I had an interesting idea how to get higher second pillar pension fund returns. It joins some ideas on the forum, but I didn’t find them in problem-meets-solution form yet. A lot of things are still unclear and I will fill them in once I found answers. In the meantime I would like to get your input. I hope to shake out problems and better solutions that are in my blind spot. Maybe it will even generate some good content for this forum.
The problem:
Second pillar returns are low because they have a lower risk tolerance because they have a shorter investment horizon than you because they have short term liablilities to pensioners and soon-to-be pensioners.
You can not choose your pension fund. It comes with your employer.
You can put your second pillar money in vested benefit foundations at Finpension, Viac, etc. at nearly a 100% equities when unemployed. But you have to give all this money to your new pension fund once you start to be an employee again. It is illegal to not do so.
Other solutions:
You could be self employed. You don’t need to join a second pillar pension fund. You can even cash out all that money. But now you are restricted what jobs you can take up. There is less security in the jobs you can take up. You need to avoid being classified as an employee.
You could just keep your money at a vested benefits foundation. Although this is illegal there was not much enforcment till now.
Cash the money out through other legal means. Buy living property, leave the country, etc. They all have their proper drawbacks and limitations.
This solution:
You could set up a LLC (Limited Liablility Company) and employ yourself. Your company can choose its pension fund (given they accept your company). Every time you change jobs you only fill up the pension fund of your LLC. The provider Gemini does have the following benefits:
Each customer (company) gets their own employee benefits unit seperate from others.
For volumes below 10 millions they have plans up to 45% equity plus another 30% real estate (and infrastructure). That leaves only 25% in bonds, liquidity, mortgages.
The TER is claimed to be 0.44% for the fund. I don’t know yet what other costs lurk hidden.
But there are drawbacks:
You need to be employed at your company. That subtracts from to your legal maximum weekly working time. Also your main employer might be difficult about having another employer.
You need some capital to found a company (at the minimum 20000 CHF of equity contribution + notary, etc.). But you can use the equity contribution in the interest of your company (e.g. buy ETFs if that’s an intended purpose of your company). So the equity contribution can fall below the initial amount.
There is overhead in time, money and knowledge. There is a strict requirement for accounting. Even if there are no earnings there are taxes (could be quite low, 35 CHF in Zurich, Zurich). There are a lot of laws to be minded. And probably more.
Remaining Questions:
You probably want to pay yourself a low salary at a low hours. There are still more attractive free investment options than this pension fund. Also the social contributions (AHV/AVS, etc.) eat about 12% of what you pay (yours and your employer’s part). But will Gemini accept you (the company) as a customer and you (the employee) as a contributor?
Even though your salary is low, where does your company source this money from? You could pack some paying hobbies or side gigs into your company. If you own real estate, you could service the real estate through your company (or have the real estate inside the company). But those are not general solutions.
What financial overhead in addition to the TER would Gemini demand?
Gemini says the employee benefits unit is run as an autonomous pension fund (in contrast to full insurance or semi-autonomous). What does that mean exactly? As far as I understand it means that your company is on the hook for all risks. If there is not enough coverage the company can be forced to fork out the difference. That can happen if you become disabled or if the fund has to much negative return. It will still be your money as you only employ yourself, but the spike in liquidity demand could be problematic (e.g. your company becomes bankrupt, or needs to exit positions in an untimely manner).
How do you wind the whole thing down if you want to exit this scheme?
If you look at average returns. If you look at risk-adjusted results, they are great. You never lose money with the 2nd pillar. Would you be able to find a variable return AAA grade bond that would be giving you 1 to 4% p.a. return in CHF between 2008 and 2021?
I don’t agree on this one. The investment horizon of a pension fund is way longer than your investment horizon, it’s basically infinite. If they had a short investment horizon, they would only invest in bonds, cash and money market securities. Pension funds actually have often pretty decent returns and due to their size they have access to vehicles like Private Equity, Infrastructure and other alternative investments.
The only thing that’s often low is what they pay you as interest, because they need to have reserves for bad years (they are obliged to pay out a certain % each year), need to finance pensioners and cover death/disability benefits with their returns.
Just look at the current year, up until now I’m more than happy that I receive +x% at the end of the year and not having lost 20-30% of my pension fund money.
Of course, they don’t have a short time horizon, that is why I wrote shorter. Whilst they might theoretically exist for an infinite time, their investment horizon does not. Their liabilities need to be paid soonish and even the over-coverage is only used to compensate risk. Anything they actually have in excess, that has an actual infinite investment horizon, is paid out to the owners or contributors.
But this doesn’t really matter. What matters is, that the whole contraption pays lower expected interest than I could get elswhere within my tolerance for risk (Which is higher still than the average contributor). That’s why I was thinking about this topic. But thank you for your thoughts about it.
Did you have any ideas about the rest of my write-up?
I’m curious, if you don’t care about pillar2, can’t you just do minimum contributions? I only have 50k of mandatory portion after 10y of contributions, it’s less than my pillar3a contributions in the same timeframe.
Or is the issue that you have employers with generous pension plans? (in which case being self employed allows you to have a bad pension plan instead?)
Even in the optimal case minimal contibutions will be at least 7% of your salary (coordinated, etc.). That is still a significant sum. You can have that compound at 1% or you can have it compound at a much more competitive rate under your control.
With this solution every time you switch jobs:
Which makes it compound at the competitive rate till retirement. At which point you wind down the scheme. You could either take the cash, or take a pension (, or first transfer your money to the pension fund of another employer to benefit from the unjust wealth redistribution going on right now).
I’m not really interested in this, the pension plan of our company is pretty decent, they pay around 3% on average. That’s great for an almost risk-free investment. I also want to make sure that my wife and my daughter (that will be arriving soon) are covered in case I suddenly die/get disabled.
Anyways, some remarks/food for thought:
If I understood correctly, your idea only works if one switches jobs regularly. What if you are happy where you are now and work there for the next 15 years, would you switch jobs just to get more return on your second pillar?
Is your second pillar soo high in relation to the rest of your portfolio, that it has a significant impact if you increase the return of it?
Did you ever try to talk to your employer about possible changes to the pension plan?
Seems like a lot of hassle for me to get there in the first place and I can’t assess how difficult it will be to get accepted by Gemini or similar institutions.
You’re coming from the pillar 2 angle while most people aiming for a “Me Inc.” solution have other benefits in mind: deducting expenses through the company as a way to save massive tax. The tax man is fully aware of it and might not tolerate certain kinds of self-employment schemes.
As for pension funds, I had the same ideas as you: their risk appetite does not suit me, I want to invest differently and they only leave me with meager returns in good years.
As pointed out by @Burningstone, I would welcome their skimpy 1% in a year like 2022. I however, have withdrawn the super-mandatory part of my pension fund and played the voluntary contribution game before that. The cash is now part of my wealth. Since becoming employed again, I find there is one huge difference between my previous and the current pension fund: the employer contribution was 17% and is now 8% (of salary).
Like you say, you cannot choose the pension fund when changing companies, but you can use your knowledge of the numbers to negotiate a better salary. I did it and got a 10% increase.
I have chosen employment again and can further choose to either make voluntary contributions to my current pension fund (and save on income tax now to later pay tax on pension income) or invest the withdrawn money however I wish (and participate fully in any up- or downside).
I think that optimizing the pension fund is not sufficient rationale for self-employment.
If I got you correctly, you yourself became self-employed (special employment status in Switzerland). That’s how you cashed out. In my solution you always stay an employee.
Still if we take @nabalzbhf’s 50000 CHF and assume there are 20 years left.
p.a.
20 years factor
Increase
1%
1.22
11010 CHF
5%
2.65
82665 CHF
Now, those are not exact predictions, I don’t know the future. But an expected extra in the ballpark of 71655 CHF is probably well payed work for the time invested. Also probably there is more money flowing in over time, so your work pays even better. Fringe benefits include already having a company for other plans, and knowledge about the administration part of running small companies. Also you have high controll of this money. If you can avoid unfavorable conditions by choosing or changing to a better provider.
Can you please argue in good faith and stop gatekeeping? Mute the topic or go somewhere else if you can’t baer other people have different ideas from yours. You are off topic.
The second pillar is not for consumption by others. It is your money, pooled to manage risk. It must compensate my risk, not the risk of others. We have AHV for wealth redistribution.
I work within the framework of our laws. I’m not bending the intention of the laws more than what is currently going on in the second pillar. I’m certainly not breaking them. I even offer a different option to the illegal keeping of funds in vested benefits foundations.
Also I would have thought that this year, people realize the 5% return is at best an average over very long time period, and there can be high volatility.
It would be a burden to society if it had to shoulder all those people with a failed 100% equity bet for their retirement… (because in practice they’d end up using social benefits). That’s the reason why pension funds have regulation on the kind of risk they’re allowed to take.
Hm, I found a maybe-good angle for sourcing the salary. The invested 20000 CHF should have some returns. If we assume 5% we can pay out nearly a 100 CHF per Month. Someone needs to do the investing, so someone can also get paid?
As far as I understood the tax authorities prefer salary paying over dividends. I heard they even force you to take a salary instead of dividends if you are not employed enough elsewhere.
The disadvantages are:
Your marginal tax rate as a natural person. So a maximum of 50%. About half are the dividends. You would have paid for them anyways. So about 25% for 20 years salary. 100 CHF * 12 Months * 20 Years * 25% = 6000 CHF (+ 3920 CHF lost opertunity interest). Maybe you could pay less. 600 CHF per year still seems appropriate for spending some days a year checking and handling your static investment. Also your marginal tax rate could be lower. Last you could hold (part of) your bond allocation there. That would make no difference taxwise.
For equity there is a high likeliness your principal falls below initial value. In that case you might have to prop it up again. That will cost some extra money at the notary and your time.
I don’t understand your proposed scheme, you want to create a company that would allow for you to be considered self-employed (so would require to give you enough returns to make it a living wage for you) even though you would be gainfully employed by another employer “on the side” with a much higher salary derived from that activity?
I’m not a specialist and may very well be wrong but the only way I can see that work is if either your company sells services and your other employers would be clients of your own company (you have to have several different clients or the AHV office won’t accept that as self-employment) or your company “lends” you, as an employee, to your other “employers” (which is basically the same).
I don’t see how you are expecting to pull this off, but maybe I’m short sighted. It sounds like the usual being a consultant rather than an employee deal, with its usual advantages and limitations.
No, I would be a normal employee at my own company (with low hours). Every time I switch main employers the pension fund money goes to the pension fund of my own company.
We disagree on the intent of the second pillar and the morality in this instance.
If the company has their own employee benefits unit the money stays in the unit or is paid out to its beneficiaries. I found multiple collective foundations providing this. At least some of them have minimum sizes. I didn’t find minimums for Gemini, but references to having less than some number.
You are right that I can’t set the interest directly. But the employee benefits committee can. They would be choosen by me (company and sole contributor).
Regarding reserves: As far as I understood the employer can add to them voluntarily.
That was somwhere in the back of my head. Was it you who explained it first on this forum? I don’t understand this mechanism very well. I am not able to make a good prediction. I try to invest in things I understand well. Do you have some predictions with numbers?
I once investigated such possibilities on behalf of my employer. I had complete freedom to find creative but compliant solutions to reduce the tax burden for all our employees. Your proposal is interesting but the costs of maintaining a company are too high.
Your best option is to redirect your pension capital to a Freizügigkeitsstiftung every time you switch employers.
Yes, you are supposed to redirect it to the pension fund of the new employer. But there is no fine or other punishment if you send it to a Freizügigkeitsstiftung instead. For this reason, many people do so. There is simply no legal consequence whatsoever.
It is not a matter of lacking enforcement. The civil code is unambiguous in that it does not provide any means of enforcement. Swiss law is based on a civil code, unlike Anglo-American common law. If the code does not specify a fine, there cannot be a fine. The Swiss system is crystal-clear.
Occupational pensions are subject to a special legislation. The sanctions are set by the art. 75 to 79 from said law. Important to note is that we are talking of penal sanctions and not only civil offenses:
In French (LPP): Fedlex
In German (BVG): Fedlex
In Italian (LPP): Fedlex
The terms and conditions of the pension funds can include further limitations/penalties.
I’ll not dive much further on the topic because the swiss legal system is complex and relies for a large part on previous judgments by courts, most of which I, like most of us, have no knowledge of. Legal advice provided on the internet has great chances to be incomplete and can lead to great harm to the person trying to apply it if doing so without consulting a professional specialised in this specific legal field. Stating that no sanctions whatsoever can be applied to people trying to dodge their obligation to contribute previous pension assets to their new pension fund upon getting new employment is reckless at best.
Disclaimer: I am not a lawyer, I am not specialized in swiss pension laws in any kind, I have no knowledge of previous judgments by swiss courts on the matter.
The obligation to transfer vested benefits assets to the new pension fund in case of new employment comes from the federal law dedicated to vested benefits (LFLP/FZG), art. 4, al. 2bis
Since there is a requirement toward the insured person to announce their vested benefits assets to the new pension fund and their entry into a new pension fund to their vested benefits fundation, I’d argue that that behavior enters the field of “not declaring information”. Undue benefits could be gathered if, on top of that, benefits for death/disability end up being paid by the new pension fund.
I leave to people with real legal knowledge to assess whether the two laws are linked and if the penalties envisioned in the LPP/BVG apply to informations that were required to be transmitted by the LFLP/FZG.
I would guess that the heaviness of any penalty that could occur as a result of such behavior would depend on both the intent of the perpetrator and whether any actual harm came out of it. I wouldn’t go so far, however, as to assume that a dedicated pension fund fundation/federal-/cantonal office willing to dedicate ressources to enforce the obligation to inform the new pension fund of existing vested benefits assets couldn’t win in a legal litigation and enforce penalties if they really put their mind to it.
Edit:
I can imagine a tax office diving deeper if unwarranted pension buybacks were to be made as the result of hidden vested benefits accounts. I could also imagine a civil litigation between a married/soon to be divorced couple getting more complicated in case some of the pension assets end up being hidden (which they theoretically couldn’t be).
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