Pillar 1e pension reform proposal. Loophole to be closed?

[Phil_MCR]

New consultation on change in 1e pension plans:

https://www.admin.ch/gov/de/start/dokumentation/medienmitteilungen.msg-id-102810.html

While the plans talk about measures to allow 1e amounts to stay with VB funds for 2 years to give people time to make up any losses, there was an interesting tidbit in there which might apply more broadly:

It already happens today that pension assets remain in the vested benefits institution, even though they should actually be transferred to a new pension institution. If insured persons do not inform their new pension institution where they were previously insured, the pension institutions must now actively search for the insured person’s assets. If the insured person does not initiate the transfer themselves, the new pension institution must request the transfer.

Right now, some people when changing jobs do not transfer their pension benefits to the new employers pension fund because these often perform badly (typically only 1%-2% return per year). Instead they put this into Vested Benefit funds that can be invested into riskier assets that have higher expected returns.

It seems, they might try to close this loophole and have the pension funds request the transfer from the VB funds directly.

Translation below:

Pension assets from the 1e plan temporarily transferred to vested benefits institutions

Bern, October 16, 2024 - Employees who are insured in the 2nd pillar in a so-called 1e pension plan with selectable investment risk should be able to temporarily transfer their pension assets to a vested benefits institution when they change jobs. This applies if the assets would otherwise have to be transferred to a pension institution that does not allow a choice of investment strategy. At its meeting on October 16, 2024, the Federal Council put the necessary amendment to the Vested Benefits Act out for consultation until January 30, 2025. At the same time, it wants to ensure that pension assets do not remain in vested benefits institutions, even though the insured would have to transfer these assets back into a pension fund.

Employers can insure employees who earn more than CHF 132,300 per year for the portion of their salary above this limit in special pension schemes in so-called 1e plans. In these pension schemes, the insured can choose between several investment strategies with different levels of risk.

If an insured person leaves such a pension scheme (change of employer, loss of job), this person can transfer the effective value of the termination benefit. Any loss is borne by the insured person themselves. In principle, the law requires that the entire pension assets be transferred to the pension scheme of the new employer. This also applies today if the new employer does not offer a 1e pension plan. In this case, any loss from the 1e pension plan can only be made up with difficulty in the new pension scheme.

Insured persons with 1e plans should be given time to compensate for losses

Parliament referred Motion 21.4142 “Protecting retirement assets when leaving a 1e plan” to the Federal Council for implementation in September 2023. The insured persons affected should be given the opportunity to temporarily transfer the pension assets from the 1e plan to a vested benefits institution for two years. By choosing an appropriate institution, the insured person can invest the pension assets in similar investments to those in the previous pension institution and thus make up for any losses if possible. The Federal Council has now sent the corresponding amendment to the Vested Benefits Act out for consultation. In order to ensure that the assets are transferred from the vested benefits institution to the new employer’s pension institution after the two years have expired, the necessary exchange of information between the institutions should be regulated at the same time.

It already happens today that pension assets remain in the vested benefits institution, even though they should actually be transferred to a new pension institution. If insured persons do not inform their new pension institution where they were previously insured, the pension institutions must now actively search for the insured person’s assets. If the insured person does not initiate the transfer themselves, the new pension institution must request the transfer.

[Axa]

I had no idea some people had some degree of freedom to chose retirement fund.

Anyway, it’s already an issue that employees are stuck with the 2nd pillar fund chosen by the employer. Don’t know how reducing freedom to chose even more improves the system.

[Phil_MCR]

They generally don’t and are stuck with the employer’s fund. It’s only when they stop working can they transfer out of the the employer’s fund into a VB fund of their choosing.

Then they take this opportunity to use a loophole so that when they get a new job, they keep their money in the better performing VB fund instead of transferring it to the new employer’s pension fund.

[Phil_MCR]

In case you haven’t done your bedtime reading yet and sifted through the 121 pages of feedback given during the consultation period, I’ve summarized the feedback so you don’t have to.

Swiss Pension Changes Proposed (1e Plans & Asset Transfers): What the Feedback Says

The Swiss government recently concluded a consultation period on proposed amendments to the Vested Benefits Act (FZG), the legislation governing pension assets during job changes. These proposals touch upon specific rules for ‘1e’ pension plans and, more broadly, the process for transferring all vested benefits (Freizügigkeitsleistungen). Given the potential impact on retirement savings, this post summarizes the key proposals and the feedback received.

The consultation revealed a mixed reaction, with significant debate around fairness, necessity, and particularly the practical implementation of the changes.

A recap of what’s being proposed

1. Proposal 1: Temporary Transfer Option for ‘1e’ Plan Assets (Art. 3a)

   • Context: 1e plans cover salary components above approx. CHF 136k (2025 limit), allowing individuals to choose investment strategies and bear the associated risks/rewards. Currently, changing to an employer without a 1e plan can force the liquidation of these investments, potentially locking in losses if market timing is unfavorable.
   • The Proposal: To offer individuals in this situation the option to transfer their 1e assets to a vested benefits institution (Freizügigkeitsseinrichtung - FZE) for a temporary period of up to two years, instead of immediately transferring them to the new employer’s standard pension fund (Pensionskasse - PK).
   • The Goal: Provide a window of time to potentially recover investment losses before consolidating the assets within the new pension fund structure.

2. Proposal 2: Mandatory Claiming of All Vested Benefits (Art. 11(2) etc.)

   • Context: A significant amount of pension capital currently resides in “forgotten” or uncollected vested benefits accounts across Switzerland, potentially impacting individuals’ retirement outcomes.
   • The Proposal: To introduce a legal obligation for the new pension fund (PK) to actively identify and claim all prior vested benefit assets (FZL) belonging to a new member from previous PKs or FZEs. This process would no longer require the explicit consent of the insured person.
   • The Goal: To ensure the consolidation of all second-pillar assets, improve oversight, and strengthen overall pension security, including associated risk benefits (death/disability).

Key Feedback Themes from the Consultation

The consultation feedback highlighted several recurring points:

• Administrative Burden and Costs: Widespread concern was expressed regarding the significant increase in administrative workload and associated costs, primarily linked to the new duties proposed under Proposal 2.
• Support for Mandatory Asset Claiming Principle: Despite cost concerns, the principle of actively consolidating vested benefits (Proposal 2) received broad support as a mechanism to prevent lost funds and strengthen the system.
• Need for Efficient Data Infrastructure: A critical point raised by many was the necessity of robust, efficient, and likely digital data exchange platforms and improved data access for PKs to feasibly fulfill the new obligations under Proposal 2. Much support was conditional on this infrastructure being in place.
• Divided Opinion on 1e Transfer: Proposal 1 generated debate, with some supporting the added flexibility while others raised concerns about fairness, potential favouritism towards high earners, and deviation from the principle of collective risk-bearing.
• Criticism of PK Responsibility: Significant opposition was voiced, particularly from employer groups and pension sector experts, against placing the primary responsibility for finding and claiming assets (Proposal 2) solely on the new pension fund. Alternatives suggested included maintaining individual responsibility or assigning duties to FZEs.
• Concerns about 2-Year Limit: Several respondents questioned whether the two-year timeframe proposed for Proposal 1 was sufficient from a market cycle perspective to achieve its stated goal of loss recovery.

Overview of Stakeholder Positions

Different groups approached the proposals from distinct perspectives:

• Left-leaning Parties/Unions: Generally opposed Proposal 1 (viewed as unfair preferential treatment) but strongly supported Proposal 2 (as enhancing protection for all workers).
• Centre/Right Parties/Employer Groups: Tended to support the flexibility offered by Proposal 1, but strongly opposed the proposed implementation of Proposal 2 due to the burden placed on PKs.
• Pension Sector (PKs, Experts, Supervisors): Focused heavily on practicalities. Major concerns about the cost and feasibility of Proposal 2 without adequate data infrastructure were paramount. Views on the necessity and logic of Proposal 1 were mixed.
• Cantonal Governments: Showed general support for the objectives but shared the significant concerns regarding the administrative challenges and costs associated with implementing Proposal 2.
• Tax Authorities: Favoured Proposal 2 for its potential to prevent tax optimisation strategies involving fragmented benefit payouts.

Overall Reaction Summary

The overall response was cautious and marked by substantial reservations. While the underlying goal of consolidating pension assets (Proposal 2) is widely endorsed, the proposed method faces strong practical objections.

The specific provision for 1e plans (Proposal 1) is contentious on grounds of fairness and necessity. Implementation challenges, particularly concerning administrative load and data systems, are the dominant concerns emerging from the feedback.

Potential Impact for Expats in Switzerland

These proposed changes could have several implications for expatriates working in Switzerland:

• For those with 1e Plans: If enacted, Proposal 1 would introduce the option of a two-year temporary transfer to an FZE upon moving to a non-1e employer, though the effectiveness and fairness of this remain debated.
• For Anyone Changing Jobs: Proposal 2 could mean a more automated process for consolidating past Swiss pension assets. Your new PK would be mandated to locate and transfer previous FZL funds, potentially reducing administrative effort for individuals and the risk of forgotten assets. However, its smooth functioning depends heavily on improved data systems.
• Potential Cost Implications: The administrative costs associated with Proposal 2 are a concern. It’s possible these could eventually be reflected in pension fund operating costs, potentially impacting administrative fees or net returns, or leading to specific charges for individuals who don’t readily provide information about past providers.
• Record Keeping: These discussions underscore the value of maintaining accurate records of all previous Swiss pension arrangements.

What Happens Next?

These proposals are not yet law. The Federal Council will review the extensive feedback received during the consultation. Based on this, the proposals may be modified, withdrawn, or advanced to the Swiss Parliament for further debate and potential enactment. This legislative process typically takes considerable time.

The consultation highlights a key tension: the recognized need to improve the handling and consolidation of pension assets, particularly vested benefits, against significant practical concerns about the cost, administrative burden, and fairness of the specific solutions proposed.

The path forward for these amendments will likely depend on finding ways to address the substantial implementation challenges raised by numerous stakeholders. Awareness of these potential developments is advisable for anyone participating in the Swiss pension system.

However, given the concerns raised and the lack of broad support for Proposal 1, I’m doubtful that this will go through. As for Proposal 2, there’s broad support but big questions on implementation cost and who the burden should fall on. Given that it will likely need a single system to efficiently handle this, I’m betting this one gets kicked into the tall grass too.