2nd Pillar: Base and Top Up Plan - advice needed

Banks, Insurances & Third Pillar
1

Hi there,
I am an avid reader of this forum, and I need your collective thoughts on a quite unusual 2nd pillar my company has set up. I should mention this is my 4th company in CH but I have never seen such structure. I have been working in CH for circa 10 years, so the pension fund is steadily growing but we are far from talking millions.

From what I understand, the 2nd pillar includes two plans: a base and a top up plan.
Base Plan: insured salary up to a max salary of circa CHF 150k. Contributions are levied on the base salary only (i.e. 150k). No choice in asset allocation, guaranteed return as usual (different on the mandatory vs extra-mandatory part), and upon retirement, a choice between lump-sum and annuity payment. All good and vanilla Pillar 2, except that voluntary contribution are not possible.

Pros: very limited risks, choice upon retirement.
Cons: Insured salary is capped, and so will be the contributions, so the capital will inevitably be limited, essentially meaning the annuity will be capped, no voluntary contributions.

Top Up Plan: insured salary in excess of the base salary (anything above CHF150k). Contributions levied on this part of the salary, with no cap, with similar contributions than the base plan (employee and employer). Choice of asset allocation, albeit limited, with a free choice of equity allocation, from 0% to 75%. Upon retirement, lump sum payment only - no annuity possible. Voluntary contribution possible.

Pros:

  • opportunity to invest in equities while reducing taxes by making voluntary contributions to the top up plan;
  • opportunity to increase my exposure to equities (i am in my mid 30’s so the time horizon would allow it)

Cons:

  • no pension option
  • returns have been quite disappointing (75% equity plan: 4.32% average, 11.64% volatility, albeit with a short track record - started in 2018). Asset allocation is not 100% aligned with my strategy, with a big CH bias (38% CH equity)

I can definitively see why the pension provider would offer such a scheme: on the top up plan, they transfer the asset risk to me, they eliminate the longevity risk (no annuity), and the base plan, where they retain these risks, is capped. That pension provider is Swisslife:

Swiss Life Business Premium – Swiss Life

What I am looking for here are any blindspots in my assessment, any additional pro/con, and if you have a similar plan, what equity allocation you selected and why.

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I don’t need to even look at it, it screams “Scam!” to me. Insurance and investment in one tax-advantaged package, we know this. And, to add a cherry on top of it, from SwissLife.

My personal decision is to minimize 2nd pillar contribution anyway.

What does it mean in this context?
Is it an insurance benefit you get if you get unemployed? Or is it your " investment account " where you get what is there? When?

Furthermore, there was a general statement about such schemes that as you might change work in less than 10 years, the investment horizon is just not suitable for stocks.

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However, this might change my opinion. What is the employer’s match? Almost the same as your contribution? Does it mean that they effectively give you more salary if you subscribe to that?

Still it doesn’t look suitable for me to go with a high amount of stocks in that wrapper.

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The top up is essentially what is called Pillar 1e.

I also have a similar option which is even worse than yours (only max 40% equity allocation).

I plan to max it out anyway since I plan to retire early and then transfer the whole lot into a VB account which can give me a 99% equity allocation if I wish.

I’m also in a high wealth tax canton and so the wealth tax savings of the pension wrapper are also a benefit.

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5

Thanks PI,

Insured salary is the base salary minus the LPP coordination amount. It is the basis for the calculation of disability and death annuity benefits in the context of Pillar 2. It may also be the basis for unemployment benefit, not sure.

The employer contribution is higher than the employee’s, however that is also true for the base plan. Contributions to both are identical in %, only the basis changes (base plan = base salary, top up plan = top up salary). I should add that the risk premium I have to pay is lower in the top up plan - obviously, since I take most of the risk.

Also, perhaps it was not clear, but the structure is not an option (i.e. i will have to accept it), only the asset allocation in the top up plan is up to me.

6

Generally a 1e plan is considered to be an extra employee benefit. There are good reasons for this:

  • Your employer covers part of the contribution, which essentially enlarges your real salary. Unless your employer would pay you a higher salary if you did not have a 1e plan, this is pure profit.

  • You can claim tax deductions for your contributions, which would otherwise be included in your income. At the kind of salary level required for a 1e plan, those tax deductions can make a big difference. As with other pillar 2 assets, you only pay a low capital withdrawal tax when you withdraw.

  • Your investment choices are limited, partly because of legal restrictions for 1e plans. But the additional contributions from your employer should make up for the opportunity cost, and then some.

Basically, it’s hard to find a downside to having a 1e plan, except that 1e assets are not covered by the pension fund participant protection scheme. Obviously, it would be great if you had free reign to invest the money as you see fit.

Personally, I would go with the general rule for stock vs. fixed-income investments: If the money will be invested for 10 years or more, get the biggest stock component possible. Otherwise stick with bonds/cash.

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Stop. Just because the product comes from SwissLife - that doesnt mean that it is an insurance product. What the opening post describes is a normal 1e solution. The clip-level is a not higher (150k) but thats it. SwissLife has good funds and is a decent 1e provider.

The only real downside os that you don‘t know the time you can keep your funds in the 1e. Worst case, a change of employer forces you to sell your equity exposure and move the funds back into a normal pension. Meaning that I wouldnt go beyond 35% of shares.

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Thanks all, I did not know about Pillar 1e, but yeah, essentially what I am describing is EXACTLY a 1e.

It’s a clever way for pension providers to curtail their assets and longevity risks. There is also no mortality risk because If I die they simply provide the balance to my heirs (minus whatever is needed to finance the heirs’ annuities). So all these risks, for which Pillar 2 was created in the first place, is shifted back to the employee in the 1e plan. And to compensate, I get to select an equity allocation with no certainty over the investment horizon. Brilliant!

Sorry for the rant.

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Not necessarily. I haven’t checked to product, but it sounds like a non-mandatory offer for higher-salaried employees.
In that case, it’s not a scam, it’s a perk.

EDIT: I missed the above comments, they covered that, kind of.

Assuming that employees with a salary +150k can cover these risk themselves. If you earn 160k a year, 150k are covered by the normal pensions plan, only 10k are included in 1e.

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With pillar 1e, In in exchange you get a better returns as you’re assuming all the risk

The longevity risk is currently managed with very low interest and low pension (conversion rate). Moreover, 2 billions is taken indirectly each year from working people to finance retirees.

Regarding the Swisslife offers, that’s true the TER is high, the choices are limited and the allocation offered is heavily country bias. Personally, I would choose 1e plan with an high equity allocation, unless you’re really close to the retirement age.

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In regards to the rant: some 2nd pillar plans don’t cover anything past the mandatory part, so would not cover a salary above 84’600.- Having an option to cover a salary past 150 kCHF is already a benefit (though it should not prevent anyone from lobbying to try to get better and better plans as part of their work compensation, of course).

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Only the legal minimum pillar 2 doesn’t cover above 84’600.
But a lot (most companies) have plan covering the amount above 84’600.

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1e plans can be interesting but there is a big “maybe”. As with all investments, the time horizon of your investment matters a lot. And this is the catch: your employer controls your employment length and thus can change your employment state against your will and force you to liquidate your investment.

To make it worse, this usually happens when your company will be in financial troubles, which is more likely to happen when the economy is already in a bad state (i.e. stocks are down).

So, 1e plans are interesting on average, but the worst case looks quite ugly.

Additionally, if you consider your pillar 2 part of your investment strategy, it usually counts among your conservative assets (like bonds) which allows you to invest your remaining money in more aggressive ways; pension funds are really good at being conservative! On the other hand, if you chose to invest your pillar 2 into shares you will have two disadvantages: 1) you will have to find a good conservative investment for your money to compensate the 1e shares allocation, and 2) you will have very limited choice of investments in a 1e plan (you can only chose 1 out of max 10 funds) and usually those are not the cheap passive ones we love.

So, on the surface 1e sounds good, but it’s actually very limited and with important downsides.

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and to make it worse, I have seen cases where employers initiated change (M&A activity) where an automatic staff transfer was initiated. Said new employer however didn’t have any 1E plan AND HR insisted that it was illegal to not transfer your 1E amount to the new pension fund and that they would hence liquidate the 1E and forward it to the new pension fund no matter what. Meaning that the employees that got stuck in such situation did not even have the option to just “hide and self-invest” their 1E through VIAC/Finpension.

In the bigger context. 1E is an invention of the artificially low interest rates. Now as interest rates normalize and there was less subsidization challenges among actively employed and employees - I would not be surprised if quite a few pension funds turn the pendulum back to. Doubt they would just unwind 1E on the go but whenver there was a change lets say in the pension foundation, I wouldn’t be surprised if they then take the opportunity to revert back to a traditional pension.

Long story short - we lost the opportunity to turn 1E into something like a larger 3rd pillar and the concept will likely over time die out again.

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