Executive Pension Plans Explained

Executive pension plans are offered by many Swiss occupational pension fund managers. The term is often used to describe 1e pension plans.

In Switzerland, compulsory pension fund contributions (pillar 2a) are based on part of your salary only. The portion of your salary which you pay compulsory pension fund contributions on is called your coordinated salary.

The rule of thumb is: The higher your salary is, the bigger the gap between your coordinated salary and your actual salary can be. The bigger the gap between your coordinated salary and your actual salary is, the lower your compulsory pension will be in relation to your current salary.

The gap also applies to the disability insurance and the survivor’s insurance (life insurance) which you get from your occupational pension fund. The standard disability pension and survivor’s pension are also based on your coordinated salary only.

What is an executive pension plan?

An executive pension plan is a supplemental occupational pension plan which employers can take out for high-salary employees. Executive pension plans close the gap between compulsory benefits and insurance coverage based on your coordinated salary, and the benefits and coverage which you should have based on your actual salary.

Executive pension plans are collective agreements between a pension fund or insurance provider, and an employer. Executive pension plan agreements are taken out separately from the standard pension fund agreement. Unlike standard pension fund plans, participation in executive pension plans can be limited to specific employees rather than all of a company's employees as a whole.

What service providers offer executive pension plans?

In addition to being offered directly by pension fund managers, executive pension plans are offered by Swiss insurance companies and industry associations. In every case, they are managed by licensed pension funds.

What are the advantages of executive pension plans?

The primary advantage of executive pension plans is that they provide full disability insurance and survivor’s insurance based on your actual salary. If your employer includes you in an executive pension plan, you can rest assured that your disability insurance and survivor’s insurance will accurately reflect your actual income.

For employers, getting a separate executive pension plan makes it possible to add special privileges just for the employees covered by the contract. For example, a company looking to attract top talent could pay all or part of voluntary contributions for employees listed in an executive pension plan as an employee benefit.

Another benefit of executive pension plans is that they simplify the process of making voluntary contributions to your pension fund. Swiss laws governing occupational pension funds allow you to make voluntary pension fund contributions (pillar 2b) based on the portion of your salary which exceeds the roof of your coordinated salary (currently 88'200 francs). An executive pension plan simplifies the process because voluntary contributions based on your actual salary are automatically deducted from your paychecks.

Contributions to the second pillar (occupational pension funds) – including voluntary contributions to close benefit gaps – can be deducted from taxable income. Pension benefits do not count as taxable wealth until they are withdrawn. Making voluntary contributions based on your whole salary can be beneficial from a tax perspective, in addition to preventing gaps in your pension.

For salaries higher than the 1e threshold (currently 132'300 francs per year), executive pension plans often double as 1e plans. The 1e designation applies to pension benefits resulting from voluntary contributions based on the part of your salary which exceeds the 1e threshold. A major benefit is that employees can choose how their 1e benefits will be invested. That means you have the freedom to invest 1e benefits and potentially earn much higher returns than the low interest which pension funds pay on benefits. Note that 1e solutions are also available separately from executive pension plans.

Swiss law dictates the size of compulsory pension fund contributions, with the maximum possible contribution being 18 percent (for employees aged 55-65). For voluntary contributions, limits vary between individual pension plans. The legal maximum is 25 percent of the portion of your salary which exceeds the 1e threshold – but limits vary between executive pension plans. Note that special limitations apply to employees who have just moved to Switzerland. Because contributions to the second pillar are tax deductible, maximizing contributions can be advantageous from a tax perspective.

What are the disadvantages of executive pension plans?

Executive pension plans can only be taken out by an employer. Employees cannot subscribe to executive pension plans by themselves. Many service providers have a minimum requirement for the number of employees an employer must sign up in order to take out an executive pension plan. For example, an employer may have to subscribe a minimum of 6 employees when taking out an executive pension plan.

Executive pension plans cost money. You pay ongoing fees which tend to be higher than those of standard or enveloping pension funds. Another possible disadvantage is that having separate standard pension plans and executive pension plans can require more bookkeeping on the part of employers.

In the case of 1e plans, invested benefits may also be subject to investment risk. Each employee carries the investment risk themselves. When you become unemployed or reach retirement age, you will have to withdraw from your executive pension plan. If you are forced to withdraw at a time when the stock market is performing poorly, you may lose money. Investing 1e benefits may also generate investment costs. Because this can impact benefits, it is important that all employees who will participate in an executive pension plan understand the risks and costs of investing 1e benefits.

A major consideration which applies to 1e benefits in general is that these benefits are not guaranteed by the LOB Guarantee Fund. For this reason, the financial solvency of pension funds is paramount when considering executive pension plans.

What is the difference between an executive pension plan and an enveloping pension plan?

Enveloping pension plans (German: umhüllende. French: enveloppants) provide insurance coverage and pensions based on both compulsory and voluntary benefits combined. With an enveloping pension plan, there is just one pension agreement which applies to both compulsory and voluntary benefits.

Enveloping pension plans pool compulsory and voluntary benefits, and typically use interest rates and conversion rates based on the average of the compulsory and voluntary rates.

Example: An employee has 500,000 francs in compulsory Swiss pension benefits and 300,000 francs in voluntary benefits at retirement. They participate in an enveloping pension plan which uses the legal minimum conversion rate of 6.8 percent for compulsory benefits (pillar 2a) and a much lower conversion rate of 3 percent for voluntary benefits (pillar 2b). Because the enveloping pension fund uses the average of both conversion rates (4.9 percent) for all 800,000 francs, they receive a pension of 39,200 francs per year. 

An executive pension plan, on the other hand, is a separate pension plan specifically for voluntary benefits. The employer has two separate agreements: one for a standard pension plan, and one for the executive pension plan. The terms and conditions are completely separate, as are contributions and benefits.

Example: Suppose the employee in the above example had separate pension plans for compulsory and voluntary benefits with the same conversion rates used above. The pension from their compulsory benefits would be 34,000 francs (6.8 percent of 500,000 francs) and the pension from their voluntary benefits would be 9000 francs (3 percent of 300,000 francs). Their combined pension would be 43,000 francs per year, or 3800 francs more than they would get with an enveloping pension.

The exact opposite applies when voluntary benefits outweigh compulsory benefits. In that case, using an enveloping pension fund can be advantageous, because rates for voluntary benefits are generally less favorable than those for compulsory benefits.

What should employers consider when looking at executive pension plans?

Employers (and ideally, participating employees) should take time to compare executive pension plans. Key points to look at include:

• Solvency: The most important point to consider before making voluntary 1e contributions to the second pillar is the pension fund's solvency because these benefits are not insured by the LOB Guarantee Fund.
• Administrative fees: The administrative fees charged vary broadly between pension funds and insurance providers.
• Interest rates: This is only relevant if an executive pension plan pays interest on benefits rather than letting you invest them at your own risk (1e benefits only).
• Conversion rates: If employees plan to get a pension rather than cashing out benefits, this is one of the most important factors to consider. Conversion rates vary between executive pension plans.
• 1e investment options: Which investment options you can choose from for your 1e benefits is an important consideration. Take time to compare the underlying investment portfolios and total investment costs.
• Limits on contributions: How much of your salary can you contribute? Many service providers offer more than one option.
• Insurance coverage: Disability insurance and survivor’s insurance coverage can vary between executive pension plans, so reviewing the insurance models used is important. Executive pension plans may also include additional insurances or extended coverage.
• Insurance premiums: The premiums you pay for disability insurance, survivor’s insurance, and other possible insurances vary between plans.
• Stand-alone plans: Can you take out an executive pension plan independently from your pension plan? Many Swiss executive pension plans can be taken out as stand-alone plans, even if you use a different pension fund for compulsory pension benefits.

Because second pillar contributions are tax-deductible, making voluntary contributions on your full salary can drastically lower your tax bill if you have a high income. However, it is important to look at the big picture. Once you place your money in the second pillar, it is held in trust and – with a few exceptions like using benefit to purchase a primary residence – you can only withdraw it when you retire. A one-time capital withdrawal tax applies when you withdraw benefits. If you could earn a higher return outside of the second pillar – taking returns and taxes into account – then making voluntary contributions might not make sense.

More on this topic:
1e retirement plans explained
Swiss pensions funds
3a pillar account comparison
Retirement funds: things you should know
Common retirement planning mistakes