1e-pension-plans-optimizing-wealth-accumulation

"1e" pension plans: Optimizing wealth accumulation

Since October 2017, the so-called "1e" plans, which offer investors and companies a new degree of freedom in organizing their pension plans, have provided new opportunities for optimized wealth accumulation.

Pension assets have long been among the most privileged corporate holdings – in terms of both taxation and prior claims in the case of bankruptcy. In October 2017, the legislature passed new rules governing the 1e plans, which offer tactical advantages for entrepreneurs and insured management personnel.

What are "1e" pension plans?

The designation "1e plans" refers to Article 1e of the Ordinance on Occupational Retirement, Survivors’ and Disability Pension Plans. Most employees hold the majority of their assets in pension funds. Since 2006, a number of pension funds have allowed insured to participate in selecting an investment strategy for the extra-mandatory portion – provided that the insured’s annual earnings exceed 126,900 Swiss francs*. However, because until recently the investment risk was borne entirely by the pension funds, these funds have had little interest in encouraging the use of the 1e options.
This asymmetrical situation was corrected when the law was changed in the fall of 2017. Now, insured still reap the benefits of their investment strategy, but they also bear the related risks.

Freedom of choice and possible returns

For insured with an income of over 126,900 francs, the 1e pension plans offer a number of advantages: 1e pension assets are fully segregated from existing pension fund assets, meaning that all insured save into their own "pots," similar to the 3rd pillar. Because of demographic trends and the interest situation, insured no longer need to be concerned about redistributive effects in the basic fund. Furthermore, they are free to select their preferred investment strategy from up to ten options, at least one of which must be low-risk. When performance is positive, the benefits are credited directly to the investor. In addition, it is possible to have a direct effect on investment costs – which, over the long term, is a critical factor in accumulating wealth.

Conservative or more risk-tolerant?

It is wise to seek comprehensive advice when devising an investment strategy. That strategy should also be reviewed on a regular basis, since while those insured benefit from the opportunities their strategies offer, they also assume the related risks. The choice of a conservative strategy or a strategy that is riskier, but may yield higher returns, should reflect the individual’s overall situation. Shortly before retirement, for example, it may be wise to shift to less risky investments. It is important to note, however, that investment strategies can be regularly modified, for example in response to a change in a person’s financial situation.

Companies: Releasing equity capital

Businesses, too, can benefit from 1e pension plans. Companies that are subject to International Financial Reporting Standards or US GAAP are required to create risk provisions for pension funds in Switzerland, which tie up equity capital. 1e is the only way to avoid these provisions and thereby free up equity. 1e plans are particularly suitable for company owners who use pension plans as a tactical instrument as part of a withdrawal strategy – in other words, for entrepreneurs who, at various levels, maintain reserves that are not required for the company’s operation and who have hesitated to transfer those reserves to their private assets. In this context, it is important to note that if approved by the voters, Tax Proposal 17 will take effect in approximately two years. Dividends will then be taxed at a higher rate than at present. Depositing dividends in the 2nd pillar will mitigate the effect of a higher tax burden. Credit Suisse has observed that many companies are very aware of these issues. This is also clear from the increase in the number of inquiries that have come in since the fall of 2017 regarding the 2nd pillar and 1e plans.

The 2nd pillar of pension provision: Statutory, extra-mandatory and management plans

1e plans for managers

Extra-mandatory BVG* insurance

Statutory BVG insurance

No BVG insurance 

Earnings of up to CHF 846,000

Lower limit CHF 126,900


Lump-sum withdrawal

As a rule, no pension is received

 

Earnings of up to CHF 126,900 

Lower limit CHF 84,600
 

Pension or lump-sum withdrawal 

Conversion rate is determined mathematically, based on market criteria

Earnings of up to CHF 84,600 

Lower limit CHF 24,675
 

Pension or lump-sum withdrawal 

Conversion rate set by law

 

Earnings of up to CHF 24,675 

 


Pension 

Regulated by the state

 

Personal consultation

Contact us
We're always here to provide advice and answer your questions – in person as well.

* As of January 1, 2019, the entry threshold (minimum annual salary) for 1e plans increases to 127,980 francs.