Pillar 2 turbo-charged

With the current entrance of VIAC in the market for pillar 2, it‘s time to step back and ask ourselves, whether there are better ways to save our money.

Let me outline my rough idea.

Idea

Let your funds grow outside the traditional retirement fund and move your money back to get an annuity.

Transfer pension funds to vested interest account (Freizügigkeitslösung) invested in stocks every time you change jobs to achieve market performance and bring the funds back into your pension fund before retirement age to get a guaranteed pension with higher returns than a typical safe withdrawal rate.

Benefits

  • Let your capital grow outside the normal pension fund restrictions
  • Having two accounts lets you spread the market risk of bringing money back to retirement plan
  • Vested interest accounts are tax exempt
  • You can profit whether you FIRE or not

Counter arguments

  • No christal ball
  • You may not find a job age 64
  • Nobody knows what the retirement system will look like in 30+ years

Scenarios

  • Best case: Stock market returns during accumulation phase & big guaranteed pension after official retirement age
  • Worst case: Market crash when approaching retirement age and not able to find a job

Questions

  • Do you see legal problems with such an approach?
  • Is there big risk besides not being able to predict the future?

Reflection

IMPORTANT NOTE: This post was not intended to propose any unlawful action. The author explicitly distances himself from such behavior.

Often times, it is a successful strategy look at an idea in an extreme form to uncover blind spots. One major blind spot that has been pointed out by the resourceful members of the forum is, that you must transfer your capital from a vested benefits account into your pension fund if you start a regular job again where you contribute to a pension fund. Thank you for stating this clearly.

For me, the discussion has been very valuable since it means conversely, that someone who FIREd and has his money in a vested benefits account has to take into account that he must transfer his money back to a pension fund if he rejoins the workforce in future.

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Hey Mago,
I also think my fundswould be better off with an index portfolio than the (current) pension fund system:

  1. Umwandlungssatz (you my call it “safe-withdrawel-rate-equivalent”) keeps falling, from historic 7.2% to currently just above 5%, likely to approach a value that represents an sustainable SWR for a not-so-agressive portfolio (lots of bonds) with capital consumption after the then-current life expectancy.
    Hence I do believe, and this is a belief, that, once I “retire”, the annuities granted via pension funds will not be superior to living off an index portfolio unless someone else pays for it.
  2. as opposed to an index portfolio, your capital drops to zero once you take the annuity.
  3. Due to the inherent financial imbalance of the current system, and it’s snowball-ity, the government wants people to keep their money in the system. I dont have a source at hand, but there are initiatives to block people from withdrawing their funds on retirement in the future.
  4. I do not believe there will be swiss politicians who are powerful enough to seriously reform the system and make it sustainable
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This thread is basically a copy of this this existing thread on it.

Sure, this is a small and unimportant forum, in the grand scheme of things.
And it’s in a non-native language in Switzerland.

Have you spelled out your intended abuse of the system? As clearly as can be.
Is the system (as set by law) “rigged” to benefit certain actors? Maybe.
So is it morally “wrong” to do this? One has to decide for oneself.

With the soft stance it is currently (un)enforced? Not really.

As I mention to someone privately, a couple of days ago: The valuepension people conveniently “forgot” to tell you in their FAQ that your benefits have to be transferred to a new pension fund upon becoming insured. This process might become (semi)automated though, by putting in place a reporting system.

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I truely hope that the whole system stays the same. Forcing me to accept a low return solution and then forcing me to take the pension instead of capital…horrible scenario.

Thanks for the reference. I was browsing through that thread but could not find my thoughts reflected in it.

I surely do not want to abuse the system but use it in the way originally intended: Saving capital for myself which I get a pension from.

The only problem I see is with disability insurance and child’s insurance which is not covered.

Yes, I also usually forget about everything the pension funds provide apart from the pension, like widow rent, etc. These greatly contribute to the “low” performance of the pension funds.

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It’s usually related to the salary, not to the capital. So no harm done when investing part of your 2nd pillar in VP oder Viac.

@ElMago
I intend to do the same thing. Just not taking the pension when I retire.

The current system is rigged. Currently, the Umwandlungssatz is around 5.5-5%, the right number should be 3.83% (as calculated by PCCmetrics).
So currently, working people are paying for retirees. It is also why the pension is a lot higher with a pension fund than taking annuities from insurance (both are the same financial products).

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The mandatory part is even at 6.8%, way too high, especially for women that retire at 64 and live for 25 more years on avg. :open_mouth:

IIRC there is already some kind of centralised reporting, I’m wondering if they are actually acting on it or just letting it go for now.

Every institution has to report to the Sicherheitsfonds in Berne annually.
But the data isn’t used to “enforce” transfers to pension funds AFAIK.

That is what I was wondering. I guess we’ll see, I certainly wouldn’t want to test it myself.

Technically, you are breaking the Swiss laws if you don‘t pay your FZ into your new pension fund. At least on the mandatory part, your pension fund technically could claim for damages incurred given your non-payment. As pension funds need to both guarantee a certain interest and to stick to 6.8 on this part; your withdrawal from the collective pool causes them a loss.

So if you don‘t forward your funds; you run the risk that the loophole was closed. In such situation; you might be forced to transfer on short notice (and realise capital loss) and worst case you face a claim for damages from the pension fund (which causes further loss beyond forced sale). Thats the situation with risk pooling based social security situations like the mandatory part of the second pillar is. Don‘t be antisocial by just taking secured 6.8% conversion rate yet not contributing to the risk pool.

The excess piece is different. Provided you are not in a full-insurance solution or a pension fund that as well provides you with 6.8% conversion on these amounts; there is less harm done. If death/invalidity risk is invoiced as a separate premium (but not taken from capital), there is nearly zero loss for the pension fund (other than fixed cost effects re. Plan management).

Hence, you are in a situation where:

  1. you should move 100% of your mandatory amounts to the new employer / make sure that a combination of mandatory and eccess amounts of at least the mandatory amounts are with the new pension
  2. should move the rest as well to the new employer if they are using a full insurance solution, provide mathematically inflated conversion rates or pay the desth/disability risk premiums directly from capital gains (whether the risk benefits are related to your capital or not doesnt matter here)

Anything beyond this that you do not send to the new employer you are technically still in break of Swiss laws but given virtually no damage caused; you could probably accept that risk. But you need to be sure that in case of policy change; you might still be caught in the same net than the ones that didnt stick to the above 2 rules; so there still was some risk.

My strategy: with every employer max out my pension fund. Given that the schemes reduce over time, i am bound to at one point in time when moving employers end up with a situation where my funds exceed the max so that I may letigimately leave some with FZ. Additionally I count for 1E money to somewhen in the next 5 years experience more liberty that I may just keep these funds out of the system when miving employers (which as well requires a maxed out 2nd pillar; until the lower floor of where 1E starts).

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Thank you for your detailed answer

I was not aware of this and didn‘t find anything official that says so. Is there some official reference you base your statement on?

I see that I made a trivial mistake: I wanted to sketch out a strategy that can be useful for anyone whether they are on the path to FIRE or not. My personal situation is quite a bit different and more likely to have a one transfer to vested benefits account once I quit traditional employment.

Thanks for anyone pointing out that the scenario outlined with leaving (all) funds on the vested benefits account and not transfering your salary is something unlawful! Even though this was not the main point I wanted to make.

Still, if you pursue your path to FIRE you could end up with the scenario that your funds compound in a vested benefits account, no matter what your intentions are, and you have to bring them back to a pension fund because you accepted a job. Might be a good or bad deal, depending on the circumstances.

I guess it’s in the LPP (https://www.admin.ch/opc/fr/classified-compilation/19930375/index.html)

But I think it’s more nuanced, you have to cover the “entry fee”. It’s even possible the pension fund won’t accept all the money (e.g. if it only has mandatory coverage while your previous employer didn’t)… in which case you’re kinda force to have it elsewhere.

Relevant articles are 12/13, I think.

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Since you said it, that might be one of the best examples of what’s “wrong” and why the system is rigged. And grate me most about it.

In my view, these 1e plans basically amount to a form of legalised tax evasion and privileges only available to the rich and high earning.

That’s why, frankly, (and regardless of legality) I can understand people to have no moral objections about “hiding” pension fund benefits and not having them transferred to the new employer.

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VIAC clearly states in its FAQ that what you are proposing is not allowed.

As someone else noted, there is an unpredictable risk associated with this. Not to mention it is against the Swiss laws. I don’t think this forum should be promoting activities that systematically try to circumvent and break Swiss laws while pretending to be ignorant about it.

It would not take that much effort by the authorities to track you down when and if they decide to do so.

2nd pillar is your money. You don’t avoid any taxes, you don’t steal anything from anyone, you are just trying to get a higher return on your retirement assets.

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No, neither Pension Fund nor Vested Benefits Accounts money is your money. Its the current / future pension funds money and you do not hold any title whatsoever in it. If you hold it on a FZ, you are an indirect custodian of your current/future pension funds money only. The money will only become your money once you either receive it in the form of an annuity or a cash withdrawal.

Therefore, you are not ok if you don‘t forward the money to the new pension fund. The damage to the pension fund is reduced as per the above (essentially if your money doesnt form part of a guaranteed plan / a plan beyond current finance mathematics).

There is currently no focus in this but given that we likely will continue to face generational cross-subsidies and conversion rates beyond the mathematically justifiable for a longer period; this situation is bound to explode over time. If this happens, make sure you are not exposed then.

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