Pension plans generally provide for the possibility of voluntary buy-ins. This is intended to give insured people the opportunity to make up for pension gaps resulting from missing contribution years or wage increases. To this end, the maximum possible retirement assets must be defined in the pension plan in the form of an age-dependent buy-in table. For a defined contribution plan, the buy-in table is based on the accumulated savings contributions as a percentage of the insured salary. Compounding of interest can also be included which leads to a higher buy-in potential than without interest. In practice, a maximum interest rate of 2 percent is considered appropriate, provided that the general provisions on appropriateness are observed.
Based on Art. 1 para. 5 BVV2 introduced on 1 October 2017, a so-called 1e pension plan is deemed appropriate if, among other things, no higher contributions than an average of 25 percent of the insured salary per possible contribution year without compounding of interest are taken into account when calculating the maximum buy-in potential. These specifications at the level of the ordinance, in particular the auxiliary "without compounding of interest", leave a certain scope for interpretation, which has now been specified by the OPSC in the form of an announcement.
Prior to the publication of the announcement by the OPSC, the Swiss Chamber of Pension Fund Experts had already published a statement on the interpretation of Art. 1 para. 5 BVV2 on 10 January 2020. According to this, no higher contributions than an average of 25 percent of the insured salary per possible year of service without interest may be allowed for the maximum buy-in amount. However, as long as this maximum limit is not exceeded, the buy-in table may use the usual interest rate in accordance with the introductory remarks, as is the case with common BVG pension plans.
The OPSC, on the other hand, states in their announcement that according to its interpretation and the interpretation of the cantonal and regional supervisory authorities, for 1e pension plans, compounding of interest for the buy-in table is not permitted. This does not depend on whether a contribution rate of less than 25 percent on average is provided for the 1e pension plan. The reason for this is that pension plans with deliberately low contributions become a "pure tax optimisation vehicle". The reason why a 1e pension plan is regarded as a tax optimisation vehicle while a classic pension solution with significantly better contributions and buy-in tables is not, is not obvious in our view.*
Are 1e pension plans losing their attractiveness?
1e pension plans are becoming increasingly popular and providers in the market are expecting further growth according to our 2019 pension provider survey. However, these additional restrictions may contribute to employers deciding not to introduce 1e pension plans.
There are several issues to consider when introducing a 1e pension plan. These include the design of the buy-in table of the future 1e pension plan compared to the previous pension plan. If the previous pension plan for salary components covered by Art. 1e BVV2 is based on a buy-in table including compounding of interest and contribution rates of less than 25 percent, replacing it with a 1e pension plan with the same structure of the contribution rates in relation to the buy-in potential (however without taking compounding of interest into account) leads to a deterioration for the insured persons. In practice, we have already experienced that, despite the many other advantages of a 1e pension plan, this argument has led to refraining from introducing a 1e pension plan, especially for employers who already provide generous contribution scales in their existing pension solution. More far-reaching solutions are therefore required.
What are possible solutions?
Possible solutions to prevent the reduction of the buy-in potential when introducing a 1e pension plan (as well as for existing 1e pension plans with a corresponding need for adjustment) lie in the design of the pension plan:
- Increase in savings credits up to a maximum of 25 percent of the insured salary – This increases the contribution costs for the insured person and/or the employer. The advantages and disadvantages from the perspective of the employee and the employer must be weighed accordingly.
- Extension of contribution years to over 40 years – The ordinance and the announcement of the OPSC do not explicitly restrict the maximum number of contribution years stipulated in the regulations. The regular savings process for 1e pension plans could therefore begin before the age of 25 or extend beyond the AHV retirement age. Care must be taken to ensure that this is coordinated with the basic pension plan.
These solutions must of course continue to comply with the general principles of adequacy for pension plans. It also remains to be seen how the pension market will react to this communication on the supervisory practice and whether further restrictions are to be expected for 1e pension plans, for example by limiting the maximum contribution years.
* The legal quality or binding effect of a communication from the OPSC entails uncertainties. However, the OPSC seems to regard communications as binding in the same way as its instructions (see RUGGLI, in SCHNEI-DER/GEISER/GÄCHTER, art. 64a Rn. 3).
- On 8 April 8 2020, the OPSC published an announcement on buy-ins into 1e pension plans.
- Contrary to the opinion of Swiss Chamber of Pension Fund Experts, OPSC does not believe that compounding of interest should be taken into account in the design of the buy-in table.
- The attractiveness of 1e pension plans can be limited by this supervisory practice. Further-reaching solutions are required.