Meeting the growing demands for customization with a "1e" pension plan

So-called "1e" pension plans have various advantages for not only employees but also companies and business owners offering extra-mandatory insurance. Besides transferring company assets to the pension assets, "1e" plans can also help take some of the burden off a company's balance sheet.

How "1e" pension plans work

Article 1e of the Ordinance on Occupational Retirement, Survivors' and Disability Pension Plans (BVV 2) states that pension funds are permitted to offer "1e" pension plans for salary components in excess of CHF 126,900*. The corresponding salary components must be insured in a separate legal entity. In addition to the initial foundation for salaries in the mandatory and extra‑mandatory insurance ranges up to the 1e salary limit, a second foundation is created to cover extra‑mandatory pension provision for salaries above that limit. To implement "1e" pension plans, companies can either establish a new, dedicated foundation or join a collective foundation with "1e" pension funds. The desired influence, cost considerations, and, in particular, experience in the area of pension capital investing are the most important evaluation criteria from the standpoint of the employer. If a company decides to offer "1e" pension plans, then all of its employees who meet certain criteria defined under pension provision law are required to insure those salary components as part of a "1e" pension solution. The limit for the "1e" solution can even be set higher than CHF 126,900.

"Article 1e" plans have four main benefits for employers. First, they eliminate the risk of coverage for asset losses or the cost of restructuring on a portion of the pension assets. Second, they eliminate the long-term pension obligations on the "1e" pension assets because those are normally paid out as lump sums. Third, this lightening of the burden on equity capital on the balance sheet can prove to be an added advantage, especially for companies that report according to international accounting rules. Fourth, middle management plans are one solution for converting corporate assets into personal assets with optimum tax benefits as part of income and asset structuring for business owners.

An answer to growing demands for customization

From the viewpoint of the insured, "1e" pension plans are an answer to the increasing desire for customization of pension solutions that has become noticeable in recent years. Depending on their risk profiles, the persons insured through them can choose from up to ten investment strategies, but at least one of them must be low-risk. That way, the insured individuals may potentially benefit from higher returns. In addition, they do not have to accept irregular system-based redistributions between the gainfully employed and pension recipients because their "1e" benefits are no longer part of the collective funds consisting of mandatory and extra‑mandatory insurance. However, unlike other pension solutions, the insured bear the entire investment risk themselves and are paid a lump sum upon retirement. Insured individuals need to be aware that unfavorable market developments or even a stock market crash can lead to heavy losses in asset value. In this context, individuals need a certain amount of know-how when it comes to investment of assets or must receive appropriate advice from their pension fund about the risks and costs involved. A key benefit associated with "1e" plans is the early and detailed analysis of and planning for financial situations in old age that often occurs too late with other pension solutions.

"1e" pension plans at a glance

Advantages

For employers For insured persons
  • No shortfall in cover for the extra-mandatory employee benefits fund possible because the insured bear the risks themselves
  • When the reserves are accounted for as defined contribution plans, they can be reduced to cover asset losses in employee benefits insurance (according to IAS 19)
  • The pension solution can be optimally customized as needed
  • Protection from redistribution because the pension assets in the extra-mandatory benefits fund are managed separately
  • Investment returns can be optimized based on the revised liquidity and risk restrictions
  • Investments can be regularly adjusted according to one's personal situation and planning

Disadvantages

For employers For insured persons
  • Increases the complexity of employee benefits insurance
  • Requires additional review of surpluses and basic insurance
  • Less ability to restructure the existing institution
  • Requires insured persons to bear the investment risk themselves
  • Unlike middle management plans, additional contributions are allowed only without paying interest on the planned pension assets
  • Upon departure (retirement, change of employer, unemployment), losses may be suffered if the stock market environment turns unfavorable

Similar plans are widespread in the US

"Article 1e" pension plans closely resemble the 401(k) plans known throughout the US. The US pension system has only a few pension funds granting employee benefits insurance in the form of fixed pension benefits ("defined benefits"). Significantly more widespread are 401(k) plans ("defined contributions"), in which the investment risk is transferred to the insured and employers are not required to guarantee the retirement capital. Insured persons from every income bracket can contribute up to USD 18,500 (as of 2018) annually tax-free. Unlike in Switzerland, contributions from employers are not regulated by law in the US. Nevertheless, almost all companies offer them as part of their compensation packages. The choice of a 401(k) as an investment strategy rests in the hands of the insured. Depending on their risk tolerance and remaining time horizon, they usually have between five and ten options from which to choose.

Personal consultation

Contact This link target opens in a new window
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.