24. October 2024 By Sandra Weis
Massive increase in the contribution assessment ceiling in 2025 – including for occupational pensions
As part of the company pension scheme, employees have the right to convert parts of their salary into a pension. This is done by converting future salary claims into contributions to a pension scheme. The draft bill of the ‘Social Security Calculation Parameters Ordinance 2025’ provides for a massive increase in the contribution assessment ceiling (CAC) in 2025. What impact will this change have on company pensions? What challenges will arise for companies, employees, insurers and pension providers? This blog post addresses these questions.
Section 1a of the German Occupational Pensions Act (BetrAVG) regulates the entitlement to a company pension through deferred compensation. Accordingly, an employee may request that their employer convert up to four per cent of their future remuneration claims into a company pension. This deferred compensation is intended to provide employees with additional security in old age and thus prevent poverty in old age. The annual adjustment of the contribution assessment ceiling also affects the maximum limits for tax-privileged pension contributions.
On 3 September 2024, the Federal Ministry of Labour and Social Affairs published the draft of the Social Security Calculation Size Ordinance 2025, which proposes a massive increase in the contribution assessment ceiling. The Federal Cabinet will decide on this, although no significant changes are expected. After the cabinet decision, the approval of the Bundesrat is still required, but this is considered a formality. The increase in the contribution assessment ceiling has a direct impact on occupational retirement provision.
Expected parameters for occupational retirement provision in 2025
From 2025, the contribution assessment ceilings for pension and unemployment insurance in eastern and western Germany will be aligned. This means that from that point on, uniform social security contributions will apply throughout the country.
Under the Act to Improve Company Pension Provision (BetrAVG), vested pension rights can be settled by the employer without the consent of the employee in accordance with § 3 (2) if they do not exceed a certain minimum limit. Similar adjustments are also planned for 2025.
Consequences of the massive increase in the contribution assessment ceiling for company pensions
Company pensions are a popular additional benefit for employees, as they are both state-subsidised and offer companies an opportunity to retain qualified employees over the long term. A major advantage of the company pension scheme is that contributions are tax- and social security-free up to four percent of the contribution assessment ceiling (BBG). The planned massive increase in the BBG could have a significant impact on this system.
Effects for employees
For employees, the increase in the BBG means that they can pay higher subsidised contributions into their company pension scheme. If an employee has agreed with their employer that four percent of the BBG will be paid into the pension scheme through deferred compensation, the increase in the BBG automatically leads to higher contributions. In addition, the employer is obliged to pay a supplement of 15 per cent of the converted amount, insofar as this saves social security contributions. The higher the employee's contribution, the higher the employer's supplement. This supplement obligation, which will also apply to existing deferred compensation from 2022, improves future occupational pension benefits for employees and helps to close gaps in provision by increasing the total contribution.
Impact on companies
The increase in the upper earnings limit not only affects contributions to deferred compensation, but also the employer's allowance. In the case of dynamic deferred compensation agreements that are linked to the upper earnings limit, an increase in the upper earnings limit also leads to a corresponding increase in the employer's allowance. Companies must ensure that payrolls are adjusted correctly and that the new total amounts are transferred to the insurance companies or pension providers in a timely manner.
Impact on insurance companies and pension providers
A key challenge for insurance companies and pension funds often lies in the inadequate technical support of their policy management systems. This applies in particular to products with variable contributions, where the employer's contributions are included in the insurance contract. It becomes problematic when the amounts paid exceed the social security-exempt limit. In such cases, insurers are faced with the complex task of developing clear solutions and handling the excesses correctly.
Information and communication requirements
The significant increase in the contribution assessment ceiling goes hand in hand with an increased need for information and communication. All parties involved must be informed about the upcoming changes in a timely and comprehensive manner. It is important to use targeted communication channels and to prepare the information in a clear, precise and understandable way. Flexible solutions must be developed for the technical implementation, which can be easily adapted to current and future adjustments to the BBG.
The approach
Adjusting the contribution assessment ceiling is a challenging task for everyone involved – employees, employers, insurance companies and pension providers. However, with careful planning and technical preparation, the new regulations can be implemented smoothly. Particularly in the case of larger companies and complex contract structures, it can make sense to call in an experienced IT service provider in the field of company pensions. These experts ensure compliance with legal requirements and support companies and insurers in optimising their billing and administration systems so that dynamic adjustments are implemented automatically. They also help develop and implement a comprehensive communication plan to transparently inform all parties – employees, employers and insurers – about the changes.
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