Executive pension plans, 1e pension plans & co.: optimizing pension solution models

Insights, Wealth & Pension Planning
14/06/2022 por Alexander Spillmann Tiempo de lectura: 4 minuto(s)
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How entrepreneurs, top management members and self-employed persons can make the best of their options

Employees with high income often want to pay as much as possible into their occupational pension provisions. That way, they save on taxes and improve on their old-age provisions. A growing number of Swiss companies, therefore, implement executive pension plans for their top management. However, often these pension plans do not take full advantage of legally permissible opportunities.

  

Many people do not know: In the extra-mandatory part of the second pillar, entrepreneurs, members of top management and self-employed persons have numerous possibilities open to them. For example, by separating basic and executive provisions, they can avoid the cross-subsidization of inflated occupational pension promises to lower income earners.

Do you want an individual solution?

Vontobel offers a wide range of solutions ranging from executive provisions and vested benefits to third-pillar benefits.

Thus, you can combine tax advantages with a customized investment strategy that fits your personal risk profile.

 

 

  

Why it is worth separating your extra-mandatory provisions

A pension fund with an integrated model does not address the needs of the insured persons; rather, it must fulfil its high levels of obligations in the short term. I.e., promised provision comes into conflict with minimum interest and conversion rates. An inflated conversion rate for mandatory provisions tends to lead to integrated pension funds setting exaggeratedly low conversion rates on extra-mandatory provisions, which encourages cross-subsidization.

Thus, more and more often, mandatory and extra-mandatory provisions are separated from one another and invested into two different solutions. This offers the opportunity of optimizing the individual solutions to better suit personal needs. It also reduces cross-subsidization as far as is possible.

  

Integrated pension fund

Supplementary provisions

   
 

Mandatory provision

 
         
         
         

 

Kadervorsorge mit Standard-Pensionskasse

Two-fund model

Silhouette einer weiblichen Person (Icon)
Silhouette einer männlichen Person mit Krawatte (Icon)

Supplementary provisions
Extra-mandatory provisions

Portion of salary over and above CHF 129,060 (1e-solution) Individual selection of personal investment strategy on the part of insured persons.

Portion of salary over and above CHF 86,040 (universal strategy) Individual selection of parameters for your pension fund, universal strategy for all insured persons.

Mandatory provisions
Basic provisions

Portion of salary from CHF 25,095 to CHF 86,040 BVG (OASDI) minimum interest rate and fixed pension conversion rate.

 


Source: Vontobel. An executive pension plan offers the possibility of achieving more individual provisions goals.

 

  

An example of the advantages of an extra-mandatory pension plan

In a so-called 1e pension plan, the annual savings premium may amount to max. 25 percent of the insured annual salary, whereby a maximum salary of CHF 860,400 can be taken into consideration. A company may offer up to three pension plans, with differing levels of savings contributions, for each employee category. This means that insured persons may decide for themselves whether they pay e.g., 15, 20 or 25 percent of their insured salary into the plan. Employer contributions must be the same for all three plans.

  

The following example shows optimization potential:

A self-employed solicitor, 55-years old, OADI salary CHF 300,000

  AHV (OASDI) salary

▼CHF 300’000

AHV (OASDI) salary
 

Savings contribution 19%



▼CHF 129’060



Savings contribution 25%

 
 


▼CHF 25’095


Savings contribution 19%

       
       


Pension plan


Current (integrated solution)

 


Solution with extra-mandatory provisions 1e

Savings contribution p.a.

CHF 52’232

 

CHF 62’506

Max. old-age capital

CHF 1’243’000

 

CHF 2’031’000

 

Additional purchasing potential of
CHF 788,000


Source: Vontobel. In this case, an executive plan is useful: Higher annual savings contributions and higher voluntary buying-in.

A 55-yearold solicitor earns CHF 300,000 per annum. The current pension plan insures the coordinated annual salary, the savings share amounts to 19 percent. The share of the salary between CHF 25,095 (coordination deduction) and CHF 129,060 is insured as in the past. New: On the share of the salary over and above CHF 129,060, the savings premium is raised to the legal maximum of 25 percent. Thereby the solicitor’s annual savings contribution goes up from CHF 52,232 to CHF 62,506 per annum. The additional savings premium reduces taxable income and expanded pension provisions increase potential for voluntary buying-in. The solicitor may now pay around CHF 788,000 more than previously into the second pillar and may deduct that amount from taxable income over a period of several years.

  

The second major advantage: Individual investment strategy

In addition to customized pension plans, 1e pension plans also allow all insured persons to pursue individual investment strategies. Insured persons of any pension fund are different with regard to risk capacity and propensity. In an integrated pension fund solution, the principle is “One size fits all.” All insured persons are in the same “pot” and must allow their capital to be invested according to a standardized strategy. In contrast, with an extra-mandatory plan, they benefit from a range of investment strategies and can flexibly tailor coverage to their personal needs and to the current capital market situation.

  

Overview: Why an extra-mandatory solution is often the right one

Pension funds need to adapt their respective investment strategies according to their structural risk capacity. For that reason, as a rule, they can only invest moderately in equities. In addition, insured persons only benefit in part from the returns which are generated because these are used for technical adjustments and for building value fluctuation reserves. Against this background, an individual investment strategy which is tailored to your own risk capacity makes sense and makes 1e extra-mandatory solutions even more attractive.

It would enable you to largely eliminate demographic challenges and the above-mentioned problem of cross-subsidization. Generally speaking, modern solutions in the field of occupational pension provisions coordinate retirement capital with free assets to achieve an advantageous overall asset allocation.

  

Systematic and long-term planning

Over and above a certain level of income, you could save a considerable amount of retirement capital if you plan your extra-mandatory coverage systematically and for the long term – and save on tax at the same time. You also benefit from an individual investment strategy. In addition, later on, when you start drawing your retirement capital, there are various further optimization possibilities.

It is worth tackling your future provisions early on. Our specialists would be pleased to help you find the best solutions for preparing for your retirement. Contact us for an initial discussion, without any obligation.

  

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