Dr. Chris is a former Senior Economist and Manager at the IMF and The World Bank. He is a Hypofriend Co-founder.
Updated on 28 November 2025
Dr. Chris is a former Senior Economist and Manager at the IMF and The World Bank. He is a Hypofriend Co-founder.
In Germany, most employees are offered a direct pension plan (‘Direktversicherung’ in German) known as a company pension ('Betriebliche Altersvorsorge' or short 'bAV') by their employer. It sounds attractive: enrolling in a savings plan subsidized by both the government and your employer, and it may well feel like the responsible thing to do.
In reality, it is one of the biggest financial mistakes to be made.
The key points
Upfront costs make most company pension plans especially wasteful for those likely to change jobs. This results in the subsidies being terminated, and in most cases, turns your savings into what we call “dead money”, money without any meaningful return that you cannot even access: You will stop your plan if you can, and then have wasted the upfront costs, which are often in the order of one-year contribution.
Your savings are invested conservatively and yield low returns, barely covering the costs. This poor investment is due to onerous legal requirements. Therefore, a company pension plan in Germany will not yield you a good pension, even when you stay with the same employer for your entire career.
The tax subsidies you get are not real subsidies – you have to pay them back. These are merely tax deferrals. The employer subsidies you get are typically not subsidies but reductions in public pension contributions, resulting in a reduction in your overall pension--because the public pension is a much better deal.
Alternative strategies like buying a home (capital gains tax free) or investing in ETFs through an effective tax shield called a 'private pension plan', yield savings or income in retirement that can be 3-4 times the company pension.
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What Makes Direct Company Pension Plans Unattractive for Job Changers
Most direct company pension products charge upfront fees. The insurance companies that provide these plans typically charge 2,5 % of the total committed contributions in the first 5 years of the contract.
For example, if you invest 100 € per month or 1.200 € per year, and you are 27, these fees calculate to: retirement age of 67 — current age of 27 → 40 × 1.200 € × fee of 2,5 % = 1.200 €.
Meaning, within the first 5 years, you lose one year of contributions in upfront costs. That amounts to 20 % of your contribution in these 5 years, and vastly outweighs the typical gross return of about 3%.
On top of these upfront fees, the insurance company will charge an annual or monthly fixed fee and about 1 % of the asset value.
Why are these upfront fees so bad for your investment? First, you lose the upfront fees when you realize the returns are poor and quit the program. Secondly, the money you pay upfront would have worked the longest for you. The 1.200 € upfront fee in the example above, would have grown to 19.200 € if invested with a 7,2% return for 40 years! Third, if you change jobs,¹ ² all subsidies fall away, but not the costs.
Many people may then say: “So what? I can take the money out and collect the subsidy and company support I already received.” Not so quick.
Many people find themselves with savings they cannot access, i.e., “dead money,” as the contract does not allow cancellation. Only if the amount is modest (see table below) do you get your money back.
Even if you can cancel the contract and get your assets paid out, you have to pay taxes immediately. Your total bill is likely to be more than what you got as so-called “tax subsidies,” as the taxes on a one-off amount will place you in a higher tax bracket.
You cannot undo the loss in public pension.
Especially if you have not paid the full up-front cost yet, it nearly always pays to cancel your contract and get your money out immediately. Even if you cannot get your savings paid out, you are nearly always better off cancelling the plan as the net return is typically less than 1-2%. While you have already paid the up-front costs, the return is so low, and the cost of ongoing fees and forgoing some public pension is so high, that the net return is abysmal.
¹ Changing jobs almost always means that your current company pension plan switches to a private pension plan without subsidies, so you are stuck with a costly private pension plan. Only in rare cases does your new employer have the same solution as your previous company, allowing you to continue your existing plan.
² Gallup Engagement Index reports 66 % of German employees are looking to change jobs within 3 years.
What Makes the Direct Company Pension Plan Unattractive, Even if You Don’t Switch Jobs?
Fundamentally, the returns on savings invested in a company pension plan are poor even when invested for a long period: at present, maybe 0-1% after taking costs and the reduction in public pension into account. A major reason is that legally, a minimum of 80% of the paid-in assets have to be guaranteed. This means that the assets are very conservatively invested, mostly in government bonds.
You may say that if this is the price for a guaranteed return, then so be it. Again, do not judge so quickly. Although the alternatives of investing in widespread ETFs or real estate do not have a guaranteed return, if you hold them long enough (over 15 years), the minimum return is in the order of 5%, well above the return of a company pension plan.
To give clients a higher upside and at the same time offer them guarantees, insurance companies have also come up with some complex new products, like Index Select from Allianz, Germany’s largest insurance company. However, if properly evaluated, it is clear that these products don’t make sense in the long run. The figure below tells it all too well, showing the results for the Index Select product from Allianz.
The return of this Company Pension product, see the red line, taking into account the small print--you don't participate in dividends--and the cost is really bad. Basically, 1 % annually. And this ignores the potential cost of switching money from the public pension to the company pension plan.
Investing in the index itself, the Euro Stoxx 50 index represented by the highest line in the figure, yields a much better return over time, despite some volatility. That the complex Index Select product yields a stable return, represented by the red line, is poor consolation: it is stable at an extraordinarily low level.
You may then think: “But the tax subsidy is so high.” Many people think it doubles their money. Alas, that is not correct. Sure, in the first instance, it appears to almost double your money. However, that is just on paper. When, in retirement, you take the money out, you have to pay that tax subsidy back, plus some social security contributions. On top, your public pension is reduced. Therefore, don't be misled by this doubling of the money in your account; de facto, it is “dead money”, untouchable and with a very low return.
On balance, the company pension plan yields you a return that is considerably less than inflation, and no way to secure your financial future.
Another Hidden Cost Surprise Within Company Pension Plans
Another cost that most people are unaware of is the vast implicit charge in the pay-out phase of your company pension. If you choose to have your built-up savings paid in the form of an annual guaranteed pension, e.g., to help pay the rent, then the pay-out is very low: for each 10.000 € saved, you only receive around 6.500 € (considering you reach the average current life expectancy of about 85).
This is because the assets are not invested during the retirement phase--with the same problem as noted above for the pay-in phase, that they can only be invested in guaranteed products, now applies to 100 % of the assets. Moreover, insurance companies retain large buffers in case the insured lives longer than the average current life expectancy. This could potentially lead to some surprise extra payments for those who live long, but this is a very poor basis upon which to plan your retirement financially.
If you take your pension as an annuity, the sum of your pension payments is less than the nominal amount you contributed yourself !! Indeed, this is a rather shocking result.
If you choose to have your company pension paid out as a lump sum, you avoid this tax, but you will be faced with an extra high tax rate as the sizable payment will put you in a higher tax bracket.
Buying a home is a much better idea for your long-term financial safety!
Firstly, the return on a home is much higher during the pension build-up phase than the company pension plan, which cannot be invested well. A house typically returns 3-4 % appreciation, minus maintenance, minus the interest rate, plus rental yields of around 3 %. Currently, on the order of 3%.
Secondly, the tax treatment of a home is much better, as the return on a house is not taxed at all if you live in it yourself, and there is no capital gains tax in the case of selling a home you have only lived in yourself--a rental home you need to keep for 10 years to get this tax treatment.
Thirdly, unlike with a company pension plan, throughout retirement, your money continues as an investment, and your return is that you don't pay ever-increasing rents.
In addition, consider the following:
As the value of your house will grow over the long run, it creates a great store of wealth for emergencies or to bequeath.
Finally, your home is secure. Rent increases can’t force you to leave. You can raise a family there or grow old. You paint the interior walls however you like!
Therefore, it makes a lot of sense to save for your first home instead of going for a direct company pension plan!
It begins with saving for your first home. Your first home provides the best return and also offers you the best old-age insurance. Importantly, you can avoid the risk of dead money with a company pension plan.
If you already have a home or a wonderfully low rent and don't like the idea of an investment home, then the second-best solution is to invest in ETFs. We suggest doing that through a tax shield, such as a Private Pension Plan.
Unless you are the Managing Director and the company pension plan does not come with the return-killing guarantee requirement, don't go for it. Save in a bank account. You can also save in well-spread ETFs. You can also use a private pension plan as collateral when purchasing that first home if you don't have one yet. Remember that if you do so and the ETFs perform poorly, you may have to wait extra months to buy a home.
If you already have a direct company pension plan but have had it for only a few years, then you may not have paid for all your upfront costs yet. You are nearly always better off canceling your contract if you can or stopping contributing.
