Why Company Pension Plans Don’t Make Sense in Germany

Although company pension plans are very common in Germany, in the vast majority of cases they are not worthwhile. We show you why.
Dr. Chris Mulder

Dr. Chris is a former Senior Economist and Manager at the IMF and The World Bank. He is a Hypofriend Co-founder.

Published on Nov 25, 2022 Published on Nov 25, 2022 . Updated 4 months ago

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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 touch: You will stop your plan if you can and then have wasted the upfront costs that are often in the order of one-year contribution.
  • Your savings are invested very conservatively and have returns that are low and barely make up for the cost. This poor investment is due to onerous legal requirements. So also when you stay with the same employer for your entire career, it does not work well.
  • The tax subsidies you get are not real subsidies – you have to pay them back. These are tax deferrals. This adds insult to injury.
  • Buying a home is a much smarter strategy. Use your savings for a downpayment that reduces the interest rate on the loan instead of a company pension plan!
  • Your second best strategy is investing in ETFs, ideally through a flexible tax wrapper called a 'private pension plan'. This also beats direct company pension plans hands down in the current low interest environment.
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