Retirement savings plans for high earners are controversial, among industry experts and savers alike. Some of the criticism is justified, say experts. However, the benefits of personal responsibility and choice outweigh the disadvantages.
The topic of retirement provisions is heating up many minds: «In addition to the controversy surrounding conversion rates, retirement age and the security of the system in general, questions of personal responsibility and solidarity are also being hotly debated», explain the experts from 'Maklerzentrum Schweiz', an intermediary network for providers of insurance solutions. For example, insured persons wanted to know how much of their retirement savings could be withdrawn early and why, or whether a lump-sum withdrawal was preferable to an annuity when they retired. And the brokers know: For some time now, another topic has been occupying the minds of the insured - the 1e pension plans.
Self-determined investing in the extra-mandatory area
So-called 1e pension plans are individual savings plans for insured persons with higher incomes. With 1e plans, the insured person can influence the investment strategy in the salary range above one and a half times the upper BVG salary limit, i.e., salary components from the amount of CHF 132,300 can be insured. The insured person can choose from a maximum of ten proposed investment strategies, at least one of which must be low risk. Salary components up to 132'300 Swiss francs will be managed as before, without investment choices by the insured.
A change in law has made 1e plans possible
1e plans for the extra-mandatory area of occupational pension provision have been around since 2006. However, as part of the amendment to the Vested Benefits Law, the Federal Council brought a new ordinance into force on October 1, 2017, which has really enabled the spread of 1e plans: Pension plans no longer have to pay insured members a guaranteed minimum amount when they leave their pension fund. This means that insured persons who make use of the investment choice options with their pension fund will not only be able to take a higher investment return with them when they leave the pension fund but will also have to assume any losses. This means that an investment loss does not have to be borne by the remaining insured in the 1e plan, as was previously the case.
Who benefits the most?
«1e pension plans offer insured persons the opportunity to invest their pension assets in a more self-determined manner and to adapt the investment strategy to their individual needs and risk preferences», the brokers explain. And they continue, «Risk tolerance also depends heavily on investment horizon; younger insureds may choose riskier strategies than insureds nearing retirement.» Brokers see the greater flexibility and freedom of 1e plans as the biggest advantage. However, this freedom comes with more personal responsibility, and any investment losses must be carried by the insured themselves, they warn.
Employers also benefit
«1e plans can also come with noticeable benefits for employers», the brokers highlight. Risk considerations usually play a role here. The employers' obligation is limited to the contributions to the pension fund. The reorganization risk would be eliminated since the insured would bear the investment risk themselves. This would lead to a reduction in pension fund obligations. In addition, companies that prepare their accounts in accordance with international accounting standards such as IAS/IFRS or US GAAP could treat 1e plans as defined contribution plans. «There are those who say that 1e plans were mainly initiated by employers - for the purpose of reducing balance sheet obligations», the brokers said.
Do 1e pension plans contradict the 2nd pillar?
«The criticism most frequently raised by skeptics revolves around desolidarization», the brokers explain further. For example, critics claimed that 1e pension solutions are firstly only for the rich and secondly contradict the idea of the 2nd pillar. The pension system would be undermined by individualization, and solidarity would be trampled underfoot. One of the main tasks of occupational pensions is to protect the insured, he said. «This raises the question of when and under what conditions insured persons should or may be released from this protection. Some public pension funds are therefore unlikely to want to offer 1e pension solutions for reputational reasons such as solidarity and protection of the insured.»
Are the investment strategies window dressing?
The brokers cite another point of criticism regarding the investment strategies offered: «Since insureds usually choose a medium-risk strategy, i.e. an investment strategy offered by the pension funds themselves, critics see some of this window dressing in these strategies.» After all, they say, the pension funds would invest the insureds' pension assets in this way anyway, even without 1e plans.
In addition, critics claim administrative difficulties: «Smaller pension funds are disadvantaged because they do not have the necessary resources and systems to introduce 1e plans themselves. They must resort to external providers, which involves a lot of effort and expense.»
1e plans help prevent redistribution
«However, these accusations can be countered by a few things», say the brokers. According to the Federal Statistical Office, 1e plans would only be an option for about one in ten insured persons. The idea of the 2nd pillar, they say, is that individual insured persons accumulate a credit balance that finances their benefits after retirement (funded method). But many pension funds would have to redistribute funds from the extra-mandatory area to keep their pension promises. The legally prescribed conversion rate of 6.8% in the compulsory pension system would lead to new pensions being too high - they would be cross-subsidized by the active insured. Because of the high conversion rate, a BVG pension for new pensioners requires a lifetime interest rate that is several percentage points above the current minimum interest rate of 1% - not to mention the negative interest rate level that has prevailed for a long time. Thus, a systemic redistribution from rich to poor and from active to passive is taking place.
However, the 2nd pillar does not provide for a generational contract with redistribution from young to old, as is the case with the pay-as-you-go system. «With 1e plans, therefore, one cannot speak of a desolidarization, on the contrary. The redistribution from young to old has taken on such proportions that there is sometimes talk of exploitation. This undesirable development can be partially avoided with 1e solutions», the brokers are convinced. This is because the insured persons choose the investment strategy for their 1e capital themselves, settlement takes place in an individual account, and the pension fund does not have to compensate for losses or hold fluctuation reserves for these funds. «The only criticism that can be allowed to stand is that capital flows out of the collective because of the outflow of extra-mandatory pension assets into 1e plans. This could make it more difficult to restructure pension funds in the event of an emergency», the brokers add.
Risk capacity is decisive
However, policy holders who want to benefit from the option of 1e plans and take more personal responsibility for their retirement planning must consider a few things: «The investment strategy must be chosen carefully and correspond to the age, risk capacity and risk tolerance. People nearing retirement, for example, might opt for a high proportion of cash and the safest possible investments», the brokers explain.
The investment strategy of the 1e solution must also be carried out in the context of the overall assets. The brokers advise conducting a holistic risk analysis of the assets and paying attention to broad diversification. It should also be noted that the assets accumulated in 1e plans cannot generally be withdrawn as an annuity but must be withdrawn as a lump sum.
Ultimately, however, brokers are convinced that 1e plans are an important complement to retirement products and should be welcomed because of the personal responsibility they require.