nearly all assets are invested in fixed-interest instruments, currently yielding only 2-3 %. We recommend using a 3 % return for a more accurate estimate: Using 4,5 % inflates the pension projection by about one-third.

Most notably, these calculators don't show you your net pension, while this is the key outcome and needs to be compared with the contribution:

Why is the net pension so much lower? Because these bAV calculators do not show you the following:

• The amount of -48 € you forego by not investing in your public pension.

• The amount of  -37 € you will have to pay in tax and social security in retirement.

These are the numbers for the realistic assumptions.

Instead of showing you these losses, the standard bAV calculators stress how much you save when contributing. The simple truth is that you need to look at both: How much the pension really costs you in terms of net contribution and how much you end up getting. And then see what the implicit rate of return on your money is and how it compares to other options.

Compare your net bAV contribution to your net pension.

Given your age of 30, you are expected to contribute 37 years an amount of 47 € and earn a net additional pension for 20 years of 65 €. You can calculate that your expected total pension is roughly the same as your total contribution. And that is a problem.

With realistic assumptions, your own net contribution has an effective annual return of -1,05 %.This will not get you near a decent pension.

Compare these outcomes with other alternatives!

Let us give you an idea of the outcome. If you were to take your net monthly contribution of 47 € and invest it in a private pension plan with our predicted 7 % return after tax and cost, you could achieve 220 €.

Why is that? It is, in essence, the power of compounding. A solid investment with a return of 7 % doubles your money every 10 years. This far outweighs any short-term tax benefit. This is explained in detail in the rest of the article.

Why is the bAV offered if it is such a poor proposal?

Before we go into the details, these poor results for the bAV beg the question of why the bAV is so widely used.

First, nearly all employers think they need to offer it. That is not correct. They also can just endorse the plans an employee comes with. We at Hypofriend do that. And when the new employee realizes how poor their pre-existing bAV is, they cancel them.

Second, employers may not be quite truthful. What employers often don't tell their employees is that they can save on taxes by promoting company pension plans among their employees. Companies are incentivized to promote company pension plans because they can reduce their payments from about 20 % to 15 % of gross wages. This typically saves them 5 % on their wage bill.

As company owners and an insurance broker who can legally broker company pension plans, we know. However, the key issue is a third one: many employers delegate this offering and advisory to an insurance company or some intermediary. These third parties have a strong incentive to show all the benefits and hide the problems. We see this in virtually all cases where clients come to us. They add an obscure footnote regarding future taxes and possible impacts on public pensions without telling employees how much it costs them.

Of course, some companies are generous and subsidize their employees, which might make a difference. Learn more about the impact of a generous employer next. 

Where can I find out how much my employer contributes? 

Why is my employer's contribution so important? 

If your company contributes much more than the standard 15 %, a company plan can become more attractive, as the table below illustrates, but overall, the returns are still low. This can result in a poor pension due to the high cost, low returns, and taxation in retirement.

The expected return of your bAV contribution for an income of 4k gross (below the public pension contribution threshold)

The expected return of your bAV contribution for an income of 8k gross (above GRV threshold)  

Assumptions: At age 30, retirement at 67, income is assumed to grow 3 % annually, life expectancy of 87, and retirement income ⅔ of last earned income.

Based on my age of 30, all in all, I can expect a net additional pension of 65 € per month at age 67 if I keep working at my company. My effective annual return is -1,05 %.

In general, there are much better alternatives. If you forgo the subsidy and invest in a PPP, your income could be 220 € per month.

Understanding the loss of public pension

Opting for a company pension plan results in a reduced contribution to your public pension and a decline in your public pension. This is the case because you do not pay social security contributions to the part of your income that goes to the company pension plan. The same applies to the contributions that your employer normally pays to the public pension plan, which are now diverted to the company plan. We are talking about 18,6 % of your salary. So it is about a high amount.

Note: if you are above the public pension contribution limit of 90.600 €, you will not experience a loss in public pension, and you can skip this section.

For most of us who are under the contribution threshold, not contributing to the public pension reduces our overall pension. This happens for four main reasons: 

1. Public pension value grows faster. The value of your public pension grows by about 2-3 % annually until the age of retirement as the value of your pension points keeps up with wages, whereas the value of the company pension increases by only about 1–1,5 %.

2. Public pensions keep growing during retirement. The value of the pension keeps rising 2-3 % during retirement as they keep growing with wages. Conservatively, this means that over 20 years, your public pension grows by almost half, 49 % to be precise, if wage growth is 2 %, and more if it is higher. In contrast, the value of the company plan benefits is stagnant. 

3. The public pension system pays out for your entire retired life. If an insurance company gives you that benefit in return for the sum built up in your pension plan, they make you take a huge haircut. They pay you about 22 € per month for each 10.000 € you have saved when 42 € would be the amount corresponding to an average life expectancy. The government does not take such a huge haircut.  

4. Government support. The public pension is subsidized by the general taxpayer, which translates into higher benefits compared to your contributions. 

These four arguments together are very substantive. They make such a serious dent in your expected net pension increase that it can result in a negative overall return on your company pension contribution. Prof. Hartmut Walz, in his detailed article on the company pension plan, dubbed it the misleading pension plan. The private assessment of economic insiders and consultants to the government that we have spoken to is the same.

Indeed, if you are the CFO or CEO of a company, you could do far better for your employees by just giving them the salaries or helping them invest in a private pension plan.

Understanding the Returns for Company Pension Plans

Company pension plans for employees are legally required to have an 80 % guarantee. This means they are largely invested in fixed-interest rate instruments like government bonds. And the return on these investments is just very low. Currently, German government bonds yield about 2 %. Realistically, you should not expect returns for direct company pension plans of over 3 %. And that is before cost. 

Many advisors promoting such plans claim that the company pension plan is invested in ETFs, and many clients we speak with believe that as well. In reality, the assets are invested in ETFs only after a surplus is generated, which takes years. The issue is that nearly all plans come with substantive upfront costs—usually about 20 % of the contribution in the first 5 years.

Because of the upfront costs of company pension plans, we calculate that with a gross return of 3 %, it takes about 15 years before you get the first investment in and returns from ETFs! Over 30 years, the added return from ETFs may increase your overall return by about 0,35 %. So that is not material: it could lift your return after cost from, say, 1,5 % to 1,85 %.

Regarding company pension plans, most are offered these days as direct pension plans, typically provided by an insurance company contracted by your employer. Larger companies may offer different solutions, such as pension funds, which are then usually mandatory. This article is not about such plans, as you have no choice and they are very company-specific.  

Understanding the Costs of Company Pension Plans

The insurance companies providing the direct company plan on behalf of the company charge relatively high costs. Usually, the effective costs are in the order of 1,7 %. Effective costs are the average annual costs if you stick to the contract for its entire period.

The costs are high as the contributions are often small, employees often change jobs, and the companies do not quickly switch once they have opted for a specific insurance company.

Let's break down the key costs

1. Upfront Costs (bAV Abschlusskosten)
As discussed, a significant part of the costs for the direct company plan consists of 2,5 % of the lifetime contribution as an upfront cost calculated into the plan. You are charged based on the assumption that you will keep working for the company until you are 67, regardless of whether you plan to stay working or even stay in Germany. So, if you are 27, the assumption is that you work and contribute another 40 years. The standard fee of 2 ½ % over 40 years amounts to one full year of contribution. Paying one full year of contribution over 5 years as costs means you pay ⅕ th or 20 % each year in the first 5 years. Be aware that some companies manage to charge even more.

2. Ongoing Fees (Verwaltungskosten betriebliche Altersvorsorge)
In addition to the upfront fees, there are monthly administrative costs, typically small, but they end up significant, especially for lower contributions. The bigger impact usually comes from the annual management fees that are often about 0,7 % of your total assets.

When you take these together, you get effective costs of about 1,7 %, and if you factor in these fees, your gross return—of about 3 %—shrinks considerably. After costs, the net return from a typical company pension plan might only be around 1-2 %. This is before any loss of the public pension. The loss of the public pension pushes the return into negative territory.

Note also that with such a cost structure, if you cancel early, your effective costs are quite high, on the order of 20 %.

Impact of our cost return assumption

In our calculator above, we assume a gross return of 3 % for the company pension plan, which is notably higher than current interest rates on German government bonds. Currently, bonds yield around 2 %, so we've adjusted our calculator to reflect more realistic market conditions for company pension plans.

Additionally, we assume company pension plan costs of around 1,5 %. Typical company pension costs can range from 1,5 % to 2,5 %, with some plans exceeding this range. We've set a lower cost assumption of 1,5 % in our calculator to offer a fairer reflection of the net return you can expect after fees.

Why do alternatives yield a much higher level?

Alternative investments can yield a much better pension by unleashing the power of compounding.

The table below shows you the difference in outcome between a guaranteed investment with a return of 1,5 % and one that is well invested and returns 7,2 % --both are after cost. The differences are much higher than a simple comparison of return suggests. The reason is compounding: interest over interest. An investment with a return of 7,2 % doubles every 10 years. An investment with a 1,5 % return requires about 47 years to double.

Table 1. The difference between being able to invest well 

Return multiple for constant investment each year until the age of 67 

So, a 27-year-old can turn his monthly investment of 100 € into 530 € at age 67 with a return of 7,2 %. With a 1,5 % return, this would be 140 €.

You may now say that this is not a fair comparison and argue that the 1,5 % return is a certain outcome as it is guaranteed, and the 7,2 % is an unlikely optimistic assumption.

• The low outcome is indeed guaranteed, but it comes at the cost of a very, very limited upside that is factored into our calculations. 

• The low outcome does not cover you for the risk of inflation, while a good ETF portfolio in the long run does.

• The choice should depend very much on how long you still have to invest. If it is over 15 years, the minimum return on a good ETF portfolio outperforms the guaranteed portfolio. Over 20 years, this outperformance is massive. 

How the Risk of Stocks Declines When You Invest Longer

S&P 500 historical annualized returns for different time horizons (without Great Depression)

We like to stress the need to choose a really good portfolio of ETFs selected by proper professionals at a low cost. A bad portfolio can undermine your results.

Should you then invest yourself? A big warning is warranted.

Don't be tempted to do it all yourself. Many individuals struggle to match market returns. In fact, data show that nearly all individuals underperform the market in a way that will halve their pension. I studied the data for over 20.000 Trade Republic clients and was shocked at how many lost all. While the company claimed that average returns for those with accounts over a year were 10 %, the market at that time was one of the best ever, with indices showing returns of about 40 %.

To give you a specific example of what individuals don't do but should for proper portfolio management: I see no one taking the time to find the data to analyze tracking differences--the difference between indices and the ETFs that track them--or the data since the inception of the indices. The ETF selectors don't show you this and provide you with fake certainty. And I see virtually no one doing proper portfolio construction (choosing % of bonds, % of stocks, % of real estate, what currency composition) or tracking their performance against the market.

A note from this author is in order: Stocks are my hobby. I have proven to outperform the market if I spend 2-3 hours or so per day. I have proven this over decades, tracking my performance and doing thousands and thousands of trades. Some were great, and some were lousy, but on balance, they were good. I wish, though, that I had had the portfolio advice that Pensionfriend gives to clients. It would have allowed me to invest earlier and a more substantive part of my assets, and with a higher degree of comfort. 

Understanding the tax benefits

Many people think that the tax benefits of a company pension plan make a big difference because the plan can be deducted from tax—provided the amount is below about 320 € per month and double that for company directors. 

For many people, this seems to give a sense of immediate value. They overlook that you actually can't take the money out as soon as it grows over 4.000 €. So you are stuck with it.

Then, when you take out the money, you have to pay tax on it. It is not that somehow they exempt the capital gains. Not all of what you put in, and all the gains, are subject to taxation. Therefore, the tax benefit is really the difference in the tax rate you pay now, which determines the savings vs. the tax rate you pay in retirement, and that reduces your pension.

This tax difference between now and what you pay in retirement is, in practice, rather small, as most people will pay a tax rate in retirement that is close to their current rate. The reason is that your income will grow over time, and so will what you earn in retirement.  

In practice, you may, therefore, end up having a tax rate that is at most 10 percentage points less than when you work. Saving 10 % sounds like a good deal, but you need to consider that this is over a very long period and, hence, per year is small. Achieving a high return, as discussed above, that doubles your money every 10 years instead of every 40–50 years, has a far higher impact on your pension, for example, for a 27-year-old 4,3X better, as detailed in the earlier table.

More on the alternative options

In sum, the company pension plan is not very flexible. You cannot take your money out if it is over 4.000 €; It is poorly invested, and costs are actually relatively high.

But what is the best alternative? Our extensive research shows that for nearly everyone, a well-managed, low-cost private pension plan is better. Here's why:

• Flexible pension plan options: You can withdraw money if needed and even use it as collateral for a mortgage. 

• Unlimited investment potential: With a private pension plan, there are no restrictions on the assets you can invest in, allowing for much greater returns over time. If the investment horizon is adequately long, you achieve higher returns with minimal risk.

• No impact on public pension: Unlike company pension plans, a private plan doesn't reduce your public pension benefits.

• Tax efficiency: In a private pension plan, you only pay capital gains tax once—when you withdraw your funds. After age 62, you only pay tax on half the gains, making it a tax-efficient way to grow your retirement savings. In addition, 15% of gains are tax-exempt at any time. While company pension plans may offer some tax benefits, they are dwarfed by the investment disadvantages of company pension plans.

How we designed Pensionfriend's Private Pension Plan

As we realized that the private pension plan is the superior savings plan solution, we spent a lot of time developing our own, the Pensionfriend Private Pension Plan, that avoids the complicated and high-cost structures that most of the existing alternatives come with. We also set out to provide optimal portfolio advice — automated to reduce cost — and select the best-performing ETFs for these portfolios.

Can I Get my Money Back or Cancel my Company Pension Plan?

If you already have a direct company pension plan, you will want to consider canceling it. The sooner you cancel, the more of the upfront costs you avoid! Even after the 5 years, you are better off canceling, as your return is so low. If your assets are under 4.242 €, you can get them back. Otherwise, you will have to wait until retirement! 

Read this article for more information on how to cancel your existing company pension plan and to download sample cancellation letters: How to Cancel Your German Company Pension Plan