Vested benefits act for occupational pension provision: Tips & FAQ

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The flexibility required in the world of work means that the second pillar of pension provision must also be as flexible as possible. Finally, switching to a new employer should not be associated with disadvantages in terms of occupational pension components or be made more difficult.

The Vested Benefits Act from 1995 states in addition the vested benefits between the  BVG-bonds secure. In the case of insured persons, a change in the benefit provider of the occupational pension is-, Survivors’ and disability benefits (BVG) the vested benefits are transfered. Both the ID card and the transmission route are specified. It is therefore worthwhile for every insured person to check in the Inform in advance. If you know your options, you’ll be carefree about your retirement savings, even in the face of change.

The most important at a glance

• Starting from the BVG minimum wages (in 2021: CHF 21’500) there is compulsory insurance with a pension fund. Below this BVG entry threshold, coverage exists only via the first pillar (AHV/IV).
• The acquired entitlements (vested benefits) are paid out as a pension upon retirement. Only in a few exceptions and subject to compliance with strict conditions is early payment possible.
• For the cases of Change of the employer, leaving the company, divorce, and death the so-called vested benefit credits are transferred.
• If the vested benefits cannot be transferred directly to another pension fund, the vested benefits must be parked temporarily at a vested benefits institution. This is the case, for example, if the employee leaves the company without a new employer.

Functioning of vested benefits

The second pillar of the Swiss pension system is a mandatory occupational pension plan. It supplements the basic provision of the first pillar and secures the standard of living. The Federal Law on Occupational Retirement, Survivors, and Disability Pension Plans (BVG) stipulate that insurance benefits are provided by pension funds. In the following video, basic interrelationships of the 3-pillar system in Switzerland are explained:

Pension fund contributions and benefits

• In the first stage, the occupational pension plan consists of a mandatory part in which all employees from the age of 17 are insured in the event of disability as well as death. It is also referred to as pension 2b.
• Retirement benefits are built up from the 24th birthday.
• From the BVG minimum annual wage (Stand 2021: CHF 21’150) employees are liable to pay contributions and insurance. The mandatory part of the income is limited to CHF 85,320.
• At least half of the contributions are paid by the employers. They amount to between 7 and 18 percent of the insured salary, graded according to age. The employer can determine the pension fund where his employees are insured. Likewise, he can determine the framework conditions (for example, employer contribution or savings rate).
• Employers are responsible for the proper payment of contributions.

Since the mandatory part is limited, there is the offer of voluntary private pension provision for the so-called extra-mandatory part of the income. Professionals, whether employed or self-employed, should inquire about possible offers in good time. Important: The state participates by exempting the contributions and the capital paid out from tax.

From pension fund to vested benefits institution

Pension fund assets cannot always be transferred from one pension fund to another in the form of a termination benefit.

This applies, for example, to the following cases:

• Unemployment
• Emigration
• career break
• Self-employment (Without follow-up insurance in a pension fund)
• Baby break
• Change of employer (if the entire vested benefits cannot be transferred to the new pension fund)
• Income below the BVG minimum wage (For example, in the case of part-time work)
• Divorce (Transfer of entitlement to the former spouse)

Since paid-in pension fund assets must, by law, remain in the pension scheme circuit, the vested benefit credit saved must, in such cases, be parked with a catch-up institution.

If pension assets cannot be transferred directly from one pension fund to another, the assets are invested and managed by special vested benefits foundations. This guarantees that pension protection is maintained. These are institutions of banks or insurance companies.

The following points must be observed when investing the vested benefit credit:

1. When leaving a company, employees themselves are responsible for opening a vested benefits account.
2. The insured person is free to choose the provider. A maximum of two vested benefits foundations is permitted. Again, it is not possible to have more than one account with the same foundation.
3. If no vested benefits account is opened after leaving a pension fund, the retirement assets are deposited and invested with the national pension fund “Stiftung Auffangeinrichtung”. The transfer usually takes place automatically after six months.
4. The Vested Benefits Act introduced the concept of a minimum vested benefit. This coverage means that the insured person receives at least the sum from all contributions made by themselves. In addition, there is a supplement of four percent per year of life (maximum 100 percent) from the age of 20. If the employer has paid the contributions in full, one-third of these are deemed to have been paid by the insured person.

Payment of the vested benefit assets

If for the above reasons, there is no direct continued insurance with another pension fund after compulsory BVG insurance, the pension fund of the previous employer transfers the vested benefits to the account with a vested benefits foundation. The employee is free to choose this foundation. In this way, the personal retirement assets are invested temporarily or until retirement.

If a new employment relationship is established in Switzerland after the career break, the vested benefits account balance is transferred to the pension fund of the new employer. The vested benefits account can then be closed again.

The withdrawal of vested benefits is governed by legal regulations. Accordingly, there are the following options:

• Retirement: From five years before the AHV retirement age and up to five years thereafter, payment can be requested. Accordingly, the earliest date is from age 59 for women and age 60 for men.
• When leaving Switzerland for good: Employees who move to an EU/EFTA country can only have the non-compulsory part of their retirement assets paid out. If the account holders are not compulsorily insured in this country, the compulsory part can also be paid out.
• Final cessation of employment in Switzerland as a cross-border commuter: If the cross-border commuter permit is canceled, the vested benefits can be paid out. In this case, no gainful employment may be pursued in Switzerland and there must also be no residence in Switzerland.
• Disability: The receipt of a whole disability pension from the federal disability insurance serves as proof.
• Acquisition of residential property: The Swiss homeownership promotion scheme provides for the withdrawal of all or part of the vested benefit assets to promote homeownership. This is possible per account every five years and up to five years before the AHV retirement age. The possible uses in this context include the purchase of owner-occupied residential property, construction, repayment of mortgage loans, and renovation. The participation in housing cooperatives or shares of a tenant stock corporation is also promoted in this way. The vested benefits foundations keep the necessary disbursement forms on hand and provide information on the specific disbursement conditions.
• Death of the holder of the vested benefits account: In the event of death, the regulation provides that the vested benefits are paid out to the legal beneficiaries. The order is predetermined. The first beneficiaries are the spouses, followed by minor children and children under the age of 25 who are still in education. In the next level, persons are considered who have lived with the account holder in a cohabitation relationship in the last five years before the death. It must be evident that these persons were substantially supported. The sequence ends with children of full age and other legal heirs.

The vested benefits system in practice

Due to the changes in the labor market and the required flexibility, the vested benefits case occurs more frequently today.

Examples:

• temporarily no employment (world trip, unemployment, studies, child care)
• indefinite stay abroad
• Reduction in working hours with below BVG entry threshold.
• New self-employment with the waiver of withdrawal of the vested benefit credit
• Partial transfer of pension assets of the former partner after divorce

When leaving a pension fund, the vested benefits, also called termination benefits, are calculated according to the specifications. If insurance with another pension fund does not follow directly for the above reasons, the retirement assets must be transferred to a vested benefits institution. Until the time of the transfer, the credit balance earns interest at the BVG minimum interest rate (as of 2021: one percent).

The amount of the vested benefit credit depends, among other things, on whether the pension fund is managed on a defined benefit or defined contribution basis.

Defined benefit plan: Here, the pension fund benefits are determined according to the insured salary. What initially looks simple and understandable has the disadvantage, however, that the insurance benefits can fluctuate depending on income trends. This can have far-reaching negative consequences for surviving dependents in individual cases.

Defined contribution plan: In the event of an insured event, benefits under this model are calculated based on the contributions paid by the insured plus interest. They are thus based on the accumulated credit balance. The pension is calculated according to a predefined calculation based on the accumulated pension fund capital. Most pension funds under private law have now opted for this model because it is easier to plan.

The choice of vested benefits account

Bank accounts, policies, or securities deposits are available for the choice of vested benefits institution. In times of historically low-interest rates, the choice of the optimal investment for vested benefits has become enormously important. After all, the aim is to be able to maintain one’s standard of living in old age with this investment.

For vested benefits accounts, the average interest rate is 0.022 percent (as of 08/2021). The fees range between 0 and 36 francs. In the case of vested benefits policies, a barely higher return can currently be expected.

Experience shows that the longer the investment horizon, the more profitable a higher equity allocation is. Therefore, investing with securities on a vested benefits account has become extremely attractive. With securities, the assets are invested in equities, bonds, and other securities. In this way, the pension capital can be used to take advantage of the opportunities offered by the financial markets. Providers usually offer various investment strategies to suit individual risk tolerance.

No vested benefits account required in case of insignificance

To avoid unnecessary administrative work, vested benefits accounts do not have to be set up for minor termination benefits from pension funds. In these cases, the vested benefits can be paid out directly to the insured persons.

If the termination benefit is no more than the sum of the savings contributions for one year, it is negligible within the meaning of this regulation. The pension funds can define further details independently.

Tips and first steps in the case of vested benefits

The following points should be observed to ensure that the vested benefit credit earned is invested in a comprehensible, secure, and profitable manner at all times:

• Contact the pension fund promptly in the event of a change in employment. In the event of a change of employer, inform them of the new pension fund. If you do not change to a new pension fund for the reasons described above, then inform the vested benefits institution of the transfer of the termination benefit.
• Use the free choice of vested benefits foundation! In addition to the interest rates, the fees should also be compared.
• Vested benefit assets can be distributed between two different vested benefits foundations; this is no longer possible at a later date. Distribution increases the flexibility of the investment.
• For a longer-term horizon: Take advantage of investment opportunities on the capital market by investing securities in a vested benefits custody account.
• Retirement planning means securing your standard of living in retirement. Therefore, competent advice always pays off. Before making a decision, the personal options should therefore be discussed with a financial expert.

Read on in our journal:

• Pillar 3a insider tips
• Pillar 3a withdrawal: to consider
• Pillar 3b: Tips & background