Management employee benefit scheme: Change in the law causes movement.
For more than ten years, pension institutions have been able to offer their insured persons up to ten investment strategies as part of a pension plan. However, this option (under Article 1e of the “Verordnung über die berufliche Vorsorge”) only applies to salary components above the guarantee range of the Guarantee Fund (from CHF 126,900 to CHF 846,000; status September 2016).
With 1e plans, insured persons can tailor the investment strategy to their individual risk profile. Savings contributions are credited to a personal account and invested according to the chosen strategy. The return is allocated exclusively to the personal account; no collective fluctuation reserves are formed. Especially in the current low-interest-rate environment, the individual investment choice offers an opportunity for higher returns, however, the insured person also bears the risk. Since this is not to everyone’s taste, the 1e plan must offer at least one low-risk strategy.
System error is eliminated
1e plans are not very widely used. One reason is that implementation is associated with risks for the pension institution. According to the “Freizügigkeitsgesetz” (FZG), the insured person is guaranteed a minimum withdrawal benefit. An insured person could, therefore, choose a high-risk strategy and pass on later losses to the pension fund.
As early as 2008, National Councillor Jürg Stahl called for this system error to be corrected. In December 2015, parliament decided to amend the law on the free movement of persons. In August, the Federal Social Insurance Office invited a small group of experts to comment on the draft ordinance. Among other things, the limitation to only three investment strategies was criticised and an adjustment was demanded. The definitive ordinance should be published these days (after the editorial deadline) and will come into force on 1 January 2017. The minimum vested benefits will no longer apply.
In the BVG system, solidarity, like the joint insurance of risk benefits, is intended and desirable. On the other hand, the redistribution from active insured to pensioners, which is fundamentally contrary to the system, is a consequence of the rigid legal requirements in the BVG mandatory system. Higher life expectancy and low-interest rates have massively aggravated the situation and revealed weaknesses in the current BVG system. It is estimated that currently 3 to 4 billion Swiss francs are redistributed annually at the expense of the active insured.
Digital Transformation helps
Insured persons can protect themselves against this with a 1e solution. For tax optimisation purposes, additional purchasing potential can be created by increasing savings contributions. In combination with the protection against redistribution and their own choice of investment strategy, voluntary purchases will become even more attractive, especially since they can be deducted from taxable income. It is precisely these advantages that are likely to appeal to many managers in SMEs and in the long term will lead to a significantly higher average exit benefit.
The introduction of a 1e plan can result in a significant reduction in pension obligations under IFRS and US-GAAP. This is particularly worth considering for international companies. Depending on the degree of coverage and how free reserves are handled, a 1e solution can also be positive for your own pension fund. The effects must be clarified in advance in order to rule out any negative effects for individual income groups.
With the amendment of the FZG, new 1e offers will be launched. The digital transformation helps, especially since modern 1e plans can be offered even more flexibly and at lower prices. The price-advantage, in particular, should not be underestimated given the current low-interest rates.
Article by Beat Bühlmann, published in Sonderbund Vorsorge der Finanz und Wirtschaft, September 2016. (Article has been translated into English)