An initial government proposal for a regulation on self-guided top-up pension plans for high earners has been slammed. Susanna Rust reports
At a glance
• 1e plans are pension plans for high earners that allow them to choose from a range of investment strategies.
• A November 2015 reform transferred the entire investment risk to the individual, but stipulated that at least one low risk strategy be offered.
• The government is responsible for passing a regulation to implement the law, but its first proposal was heavily criticised for being too restrictive.
“This reform has the potential to change the face of Swiss pensions.” This is how PwC commented on an amendment to legislation passed in November 2015 that affected so-called 1e plans, which are individualised risk pension plans for high-earners.
Arguably, the prospect of a change as significant as that flagged by PwC is the reason why there was a disagreement over the initial ideas for a decree to implement the reform, with the government’s first proposal heavily criticised by the pensions industry.
André Tapernoux, head of retirement business for Switzerland at Mercer, explains: “With the revised law for 1e plans, Switzerland will for the first time have proper defined contribution plans – even though only available to a small proportion of the population covered by workplace pensions – and the fear is that if these establish themselves they could eventually spell the end for benefit guarantees and in Switzerland these guarantees are, at least for a part of the insured population, sacred.”
The 1e plans – named after the section of the law governing them – are top-up pension plans that companies can offer to higher paid employees on the part of their salary above that for which contributions are mandatory. The threshold is CHF126,900 (€116,200).
The key aspect of these plans is that they give employees a choice of investment strategies. Employees choose how their contributions are invested and are given a number of strategies to pick from.
Such plans have been permissible for a while, but many companies have not introduced them because of a requirement that they guarantee the original amount invested.
The reform alluded to by PwC, however, dropped this requirement, meaning that the burden of investment risk lies fully with the individual. However, because a need was felt to protect members, the reform also introduced a new requirement that 1e plans offer individuals a “low risk strategy” as one of their investment choices. This is to be specified in an implementing decree by the government, and it is the preparations for this that have angered the industry.
Earlier this summer, the Bundesamt für Sozialversicherungen (BSV), the government office for social security, circulated a draft among stakeholders. Notwithstanding the provisional and unofficial nature of the proposal, it was not well received. ‘Stossend’, which can be translated as disturbing or unacceptable, has cropped up often, in conversations and written statements.
Peter Zanella, head of benefits and retirement solutions at Willis Towers Watson in Zurich, says it was “heavily discussed, and more or less torn apart – justifiably so, I admit”.
He adds: “I don’t understand the motivation. Who are they trying to protect? It can’t be lower earners, because they’re not affected by the 1e plans. I know it wasn’t an official proposal and they probably expected it wouldn’t make a good impression, but I’m still disappointed that it was made at all. I absolutely cannot understand why the BSV is so against it. I think they and a part of the public have an idealised understanding of the current system, and that there shouldn’t be such a taboo around 1e plans.”
The most controversial aspect of the BSV’s proposal is for no more than three investment strategies to be offered under 1e plans, one of which must be the obligatory low-risk strategy.
According to ASIP, the Swiss pension fund association, and SKPE, the association of pension fund experts, this and other aspects of the draft run counter to previous statements from the cabinet (the Bundesrat) and agreements made in parliament.
Commenting on the proposal, the associations called for up to 10 investment strategies to be permitted instead, noting that the guiding statement from the Bundesrat referred to a maximum of 5-10 strategies.
Simon Heim, head of employee benefits legal practice for Swiss Life, criticises this particular aspect of the BSV’s working draft. “The whole point of these plans,” he says, “is to give insured individuals a certain element of choice, within a reasonable framework.
“That does not mean that dozens of strategies or products have to be offered, but three strategies is definitely too few. If the investment risk is going to be transferred to the individual then the people have to granted a certain flexibility when it comes to the choice of strategy. Anything else would contradict the idea behind the 1e plans.”
Mercer’s Tapernoux argues that the BSV’s proposal, would undermine the ability for employers to offer lifecycle plans, which in his opinion would form part of a “sensible 1e plan”.
Other aspects of the proposal have also irked the industry, with ASIP and SKPE criticising the suggested approach to defining a low-risk investment strategy and a plan’s suitability test, to be carried out by actuaries.
But, there are some points of agreement. ASIP, for example, welcomed that the BSV did not suggest the low-risk strategy as the default for 1e plan participants that do not make an active choice.
Zanella at Willis Towers Watson says he agrees with the proposal to prohibit stock-picking under 1e plans and only allow investments in collective products like funds.
Heim at Swiss Life adds another positive: “the fact that things are finally moving ‘forward’”.
He continues: “In that sense, we can hope that there aren’t further delays and that the revised law can enter into force in the first half of 2017 – having taken into account the feedback during the consultation process.” The direction of travel may become clear prior to the publication of this article.
Another step on the way to the implementing decree being finalised is for the independent occupational pension body, the BVG Kommission, to issue an advisory opinion to the Bundesrat.
Asked for a comment on the critical reception of the BSV’s first proposal, a spokeswoman for BVG noted that, with a view to the consultation within the commission, the BSV had “provided different trade organisations with a pre-draft for the implementation of Article 19a of the Freizügigkeitsgesetz [the law that was reformed in November 2015; the decree implements Article 19a]”.
She added: “The discussion in the commission showed that more work needs to be done.” In October, an expert group of commission members would be discussing the necessary follow-up work, she added.
The BVG is expected to deliver its recommendations to the Bundesrat in November, and the advisory commission of the upper house of parliament will also be consulted then, according to the spokeswoman.
The federal council will decide the final decree after these meetings. Many in the pensions sector may be hoping that the final decision will see the BSV’s initial proposal regarded a false start.
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Sector slams government proposals for regulation on Switzerland's 1e plans