At a time when the Confederation is trying to launch a new reform of the 2nd pillar, business managers are looking for the most efficient solutions to make their assets grow and plan their retirement as well as that of their employees. Occupational pension plans offer a range of possibilities that will have a considerable impact on the amount of the annuity as well as from a tax perspective.
Organising one’s pension plan is a major issue for companies and employees alike. The 2nd pillar [Federal Law on occupational pension, survivors’ and disability schemes (LPP)]) offers several possibilities.
The 1e refers to the section bearing that number in the second ordinance on occupational pension plans (OPP2).
A 1e plan can be set up only for the portion of annual salary exceeding CHF 129,060. Unlike pension funds which only have one strategy, a 1e can offer up to 10 investment strategies, ranked according to investment risk.
It has many advantages for both the employer and the employee: it is not necessary to constitute reserves. In practice, the choice made by the insured does not affect the others. For companies subject to IFRS accounting standards, the pension commitments on the balance sheet can be reduced, which in turn improves their shareholders’ equity. Lastly, as Jean-François André points out, "the 1e can be a tool for attracting and retaining managers or key people in the company." The employee benefits from tax optimisation through voluntary top-up payments, they can choose their investment strategy according to their risk tolerance and can change it regularly, which can be useful in periods of uncertainty in the stock market. This flexibility is found in the choice of investment strategies, which can be active, passive, responsible, or bespoke - in short, adapted to the situation and wishes of the affiliated company’s pension fund commission.
The impact of financial planning: 1% additional return on your retirement savings at the start of your career corresponds to a 20% increase in pension...! Every situation needs to be analysed in order to make the best decisions, and this holds true for both employers as well as employees. Seek advice from an independent pensions expert to help you in making the right decisions.
There are three main factors that explain the current pension situation.
First of all, life expectancy continues to rise in Switzerland. This is good news, of course, but the consequence is that retirement pensions will decrease. “In 2021, for the first time in its history, the conversion rate on LPP assets set by insurers was lower than the statutory rate (by way of a reminder, 6.8%)”, explains Jean-François André, Head of LPP brokerage at Qualibroker-Swiss Risk & Care.
Secondly, bond yields remain low, causing a deficit in the 2nd pillar.
Lastly, the successive failures of the Association Vieillesse et survivants [Old age and survivors’ insurance (AVS)] and LPP reforms over the past few years have meant that there are fewer new solutions to try.
In view of this situation, Jean-François André reminds us that AVS is in good shape with its Compensation Fund amounting to nearly CHF 39 billion at the end of 2021. Pension funds have an average coverage ratio of more than 117% (i.e. more than CHF 170 billion in reserves, in addition to their annuity provisions), which is also a sign of great solidity.
ESG funds, cryptocurrencies, ... pension funds are opening up to new investment opportunities. Are they a snare or profitable alternatives - Jean-François André, Head of LPP Brokerage at Qualibroker-Swiss Risk & Care, and Alberto Gonzalez, Market Head Romandie at Finpension AG, review the situation.
Alberto Gonzalez: FINMA, the financial market supervisory authority, has authorised the first cryptocurrency fund under Swiss law in September 2021. The situation is that
it is not possible to invest directly in cryptocurrencies for your pension but only via a crypto fund i.e. in a collective investment scheme. In any event, this type of investment should be reserved for «high» and «very high» risk investment strategies, and should not exceed 5% of pension-related investments.
Alberto Gonzalez: Investments known as “responsible” are the current trend. The companies that form part of an ESG fund’s investment strategy are assessed on the basis of environmental, social and governance (= ESG) criteria. They are thereby given an ESG rating. Once the individual company ratings have been complied, an ESG rating is obtained for the ESG investment fund. It should be pointed out that this assessment does not correspond to any international standard. Interpretation will vary from one country to another depending on the assessment criteria retained. At this point in time it is therefore difficult to compare companies and the rating remains indicative.
Jean-François André: As a general rule, companies choose their pension fund on the basis of its costs, the quality of its administrative management, its solidity, the security of its processes and its returns. We have nonetheless found that over the past 2 years, clients have been more frequently asking for pension funds to comply with ESG criteria. Market players are following this «greening» trend, even if not all funds are ESG-labelled. Do ESG funds perform well? Isn’t the question really: are we willing to sacrifice some performance in return for sustainability, which is in itself another form of performance?
This article was published in Insurance Inside n°27 - September 2022.
The stakeholders: Alberto Gonzalez, Market Head Romandie at Finpension AG and Jean-François André, Head of LPP Brokerage at Qualibroker-Swiss Risk & Care.
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