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What Is a Pension Plan and How Does It Work?

Key Takeaways

1. Most countries provide some form of retirement benefits to workers, either through a government-run social security system or employer-sponsored pension plans.

2. Depending on the country, income from a basic state pension may be supplemented through compulsory or voluntary means.

3. There are several legal requirements to consider when managing pension plans globally, such as disclosure requirements and compliance with local laws and regulations.

4. An independent manager of benefits such as a Professional Employer Organization (PEO), can provide compliance support to help ensure pension plans are compliant with local laws and regulations.

Employers show their commitment to their employees’ financial well-being in a number of ways, one of which is by providing them with a source of income in their retirement years.

By offering a comprehensive retirement savings plan that allows employees to build a nest egg for their retirement years, employers can demonstrate their commitment to their employees’ long-term financial security and well-being, helping them to attract and retain talented employees and build a dedicated and motivated workforce, which ultimately contributes to their success.

This article will explore pension plans in various countries worldwide and consider the best way to manage pension plans globally.

What is a pension plan?

A pension plan is a type of retirement savings plan that is typically offered as an employee benefit with the purpose of providing eligible employees with a reliable source of income during their retirement years.

Under this plan, the employer makes regular contributions to a pool of funds that are set aside and paid out to employees after they retire. This income can be in the form of a guaranteed pension benefit, based on factors such as the employee’s salary and years of service with the employer, or a retirement benefit based on the value of the contributions made by both the employer and the employee.

Below is a summary of the types of pension plans offered in Germany, France, the Unite States and China.

Pension Plans in Germany

The German pension system is based on a system of social insurance designed to provide individuals with a basic level of retirement income and to supplement that income through voluntary means.

The German pension system consists of three main pillars as follows:

  • Statutory Pension Insurance:
  • The first pillar of the German pension system covers almost all employees and is a pay-as-you-go system funded by social security contributions from current workers and their employers. The pension benefit that a retiree receives is based on their average income during their working life and the number of years they have contributed to the system.
  • Occupational Pension Plans:
  • The betriebliche Altersvorsorge (bAV) is a voluntary supplementary pension plan provided by employers, consisting of contributions by the employer, the employee, or both. These plans can be either defined benefit plans, where the employer guarantees a certain level of retirement income, or defined contribution plans, where the employee and employer make contributions to a retirement fund.
  • Private Pension Plan:
  • The third pillar is a voluntary retirement savings plan intended to supplement an individual’s retirement income and where they can choose their own level of contributions and investment strategies. These can include individual retirement accounts, life insurance policies, and other forms of investment.

Note that for freelancers in Germany, enrolment in pension plans is generally voluntary (though there are exceptions for some professions such as language teachers).

The Pension System in France

The French pension system is based on a system of social insurance designed to provide individuals with a basic level of retirement income and to supplement that income through compulsory and voluntary means.


The system is based on three main pillars, which are as follows:

  • French state pension:
  • Under the French social security scheme, pension contributions by both employers and employees are paid into a French state pension. This pension is available to all French residents who have worked and paid into the system for a certain period of time and is based on factors such as the individual’s earnings over their working life, and the number of years they have contributed to the system.
  • Compulsory supplementary pensions:
  • The basic state pension is supplemented by an additional pension scheme mandated by law and funded by employee and employer contributions on a pay-as-you-go basis. The amount of the supplementary pension is based on the individual’s earnings and the contributions made to the pension fund.
  • Private pension plan:
  • This voluntary pension plan is a private pension plan that individuals can set up to supplement their retirement income. These plans are funded by individual contributions and are typically managed by insurance companies or other financial institutions. The amount of the individual pension plan is based on the individual’s contributions and the returns earned on those contributions.

The Pension System in the United States

The U.S. pension system is primarily based on private pension plans and employers are generally not required to offer their employees retirement benefits. Private pension plans in the U.S. can be divided into two main types:

  • Defined Benefit Plans:
  • Under this type of pension plan the employer guarantees a certain level of retirement income based on a formula that takes into account the employee’s salary and years of service. Employers are responsible for funding and managing these plans.
  • Defined Contribution Plans:
  • These are pension plans where the employee and/or employer contribute to a retirement savings account, such as a 401K plan. The benefit amount is based on the contributions and investment returns, and the employee is responsible for managing their investments.

Employers may offer both types of plans, and employees can choose to participate in either or both. In addition, individuals can also set up their own individual retirement accounts (IRAs) to save for their retirement.

Video: CNBC on how 401(K) plans have replaced pension plans in the USA

The Pension System in China

The pension system in China is a mix of a basic state pension and employer-sponsored plans.

The system is formed of three pillars as follows:

  • Basic state pension:
  • this mandatory system covers all employed citizens. Contributions are made by employees and their employer and the amount of benefit is based on the individual’s average salary over their working life and the number of years they have contributed to the system.
  • Voluntary employee pension plan:
  • this is a type of supplementary, employer-sponsored pension plan that allows employees to voluntarily contribute a portion of their salary to a pension account.
  • Private pension plan:
  • Individuals can set up voluntary savings plans, making contributions with financial institutions such as banks or insurance companies. The benefit amount is based on the amount of contributions made and investment returns.

What is the best way to manage pension plans globally?

When managing pension plans globally, there are several requirements that must be considered. Below are some of the best practices for managing pension plans globally:

  • Check legal requirements:
  • In some jurisdictions, regulatory approval may be required before a pension plan can operate to ensure compliance with local laws and regulations. Such approval may include meeting certain standards regarding funding levels, investment limits, and governance. Additionally, pension plans will typically be subject to disclosure requirements that provide plan members with key information, such as the plan’s funding status, investment performance, and fees, to help them make informed decisions about their retirement savings.
  • Check market standard:
  • Pension plans should align their asset allocation plan with their objectives and regularly review and adjust it to reflect changing market conditions and investment opportunities. Pension plans should also benchmark their investment performance against market standards to ensure that they are achieving their objectives and should monitor their fees and costs effectively to check that they remain competitive and are not eroding investment returns. Additionally, a well-managed and financially sound pension plan should have a robust risk management framework that includes identifying, measuring, and mitigating risks. informed decisions about their retirement savings.
  • Consider support from an independent manager of benefits:
  • Managing pension plans globally can be challenging due to differing legal and regulatory requirements in different jurisdictions. An independent manager of benefits, such as a Professional Employer Organization (PEO), can provide compliance support to help ensure that the plan is compliant with local laws and regulations and can help to manage costs associated with matters such as plan administration, investment management, and compliance. A PEO can also oversee the administration of employee benefits such as pension contributions, ensuring careful management and that employees are receiving the retirement benefits they are entitled to.

Managing pension plans — globally

As a global PEO, Horizons specialises in administering employee benefits all over the world, providing expertise, resources, and compliance support to help your business manage its pension plans efficiently and effectively. Contact us today to see how we can help you achieve your retirement plan objectives.

Frequently asked questions

In many countries, pension plans are mandatory for workers, either through a government-run social security system or offered by private sector employers. However, there are some countries where pension plans are non-mandatory, and participation is voluntary. For example, in the United States, participation in employer-sponsored retirement plans, such as 401K plans, is voluntary.

ent contractors amounts on regular intervals that are equivalent to a salary or wages in monetary terms.

A 401K is a retirement savings plan offered by employers in the United States. It allows employees to make pre-tax contributions to the plan, which can then be invested in a variety of options, such as stocks, bonds, and mutual funds. The plan offers tax advantages as the contributions are deducted from the employee’s taxable income for the year and depending on the terms of the 401K, the employer may match all or part of the employee’s contribution.

The purpose of an umbrella company is to stand between the worker and their workplace in a fixed-term or contracting situation, to ensure that the employee is paid in full compliance with employment and tax laws. 

Umbrella companies add a margin to the total cost of employment, that is passed on to the ultimate client. Usually, the employee does not ‘see’ the fee paid to the umbrella company.