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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

Reading Time: 9 minutes

Many investors associate the term private equity with a mysterious investment for multimillionaires and institutional investment professionals. This often raises the question among potential investors: What is private equity?

The interested reader learns from the context and background that private equity is not witchcraft and follows certain logical patterns. It is essential to carefully evaluate a planned investment and acknowledge the opportunities and risks. With this guide, we would like to create a basis so that you can find your way around the Swiss private equity universe.

The most important facts in brief

For your better orientation, we have summarized the contents of the guide on private equity in key points.

• Private equity is capital from private investors
• This capital is invested in companies with the aim of generating long-term profits.
• Behind the capital are investors who invest their assets in companies through holding companies.
• Private equity investments require a lot of skill and experience, the selection of the right investment targets is crucial.

Definition: What is Private Equity?

The term private equity comes from the English language. Literally translated, it is divided into two terms private and equity. It thus describes private equity or off-market equity capital. Private equity companies use the money they collect to invest directly in companies to generate a profit.

In the context of private equity, investments in “start-ups” (young companies) are referred to as “venture capital”, which is naturally exposed to a higher risk.

The difference to other investment opportunities lies in the direct influence of the investor on the operative business of the target company. This includes measures such as:

• Further development of the existing corporate strategy
• Provision of know-how
• Work process optimization
• Expansion into new products and markets

Private equity companies in Switzerland are interested in long-term investment with sustainable corporate success. Achieving short-term speculative profits and a quick return is not the focus. In other investment opportunities, the focus is rather on shareholder returns without a direct influence on the management.

The history of private equity begins immediately after World War II. Through the American Research and Development Corporation (ARDC), the private sector encouraged investments by returning servicemen and women to start-up companies. The first private equity success story was a $70,000 investment in Digital Equipment in 1957, made by ARDC immediately after the company went public.

How does private equity work?

Money is collected from wealthy private investors and pooled to form a fund in the private equity sector. The fund subsequently acquires shares in one or more target companies. Any additional financial resources required are provided by banks or external investors as part of a co-financing arrangement. The investment aims to increase the profitability of the target companies through appropriate measures. After a certain holding period, the investment is sold and liquidated at a profit.

Company investments by private equity funds follow different patterns. The goal is always a significant majority stake to be able to influence the target company. In the first step, a blocking minority is sought in the case of listed companies. This limit is 25.1 percent of the capital stock. This means that no qualified majority resolution can be passed against the new shareholder at the Annual General Meeting.

In the case of the corporate phases in the development of companies, there are further possible uses of private equity. Here a distinction is made between:

• Venture capital in the case of a start-up with a successful business model
• Growth capital when a company expands into new markets or new product lines

In both cases, traditional lending banks are risk-averse and usually only want to provide debt capital after a successful market launch.

The second area of private equity in Switzerland consists of participating in buy-out financings with investments. Here are the best-known forms:

• Leveraged Buy-out (LBO)
• Management-Buy-out (MBO)

Leveraged Buy-out (LBO)

In an LBO, the majority of the purchase price for the target company is debt-financed. The liabilities incurred are charged to the target company. The loans are repaid from the cash flow of the acquired company.

Management-Buy-out (MBO)

In an MBO, the initiator is the management of the company itself. This can be triggered, for example, by a restructuring that is not carried out by the previous shareholders. The capital for financing is provided by the management itself and mostly by private equity firms.

Classification, delimitation, and comparison with other forms of finance

The main objective of private equity is to make equity investments in companies that are not listed on the stock exchange. In connection with private equity, there are two main directions for the targeted investments, as already mentioned in the last chapter:

• Buy-out
• Venture Capital (VC)

In terms of financial instruments, private equity aims to invest equity to gain direct access to the targeted company. A minority shareholding is only very rarely sought.

In terms of investment approach, private equity in Switzerland differs significantly from an investment in shares of companies. When private investors invest money in this asset class, the focus is primarily on achieving the highest possible return. The investor is not interested in making strategic decisions or gaining influence on the management. Whether investment in private equity is ultimately better than a direct investment in shares depends heavily on the timing and holding period of the investment.

Venture capital is mostly used in connection with start-ups with high growth potential. Private equity provides the basis for equity capital here. Because growth financing for young companies is often associated with high risks, the use of debt capital by banks is rare. As an equivalent for the high-risk appetite of private equity funds, a high return on equity is expected during the investment process.

Opportunities & Risks of Private Equity

An investment in private equity is certainly not a basic investment for capital investors. It requires a lot of experience in dealing with financial investments and at the same time a high starting capital for the entry. In connection with the investment in private equity, the investor takes a high financial risk. In exceptional cases, this can also lead to a total loss of the invested funds, because the investor is fully liable. You should keep these risks in mind before making an investment decision:

• Liquidity risks during the term of the investment
• Valuation risks relating to the acquired companies
• Cost risks due to high management fees and distribution costs
• Total loss of the paid-in funds due to insolvency of the target companies cannot be ruled out
• Transparency risks due to lack insight into the transactions carried out
• Lack of own initiative during the investment period, because dependent on the decisions of the investors

Investments in private equity and shares are considered long-term investments intangible assets. Whereas with equity investment you have the option to sell your shares on any trading day, this is not possible with private equity. The private equity fund is an institutional investor that has invested its assets for you on a long-term illiquid basis in unlisted companies. This creates an additional risk for the investor* that he/she cannot freely liquidate his/her investment in the short term.

The opportunities offered by private equity in Switzerland lie in the fact that investments are only made in selected companies with high expected returns. Investment professionals look for young companies with forward-looking business ideas. The second criterion is an undervalued company that can generate high profits in the future. In both of these cases, investors can expect high returns.

At the end of the investment horizon, an investment of the private equity fund is sold or placed on the stock exchange. Similar to an investment in real estate, the resulting increase in value is added to the investment capital. After realization of the sales proceeds, which are not necessarily generated sustainably, repayment is made to the investor.

Private equity: Only for the super-rich?

Investing in private equity is suitable for qualified private investors with expertise in the field of corporate investments. Before making an investment decision, the investor must aim for a long-term investment horizon. The second factor is that the investor considers the entrepreneurial liability risk. In addition, you should not be dependent on the invested capital during the term of the investment.

The financing amount for an investment in private equity in Switzerland is at least 250,000 Swiss francs or even a multiple thereof. For this reason, private equity is primarily suitable for:

• High-net-worth private clients
• Institutional investors
• Family Offices

You can gain access to the private equity market by contacting an institutional provider that sells such funds. When selecting a fund, it is important to carefully examine the fund’s investment focus in terms of sectors and strategy in advance.

For the normal private investor, this does not mean that he/she is completely excluded from investing in private equity. It is possible to invest money in this area via closed-end private equity retail funds or corresponding public funds. However, even in this environment, the customary minimum investment amounts are often more than 10.000 Swiss francs.

These funds are usually funds of funds, which subsequently invest the collected customer money in other private equity funds. However, before potentially investing money in these vehicles, you should consider:

• The dual fund structure creates an even greater lack of transparency of the invested funds
• Double costs, as the fund of funds, also charges its fees and management costs

How do private equity firms differ?

In their investment decisions, private equity funds set strict criteria according to which they invest the money they collect. A distinction is made between:

• Company phase
• Branch
• Financing amount
• Region

This ensures that the invested assets of a fund have homogeneous objectives.

Company phase

Funds that focus on the allocation of venture capital (venture capital) support a young company in a difficult phase. Here, the risks of total failure are greatest until the company with a promising business model has reached market maturity.

Companies wishing to spin off or expand a business unit look to private equity in Switzerland for growth capital. This can also be done in the course of an international expansion into new markets.

In the case of an MBO (management buy-out), private equity supports the management’s new strategy for a turnaround or business transformation.

Branch

When it comes to sectors, private equity funds specifically select segments with future growth. These are, for example, new trends based on innovative technology or topics that are promising for the future. These include, for example, investments in sustainable technology or products with added ecological value.

Funding Level

When it comes to the amount of financing, private equity focuses on the funds required for the planned investment and on the size of the target company. The volume of funds required often also influences the minimum investment amount.

Region

With a view to the region, private equity is focusing on future growth markets. These do not necessarily have to be in Switzerland or Europe. In the Asian region, in particular, economic growth is unabated in many countries.

Reading tip: Private debt: Alternative corporate financing and exciting asset class

Private Equity – Tips for the first investment

Before you, as an investor, consider investing in private equity funds for the first time, you should take your time to draw up a checklist. These questions, for example, are certainly helpful:

• Can you do without the invested money for a longer period of at least 10 years?
• Are you willing to take a risk that, in the worst case, could even mean a total loss?
• Can you correctly assess the risks of the planned investment?
• Have you chosen the right investment company?
• Is the private equity fund’s plan transparent and comprehensible to you?
• Are you aware of all the fees and costs incurred for the investment?
• Were you fully informed about all the questions you asked in discussions with the fund distributor?
• Are you willing to forego distributions during the term of the investment and only receive your capital with accumulated growth at the end of the investment?
• Are you prepared to take on additional risks (transparency and exchange rate risks) for a possible fund investment abroad?

It is crucial for your financial investment that you answer all of these questions with a clear YES. In addition, other questions may arise that are related to your situation. If the slightest doubt arises when assessing your investment, it is a good idea to consult an expert advisor. Under no circumstances should you ignore possible risks, because, in the end, you bear the sole responsibility for the investment.

A vivid example to imagine the total loss of financial investment is the comparison with the purchase of a luxury car. Imagine you buy a luxury car for at least 100,000 Swiss francs and drive the car head-on into the wall with a total loss on the first drive. If you are willing to take this pain, then nothing stands in the way of investing in private equity funds.

Conclusion on private equity

Private equity means off-market equity capital in connection with investments in companies. In this environment, a private equity fund collects investment money from investors. The most common investor groups in the private equity sector include high net worth individuals, family offices, and institutional investors. For small investors, an alternative is to invest in closed-end private equity retail funds. It is important to note that investing in private equity involves a high level of risk.

In the case of private equity funds, a rough distinction is made between venture capital funds and buy-out funds. Venture capital is mostly used to invest in young companies with a promising business model. Buy-out funds focus on expansion strategies for mature companies or transactions triggered by the management of the previous company. Both projects are supported with capital from private equity funds. In addition, banks and institutional investors can act as co-financiers in buy-out transactions.

Investors should define their approach precisely in advance of the investment. It is crucial to know all possible opportunities and risks with the planned investment employing a checklist. With the distribution of a fund of private equity in Switzerland all facts of the investment are to be discussed in the context of the first discussions. Once the right fund and the right investment objective have been found, you can invest. It is always a good idea to seek the advice of an experienced professional before signing the contracts if any doubts arise.

Read on in our journal:

• All about the Swiss vested benefit act
• More about Private Banking
• 3-pillar principle for pension provision
• Types of asset management mandates

Reading Time: 10 minutes

The basis for material security in Switzerland is the 3-pillar principle. It is the pension system guaranteed by the Federal Constitution and has proven itself over several decades. The aim is to provide Swiss citizens with financial security in old age and in the event of disability. In addition, dependents should be covered in the event of death.

Demographic developments and persistently low-interest rates also pose major challenges for Switzerland. Nevertheless, spreading the responsibility over several pillars makes pension provision more stable. This makes it all the more important for each individual to know the instruments, the specialists involved, and their areas of expertise. This article is intended to serve this purpose and provide an overview of the individual possibilities.

The most important facts in brief

• Switzerland’s pension system consists of three pillars: state, occupational and private pension plans.
• The first pillar serves to secure subsistence and is the responsibility of the state.
• The second pillar comprises occupational benefits and is the responsibility of employers.
• With the third pillar, personal responsibility is called for. With this, a private pension can be built up with state support.
• The opportunities that arise with the offers within the third pillar are interesting for several reasons. On the one hand, tax advantages already present themselves during active working life. On the other hand, this is about the possibility of avoiding unpleasant income gaps. The goal is to maintain the lifestyle in old age to which you have become accustomed.
• Spending on your private pension plan will be easier the sooner you start.

The story: A social insurance system is created by referendum

The Health and Accident Insurance Act (KUVG) came into being as early as January 1, 1912. Four decades later, the Old-Age and Survivors Insurance (OASI) was created on January 1, 1948. The two world wars were major triggers for this insurance. Many soldiers and their families were in dire straits because they were no longer able to work due to wounds. Families also experienced economic hardship due to the death of their main breadwinner.

It took many parliamentary initiatives before a nationwide solution was found. In 1960, the insurance was supplemented by disability insurance.

Many years later, the 3-pillar principle was enshrined in the Federal Constitution. On December 3, 1972, the Swiss voted in favor of the model with a 74 percent majority. For the first time in the history of Switzerland, a clear system was created that offered the population protection against the risks of disability, old age, and death of the main provider.

Before social insurance became part of public law in Art. 111 ff. of the Swiss Federal Constitution (BV), there were various institutions for this purpose. They were associations of persons as well as institutions to which people in distress could turn. These included, for example, welfare for the poor, mutual aid societies, and private insurance companies.

Structure and operation of the 3-pillar principle

The system is one of the fundamental values of Switzerland. It guarantees social security on a collective level and enables people to live a life of self-determination in old age. This objective is a major challenge in its implementation. Finally, all pension systems are subject to demographic change and have to face a changing society.

In Switzerland, this means in particular:

• Every generation so far has enjoyed a seven-year increase in life expectancy.
• 46 percent of Swiss citizens say they want to build up a nest egg for their old age.
• The challenge of the pension gap: This affects one in three Swiss citizens.

Despite the need for adjustments, Switzerland still has an excellent starting position. The basis for this is the 3-pillar principle, in which each pillar fulfills its specific purpose and has its scope of benefits. The interaction stands for classic Swiss values: solidarity as well as personal responsibility.

The first pillar includes only mandatory benefits. Likewise, some of the second pillar insurances are standard. Another part of the second pillar covers is voluntary options. The third pillar is based on completely voluntary benefits with its private insurances.

Pillar 1: Securing your livelihood – the state pension plan

The first pillar is based on the principle of solidarity. Employees (including cross-border commuters) and employers pay monthly contributions, which finance the payments to current pensioners. The age for the OASI pension, the retirement age, is currently 65 for men and 64 for women. The pension is granted upon application. If you want to know how much pension you can expect, you can apply to the cantonal compensation office for an advance calculation.

As of January 1, 2021, the maximum OASI pension is CHF 2,390 per month, and you can expect a minimum of CHF 1,195. These pensions require the full contribution period.

With this pillar, Switzerland fulfills its duty as a welfare state. In old age and the event of disability, the beneficiary’s livelihood is secured. However, you cannot expect more from the first pillar.

Features 1st pillar

The main features of the first pillar are:

1. mandatory pension plan
2. performances:

• Old-age and survivors’ insurance (OASI)
• Disability insurance (DI)
• The supplementary benefits (EL) for OASI and DI
• Unemployment insurance (ALV)
• Maternity allowance (MSE)
• EO (according to the income replacement regulation, benefits during military service, civil defense, or civilian service)

3. Objective: Securing livelihood
4. Financing: pay-as-you-go system (paid in by employed persons to payout approved pensions)

Features of the OASI

The OASI is national insurance. It covers all persons who live or work in Switzerland. This means that the insurance also covers cross-border commuters, guest workers, and people who are not gainfully employed (students, invalids, pensioners, housewives).

The OASI contributions are paid by all insured persons. Only children are exempt from this. Married persons who do not receive any income from gainful employment are also required to pay contributions. However, a limit applies to this contribution, which corresponds to twice the minimum contribution of the gainfully employed spouse.

Employee contributions are paid by the employer. The amount is based on income following the assessment for direct federal tax. Self-employed persons settle directly with the compensation office.

Pillar 2: Occupational pension provision – a building block for securing the standard of living

All employees are insured against disability from the age of 17. In addition, the family is financially protected in the event of death. The benefits are extended from the 24th birthday to include retirement benefits upon retirement.

The occupational pension plan can cover around 20 percent of all areas. Together with the benefits from the first pillar, this means that around 60 to 70 percent of the last income is covered.

Features 2nd pillar

The main features of the second pillar are:

1. Mandatory occupational pension plan
2. Services:

• BVG (Federal Law on Occupational Retirement, Survivors and Disability Pension Plans, mandatory, represented by pension funds)
• UVG (Federal Law on Accident Insurance, compulsory)
• FZG (vested benefits on leaving or changing a pension fund)
• Non-mandatory insurance for the BVG as well as for the UVG

3. Objective: Maintaining the standard of living in old age and providing coverage in the event of disability and for dependents in the event of death (in combination with the first pillar).
4. Funding: funded (savings)

Features of the occupational pension plan (BVG)

The second pillar is divided into two parts: the mandatory and the extra-mandatory part. In the mandatory part, the annual income that is insured is limited. The extra-mandatory part is the part above this

In the mandatory area, the pension plan covers the Protection in old age (BVG pension) as well as services for Disability and survivors’ insurance. It also includes daily sickness benefits insurance (continued payment of wages in the event of illness) and vested benefits (assumption of claims in the event of a change of benefits provider). The second pillar is supplemented by accident insurance (UVG), which covers employees against the risks of occupational and non-occupational accidents and work-related illnesses.

As soon as the annual salary subject to OASI exceeds the BVG minimum annual salary, employees are required to pay BVG contributions and insurance. The employers are responsible for the correct insurance in the BVG. As with the OASI contributions, they pay at least half of the contributions. Self-employed persons pay into the BVG voluntarily. The capital is managed by public and private pension funds.

The obligation to insure is thus limited to income in the mandatory area. It is therefore important to identify possible pension gaps here. You should therefore take advantage of the option of voluntary private provision of so-called pension 2b for the non-compulsory area. Important: The state indirectly participates in the financing of this essential pillar in that the contributions and the saved capital are tax-free.

Pillar 3: Private pension provision – secures the accustomed lifestyle in old age

The benefits from the mandatory areas of the first and second pillars can cover around 60 percent of income. However, this applies at most up to an income of up to CHF 86,040 (as of 2021). In combination with the extra-mandatory insurances, about 70 percent can be reached. You should also bear in mind that demographic trends mean that in the future, far fewer working people in Switzerland will have to pay the benefits of more and more pensioners.

The trend clearly shows that private third-pillar pension provision has gained in importance and is becoming increasingly important for the future.

Features 3rd pillar

The main features of the third pillar are:

1. voluntary private provision
2. benefits: In 1972, the Federal Constitution established the following ways within the third pillar to build up the additional assets needed for old age:

• Pillar 3a (A tied pension plan, tax-deductible with restrictions; in certain cases, such as the purchase of a home or the start of a self-employed business, the capital can be withdrawn early)
• Pillar 3b (free pension provision, fewer restrictions, no direct tax benefits, financial risks due to disability or death can be covered more in line with needs)

Features of private pension provision

You can tailor your voluntary private pension provision to your individual needs by choosing from a wide range of financial products. As can be seen above, the third pillar is divided into a tied pension plan (3a), which is available to all employed persons and persons subject to OASI contributions in Switzerland, and a free pension plan (3b).

1. Pillar 3a (tied pension plan)

• As the name suggests, the capital saved in pillar 3a products is tied up and can only be withdrawn early in a few defined exceptional cases.
• The contributions are tax-deductible within annually defined limits. In 2021, these amount to CHF 6,883 for employed persons with a pension fund and up to 20 percent of earned income for employed persons without a pension fund, up to a maximum of CHF 34,416.
• Tax incentives also include the fact that the income is tax-free during the term and the capital saved for pension purposes is not subject to wealth tax. In addition, the early payout of the capital is taxed at a reduced special rate.
• Payment can be made no earlier than five years before reaching OASI retirement age.
• If employment is continued beyond the regular retirement date, receipt can be postponed by up to five years.
• Pillar 3a pension provision is often represented by classic products such as pension accounts and pension custody accounts.
• Paid pensions are fully taxed by the federal government as well as the cantons.

2. Pillar 3b (untied pension plan)

• The free pension plan 3b is not subject to any state requirements such as payments, availability, or payout dates. This means that the pension gap can be closed completely and individually.
• The pension plan can be geared to achieving personal savings goals and wishes at self-determined dates, for example. There are no government restrictions on deposits, withdrawals, or payout dates. The relevant contractual provisions of the financial product are exclusively authoritative.
• The unrestricted pension plan can be used by all persons living in Switzerland.
• Contributions to unrestricted pension plans can only be deducted as part of the limited deductible contributions of the lump-sum tax deduction. This also includes premiums for health and accident insurance, which often means that the maximum amount has already been exhausted.
• If the statutory regulations are complied with, no taxes are payable on the lump-sum payment of periodically financed endowment life insurance policies. For this purpose, the contract must have been in force for at least five years and must have been concluded before the age of 66. In addition, the capital may not be paid out until after age 60.
• Compared to pensions from pillar 3a, which are fully taxable, pensions from the free pension plan 3b are only taxed at 40 percent.

Unrestricted pension provision 3b: Individuality through a variety of financial products

The ratio of pay-as-you-go to funded pension provision will continue to shift due to demographic developments, rising wages, and higher life expectancy. For the 3-pillar principle, this means that private provision in the third pillar will gain in importance. Matching retirement provision precisely to personal needs is only possible in pillar 3b.

Besides banks, fintech offers a wide variety of products. You can choose freely from a wide range of solutions. The low level of interest rates has meant that even inflation can no longer be compensated for with classic interest investments. Other investments that have an acceptable level of risk are in demand.

The most important forms of investment in the area of unrestricted pension provision are:

• Savings account
• Stocks
• Bonds
• Funds
• Commodity funds (e.g. gold)

Identify gaps in pension provision in good time and adapt pension provision forms

Everyone’s requirements are individual. What is certain, however, is that once a standard of living has been achieved, people are reluctant to give it up. You should bear this in mind when planning your retirement provision. Provisions under the first two pillars, provided the options are fully utilized, secure a maximum of around 70 percent of income. Experience shows that people feel comfortable with around 80 percent of net earned income in old age and can maintain their lifestyle habits. So take a look at your current entitlements from the first two pillars and use this data to plan your pension!

In addition, make sure to adapt your pension plan to personal changes. These are, for example:

• Start of self-employed activity
• Divorce
• Family (children)
• Homeownership formation
• Early retirement

The provider market has responded to the challenges. So you can call on professional help for your retirement planning. Digitization has made “family office-level” wealth planning accessible to broad sections of the population.

The strengths of the Swiss pension system in an international comparison

The quality of pension systems is often measured by HelpAge International’s Global AgeWatch Index. This index ranks countries in terms of their aging population and their well-being. Countries’ performance is to be identified and potential for optimization is to be surveyed. Of 91 countries surveyed worldwide, Switzerland has ranked among the top ten for many years. Interestingly, Sweden, a country comparable to Switzerland’s 3-pillar principle, is at number one.

The Swiss model has proven itself over many years. The fundamental advantage compared to other systems is that the three pillars complement each other optimally:

• The OASI offers a comparatively high level of benefits and is based on a strong community spirit.
• Second-pillar occupational pension provision has the advantage that the BVG is financed using the funded method and is thus less affected by demographic developments.
• With private pension provision in the third pillar, tax advantages can be generated during working life. The goal of securing the current standard of living for the future is more important than ever for all Swiss people. This can be tailored to the personal situation, especially with pillar 3b.

Another feature of the Swiss welfare state is that supplementary benefits are paid to people who cannot build up savings or whose income is below the subsistence level.

One advantage of the 3-pillar principle is the existence of both a pay-as-you-go system and a funded system. This increases the solidarity for the formation of necessary capital. The known risks, resulting from population development and inflation, are distributed among several pillars by the system. The state is at the center of responsibility. At the same time, companies are obligated and citizens are motivated to provide for themselves.

Reading Time: 4 minutes

In this article we would like to shed light on the scientific background of our investment strategy in order to make one of the most important distinguishing features of Everon more tangible. To do this, we first go into the discoveries of individual factors, in order to then show the concrete possibility of applying these factors in a portfolio. This is mainly done in relation to equities, but some factors can also be applied to other asset classes.

In the last century, many scientists have dealt with the question of which factors determine stock returns. One of the first and best-known models that attempts to explain this is the Capital Asset Pricing Model (CAPM), which was developed by Sharpe (1964), Lintner (1965) and Mossin (1966). They argue that the expected excess return of a stock is determined only by its (systemic) market risk. To this day, the model is popular for its simplicity in determining the cost of equity. However, empirical evidence shows that the model is too simple to explain expected stock returns (Fama and French (2004)). Later, researchers came up with additional explanations of what factors influence stock returns.

Ross (1976) proposes the “Arbitrage Pricing Model“, which states that the expected returns on financial assets are a function of several factors and the associated risk premia. However, he does not identify these factors in an economic sense. Seminal work in this area was published by Fama and French (1992,1993), where they proposed their famous three-factor model. It should be noted that they combined factors previously discovered by other researchers such as Basu (1977), Banz (1981), Sharpe (1964), Lintner (1965) and Mossin (1966). However, this does not diminish the importance of their empirical work, but it is still important to note. According to their model, stock returns are determined by three factors: “Market“, “Size“, and “Value“. Stocks with a high market correlation, a small market capitalisation (market cap) and a high book-to-market value ratio (B/M ratio) are likely to have higher excess returns. This model was then extended by Carhart (1997) to include a Momentum factor. Momentum looks at the return of a stock over the recent past, and different observation periods can be used here.

The models, such as those of Fama and French (1993, 2015), are called multi-factor models and can be divided into three categories: macroeconomic factors (e.g. inflation or interest rate surprises), statistical factors (e.g. principal component analysis) and fundamental factors that deal with a company’s fundamentals (e.g. price/book value). Everon’s investment strategy focuses on fundamental factors, which nowadays mainly include Value, Size, Momentum, Volatility, Dividend Yield and Quality. These factors have a solid research base, and there is a reasonable economic explanation for why they have historically delivered risk premia (Bender et al. (2013)).

The typical approach to factor models is to create portfolios that are sorted by the factors of interest. However, there are different approaches to how this sorting can be done. The classic methods are characterised by the fact that factor models construct each factor individually rather than scoring a stock on all factors simultaneously. This can lead to conflicting signals between the factors. For example, one would buy a stock based on Momentum but perhaps not on Quality.

At Everon, we rely on the best-known and most-researched factors such as Value, Momentum, Quality, Dividend Yield, etc. To avoid the problems mentioned above in portfolio construction, we analyse each stock simultaneously according to each factor. In this way, only those shares are included in the portfolio that can be classified as positive across all the factors considered. Furthermore, there is scientific evidence that the combination of factors in a portfolio is specifically advantageous over individual investments in each factor (S&P Dow Jones Indices (2018)).

Implementing a good multi-factor strategy on a single stock basis is costly and can therefore be expensive for private investors. We can efficiently implement this specific and sophisticated investment style through our automated and systematic investment processes.

References

W. F. Sharpe. Capital asset prices: A theory of market equilibrium under conditions of risk. The journal of finance, 19(3):425–442, 1964.

J. Lintner. Security prices, risk, and maximal gains from diversification. The journal of finance, 20(4):587–615, 1965.

J. Mossin. Equilibrium in a capital asset market. Econometrica: Journal of the econometric society, pages 768–783, 1966.

E. F. Fama and K. R. French. The capital asset pricing model: Theory and evidence. Journal of economic perspectives, 18(3):25–46, 2004.

S. Ross. The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13(3): 341–360, 1976.

E. F. Fama and K. R. French. The cross-section of expected stock returns. the Journal of Finance, 47(2):427–465, 1992.

E. F. Fama and K. R. French. Common risk factors in the returns on stocks and bonds. Journal of financial economics, 33(1):3–56, 1993.

S. Basu. Investment performance of common stocks in relation to their price-earnings ratios: A test of the efficient market hypothesis. The journal of Finance, 32(3):663–682, 1977.

R. W. Banz. The relationship between return and market value of common stocks. Journal of financial economics, 9(1):3–18, 1981.

M. M. Carhart. On persistence in mutual fund performance. The Journal of finance, 52(1): 57–82, 1997.

E. F. Fama and K. R. French. A five-factor asset pricing model. Journal of financial economics, 116(1):1–22, 2015.

J. Bender and F. Nielsen. Earnings quality revisited. The Journal of Portfolio Management, 39(4):69–79, 2013.

S&P Dow Jones Indices. The Merits and Methods of Multi-Factor Investing. Online, Apr. 2022. URL https://www.stoxx.com/document/Indices/Common/Indexguide/stoxx_ index_guide.pdf.

Read on in our journal:

• Family Office: definition, benefits & tips
• Pillar 3a insider tips
• Vested benefits account – what to look out for?

Reading Time: 3 minutes

Everon basically stands for the active investment approach, but we have our own definition of it. We understand “active” as a systematic, unemotional and quantitative way of analysing investment instruments. We do not try to “time” the market, as short-term market developments are usually difficult to predict and are often based on speculation. For this reason, we trade in predefined time intervals, which can be shorter or longer depending on the market phase and market fluctuations.

We evaluate a global universe of investment instruments (e.g. equities) according to specific criteria, such as the risk or quality of a security. The analysis also considers various “factors” whose existence is recognised in science. Combining these criteria and factors enables us to actively adjust our strategies to generate optimal risk-adjusted returns over the long term. This means optimising the return in relation to the risk taken. The investment style is called “multi-factor investing”.

Reading tip: AMCs – actively managed certificates

REASONS FOR THE ACTIVE EVERON APPROACH

Any customer wishes can be taken into account.

This includes both the explicit inclusion and the explicit exclusion of specific companies/titles.

With our investment approach, we pursue a so-called “multi-factor strategy”.

More than 50 years ago, scientists proved that certain factors in the market allow investors to earn an additional risk premium above the market return if they are exposed to these factors through their investment. An example is the «Size» factor, which states that small companies generate an excess return over large companies.

Other well known and academically accepted factors are «Quality», «Momentum», and «Value» (see chart above). Therefore, some providers offer a product (usually an exchange-traded fund, so-called ETF) of this factor by mapping a particular index. However, it has been found that the combination of different factors in a portfolio is much better performing than investing in single factors or investing in the whole market itself. This is the basis of Everon’s investment philosophy.

We have the opportunity to focus on different factors in different market phases.

Active investing offers individual solutions for each investor. It has been shown that certain factors are particularly suitable in certain market phases. This allows us to manage the portfolio, especially in more turbulent times actively. In this way, risk-return ratios can be created that are impossible with a passive investment (e.g. the entire Swiss market).

Through direct investment, the client is a shareholder in the company.

If one holds genuine company shares, dividends are paid out directly, and all shareholder rights and obligations are open, such as voting rights. This also makes it possible to influence the company actively. Our offer is aimed at clients who care about what is in their investment portfolio. The portfolio is fully transparent at all times. This is not the case with many passive investment instruments: By mapping an entire market, you also invest in areas or companies that may not be desirable. Due to our direct and active approach, we can consistently implement any type of investment according to your wishes. We are neither bound to certain products nor predefined compositions of indices. This enables us to incorporate the latest scientific findings into our strategies in the future as well.

The advantage over implementing an active approach ourselves: Our expertise in assessing individual investment instruments and avoiding so-called “behavioural biases”.

“Behavioural biases are features of human psychology that lead individuals to make sub-optimal investment decisions. The best example is the so-called “herding”, also comparable to the recently prominent “Fear of Missing Out (FOMO)”. It’s about the tendency of people to invest in stocks that have already performed very well. Individuals tend to do what others are doing (so-called “herding” or herd instinct) or get the feeling that they are missing out on a unique opportunity (“FOMO”).

Reading tip: The Advantages of AMCs for Investors

Active investing helps to fulfil various functions of the financial markets.

Active investing contributes to the efficiency of financial markets. Market efficiency means that the market price reflects the actual value correctly or that all information available to market participants is correctly valued. Inefficient markets, capital flows to “good” companies, while “bad” companies receive no capital and thus disappear from the market sooner or later. Furthermore, fair pricing emerges as active investors with different views operate in the markets. It provides liquidity for buyers and sellers. On the other hand, passive investors allocate capital quasi “blindly”, as they only buy and sell securities in connection with the mapping of the index and thus do not carry out any quality check.

Read on in our journal:

• Background on long-term investments
• Digital wealth management tips and tricks
• Private financial planning guide and template

Reading Time: 2 minutesDid you know that we are the first fintech in Switzerland with 35 years of financial advisory experience? This is possible thanks to the cooperation with the multi-family office “Swiss 5 Group”. This gives Everon clients the best of both worlds: private banking including digital asset management via the app and customized investment strategies that are otherwise reserved for professional and institutional investors.

Until today, there was little overlap between utilizing a wealth management application and receiving guidance from a family office. While apps rely on automation and standard processes to keep costs as low as possible, the family office focuses on personal and tailored advice. Accordingly, the services and investment strategies of a family office have so far only been available to a very small and exclusive group of clients.

Democratization of private banking

We are now bringing these two approaches together for the first time as we democratize private banking by combining the best of both worlds. At Everon innovation meets tradition. Our customers can manage their assets completely independently and at attractive conditions via the app. At the same time, they have access to the tried-and-tested investment strategies that we have developed together with the Multi Family Office have developed.” Further services, which in our view still include personal consulting, can also be used if required.

This service is usually only available to family office customers.

Fintech with 35 years of investment experience

Our investment philosophy has existed and proven itself for 35 years and is continuously developed.  The strategic and tactical asset allocation is defined regularly and jointly. We also coordinate with the family office on the individual strategies within the respective asset classes. In addition to traditional asset classes such as bonds, equities, real estate, and commodities, Everon clients can also invest in private markets. 

We can also respond quickly and unbureaucratic to individual customer needs in all other asset classes: Thanks to our «Portfolio Management Engine» we are very flexible. This self-developed software generates, based on the wishes and requirements of the client and the parameters of the investment committee, individualized proposals for individual investments and entire portfolio structures.

The only fintech represented in the wealth management ranking: award-winning strategies for a target group that will no longer receive the advice it deserves from banks in the future

The fact that the jointly developed investment strategy works are shown by the asset management ranking published by Bilanz and firstfive In 2020, we made it into the top 5, and in 2021 we even made it to 1st place. 

Reading Time: 3 minutes

Low margins, cost pressure, more demanding customers: Private banking is facing numerous challenges. However, as a provider, you should regard these developments as an opportunity, because this is how you can benefit from the digitalization of private banking.

Private banking has been a constantly growing and tremendously successful line of business for a long time. Since the turn of the millennium, things have looked different. Although assets under management have declined according to Deloitte continued to rise between 2000 and 2020 – by 60 percent but at the same time profitability fell by 40 percent. According to the experts at Deloitte, the provider’s business models are to blame for this development: They are outdated and increasingly fail to meet customers’ needs.

These needs have changed dramatically in recent years. As we have become accustomed to in other industries, banking transactions should be able to be carried out 24/7 and with little effort. The solutions must be state-of-the-art and include additional functions that not only look good but also offer added value. Thanks to the Internet, customers are also increasingly well informed. They compare the services and fees offered and (understandably) only want to pay for what they actually need.

Those who do not meet these demands will not be able to hold their own. Because while bank customers used to be very loyal, today they are more willing to change their banking relationship.

Not to do things by halves

The changes in private banking are so profound that it is not enough to digitize individual areas. Installing digital sales channels, such as an app, is the first step. However, to remain relevant in the future, providers must also digitize all processes from the ground up.

At the same time, it is important to maintain proven strengths such as discretion, quality, individual service, and independence. The latter, in particular, is central to private banking and allows clients to be served not by product salespeople, but by financial specialists. By advisors who earn not from product commissions, but from the growing wealth of their clients.

While many providers are still struggling with these developments and sticking to the existing business model, customers have become accustomed to the benefits of digital offerings. Not only because of the leaner fee structure but because they benefit in other ways as well. For example, in a Studie von Ernst & Young 57% of respondents say they make better investment decisions thanks to digital tools. Unsurprisingly, Millennials (78%) use the offering more than Generation X (59%) or Baby Boomers (42%). The Corona pandemic has further reinforced these developments, with more than half of respondents now relying even more heavily on digital tools.

Digital but still personal

However, the increased focus on digital offerings does not mean that people no longer play a role in private banking. The need for personal advice will continue to exist in the future, which is why hybrid business models have the best prospects. In these, all processes are digitalized, but it is still possible to speak to an advisor in person if necessary – for example, via video call.

The democratization of private banking not only benefits customers but also those providers who can meet the new demands. Thanks to competitive offerings, they are becoming attractive to more and more people and can expand their customer base. But unlike in the last 20 years, costs are no longer getting out of hand because the majority of processes are digitalized and cost-effective. Clever digitized private banking is therefore attractive for customers and providers alike.

Continue reading in our journal:

• More on Digital Wealth Management
• Background on the family office
• All about private financial planning

Reading Time: 2 minutes

Current market situation

In the last few days, we have witnessed significant movements in the global capital markets. The main reasons are the recently announced interest rate hikes and the current geopolitical situation in the Ukraine.

In principle, raising interest rates is a sign that an economy is doing well. In the current case however, the interest rate hikes by various central banks are based on the fact that there is above-average inflation in many countries. On the one hand, this is due to the loose monetary policy of the central banks during the Corona crisis, and on the other hand to the disruption of international supply chains triggered by the Corona crisis. For example, a shortage of goods with a rising money supply leads to rising prices.

Higher interest rates mean higher financing costs for many companies. This particularly affects companies that still have to invest a lot of capital in their growth, so-called “growth” stocks. For this reason, these stocks that are being hit hardest by the current market correction. Another point that currently worries market participants is the uncertainty about the velocity and extent of the announced interest rate hikes.

At Everon, we are watching the markets closely and believe that market participants are currently overreacting, as economic data has been very positive, especially over the past year. To some extent, we can also assume that some players in the market now want to realize the extraordinary gains of the last stock market year and sell their positions. An interest rate hike is basically a normal process that was bound to happen again sooner or later. The low interest rate environment has already become normal for us from a psychological point of view.

Sell-off largely limited to equity markets

Looking at other markets, we can clearly see that the current situation is not comparable to the early 2020s. Credit spreads on corporate bonds remain unchanged at a low level. Credit spreads can be seen as the risk premium that companies have to pay on their debt financing to compensate lenders for the risk of default. This is a good indicator of the overall economic health of companies.

How Everon reacts to the current market situation

We have chosen not to hedge our portfolios, because it is very costly and we see limited benefit in doing so. Instead, we reallocate within the portfolio to more stable industries and prepare to take advantage of opportunities as they arise during the inevitable recovery phase. As it is scientifically proven that about 80% of the return is explained by the strategic asset allocation, we would like to stick to it. So far, this has paid off in the medium to long term.

Therefore, it is important to remain calm in this turbulent market phase and not to be unsettled by short-term losses. Corrections, such as those we are currently seeing, are completely normal, especially against the backdrop of the recent extremely positive stock market years. And these also have a decisive advantage: they are the best times to invest additional capital. As long as nothing has changed in your financial situation or your risk profile, we are still on track for the long term with your current strategy.