The pitfalls of the employer's salary declaration to the pension fund and its risks

The insured salary is a critical reference value for pension funds. It is used to determine the contributions and benefits of the insured employees.

The insured salary is defined in the pension fund regulations or plan. Since pension funds have a certain amount of leeway in defining the insured salary¹, the insured salary varies according to the pension fund or pension scheme. The determining salary for the pension fund can – within legal limits – deviate from the AHV salary, subject to a sufficiently clear and concrete regulatory basis². For example, in practice, some pension fund regulations or plans exclude compensation components which are incurred occasionally and plans providing more than legal minimum benefits exclude even variable compensation components such as commission or bonuses from the definition of the reportable salary of the pension plan. As a result, the salary definition relevant for the pension fund and to be declared by the employer does not necessarily correspond to the salary subject to AHV contributions.

In order to provide insured employees with occupational benefits, the pension fund is dependent on the salary declarations received from the employer being correct and in accordance with the applicable pension fund regulations and plans. The pension fund usually has no insight into the individual salary components of the insured persons. The employer is obliged to report the relevant salaries correctly so that there is no breach of the pension fund regulations, pension fund plans or the affiliation contract.

In practice, it can often prove difficult for employers to determine the relevant salary for the pension fund. Some of the pitfalls of salary reporting and the possible consequences of incorrect reporting are outlined below.

The pitfalls of salary declarations

For different salary components, the employer must determine the salary to be reported on the basis of the relevant salary definition of the pension fund. This is illustrated by the following example:

• An employee's salary subject to AHV contains the following salary components:

• Depending on the regulatory basis, there is a different salary to be declared for this employee:

As simple as this may sound at first, determining the salary to be reported can prove to be a great challenge in practice. The problems we have encountered in practice are many and varied:

• The pension fund's salary definition is not sufficiently clear or concrete in view of the employer's salary structure and it leaves room for ambiguity for the employer/HR about whether an element of salary is included or excluded by the definition;
• The salary declared by the employer is not consistent to the salary defined by the pension fund regulations or plans;
• The pension fund's salary definition does not comply with the employment contract or the employer's salary structure;
• Increased complexity if the employer has a plan setup with different salary definitions for different categories of employees resulting in different treatment of salary components for different employees;
• It is possible that in individual cases the statutory minimum requirements under the BVG are not complied with.³

Determining the salary to be reported can also be more complicated if, for example, there are:

• Changes in salaries during the year;
• Strong fluctuation of compensation respectively if there are periods without a salary (e.g. in the case of hourly wage earners);
• Numerous special compensation components subject to social security contributions (e.g. in the case of internationally transferred employees).
  

Risks for the employer and ways of avoiding them

The sources of error mentioned above can lead to situations where either no salary is reported, or the reported salary is too low/high for insured employees. The correction of mistakes in reported salaries is administratively and communicatively complex and could involve additional costs. The correction is also legally complex as questions of labour, pension and tax law must be clarified. For example, if the reported salaries and thus the employee and employer contributions have been too low for several years, employees can claim these within a certain period as well as any associated interest losses. Incorrect reporting of salaries causes particular risks in connection with benefit cases. The pension fund may claim indemnification from the employer for any higher benefits resulting from a breach of the affiliation contract.

In order to minimise the risks, we recommend that employers examine the following questions.

1. Is the salary definition in the pension fund regulations clear and concrete considering the current federal court rulings? Is it clear which salary components are included in the relevant salary for the various employee categories? 
2. Is the definition of salary in line with the employer's employment contract regulations? 
3. Is the understanding of the regulatory salary definition consistent between the affiliated employer, internal HR and/or payroll and the pension fund? 
4. Do the salaries reported by the employer correspond to the salary definition in the pension fund regulations? 

If you answer one of these questions with "no" or "possibly", reviewing the pension law implications should be considered. We would be happy to support you with checking these questions, adjusting the salary definition if necessary, and dealing with any incorrect reports in the past, taking into account the relevant aspects of labour, pension and tax law.

^{1 Art 3 BVV2; art 7 in connection with art. 49 BVV2
2 EVG B 115/05 as of 10 April 2006, consideration 4.3 f.; BGE 140 V 145
3 KÖPPEL/KÜNZLI, Reglementarischer versicherbarer Lohn vs. BVG-Lohn, Tücken der Ausklammerung von Lohnbestandteilen, Schweizer Personalvorsorge, Externe Dienstleister 2020, p. 7 ss.}