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Occupational pension schemes
Types of scheme
What are the most common types of pension scheme provided by employers for their employees in your jurisdiction?
There are two types of pension scheme in Switzerland:
- defined benefit plans; and
- defined contribution plans (which are rare in practice).
In defined benefit plans, benefits are fixed in advance and their amount is usually based on the amount of the insured salary. Defined contribution plans provide for benefits which are fixed only when they are to be paid and their amount is determined in light of the accrued contributions of the insured.
Benefits As a matter of principle, occupational pension benefits are paid out as a pension. In this context, once a person reaches retirement age (ie, 65 for men and 64 for women), or in case of any other insured event, a minimum conversion rate is calculated in order to set the amount of the retirement pension. The existing conversion rate is 6.8% (for men and women who have reached the normal state retirement age). The rate is adjusted each year by the Federal Council.
In certain cases retirement savings can also be paid partially or as a lump sum.
Is there a statutory framework governing the establishment and operation of occupational pension plans?
Occupational pension plans are mainly governed by:
- the Federal Act on Occupational Pension; and
- the Federal Act on Vesting in Pensions Plans.
These two acts are complemented by the following ordinances:
- the Ordinance on Occupational Retirement, Survivor and Disability Pensions Plans;
- the Ordinance on the Tax Deductibility of Contributions to Recognised Forms of Benefits Schemes; and
- the Ordinance on the Use of Pension Assets for the Encouragement of Home Ownership.
This statutory legal framework is complemented by the internal regulation of the pension funds, which must be approved by the supervisory authority.
What are the general rules and requirements regarding the vesting of benefits?
In general, retirement savings accrued over an insured person’s working years are paid once that person has reached retirement age (ie, 65 for men and 64 for women). However, if the internal regulations of the pension fund authorise it, the retirement pension may be paid out two years before or deferred up to five years after retirement age. Whereas early retirement leads to a reduction in the pension level, deferral has the opposite effect.
Until the age of early retirement, retirement savings can, in principle, be paid only in case of the disability or death of the insured. Therefore, benefits are vested only when an insured event (ie, retirement, disability or death) occurs.
However, in certain circumstances, retirement savings may be paid out to the insured as a lump sum, irrespective of an insured event, such as:
- acquisition of real estate;
- definitive departure from Switzerland to a non-European Union or European Free Trade Association country;
- taking up self-employed activity; or
- very low retirement savings.
What are the general rules and requirements regarding the funding of plan liabilities?
Pension funds are financed by:
- contributions paid by employers and employees, as well as voluntarily affiliated self-employed persons; and
- profits from the pension fund’s investments.
As a general rule, pension funds should ensure that their coverage rate (ie, the percentage of the liabilities of a pension fund covered by its assets) does not fall below 100%. If assets exceed the liabilities, pension funds are obliged to create a fluctuation reserve. In case of a shortfall in the financing of a pension fund (ie, a coverage rate below 100%), pension funds must take measures in order to reach the legal minimum coverage rate. Such measures may, in particular, include the obligation for insured persons or retirees to pay additional contributions.
In order to establish financial statements, pension funds must rely on Swiss reporting standards (eg, Swiss GAAP FER 26, not International Financial Reporting Standards).
What are the tax consequences for employers and participants of occupational pension schemes?
Both employers and employees contributions are tax deductible.
As is the case with any other form of income, all benefits received as a pension are taxed at a normal rate. Where benefits are paid as a lump sum, a reduced rate of (in principle) one-fifth of the standard applicable rate is applied.
Is there any requirement to hold plan assets in trust or similar vehicles?
In principle, assets must be held in a pension fund structured as:
- a foundation; or
- a public entity with legal personality governed by Swiss law.
In any case, it must be a separate entity from the employer. All pension funds are under the surveillance of the supervisory authority.
There are three types of pension fund under Swiss law:
- individual pension funds (set up by a single company to run its employees’ plans);
- shared pension funds (set up by multiple companies to run their employees’ plans); or
- collective pension funds (generally set up by insurers and joined by multiple companies).
Are there any special fiduciary rules (including any prohibited transactions) in relation to the investment of pension plan assets?
Pension fund board members are responsible for the investment strategy of the pension fund’s assets and sufficiency of the returns. Board members must serve the interests of the insured’s pension fund. To this end, personal and professional interests should raise no conflict of interest.
Nevertheless, legal requirements must be complied with, which limit the types of investment, as well as the proportion of investment. For example, only 5% of the pension fund’s assets can be invested in a single company’s shares.
Is there any government oversight of plan administration and/or insurance coverage for plan benefits in the event of an employer’s insolvency?
Pension funds are structured as entities which are separate from employers. As such, an employer’s insolvency has no effect on the pension fund’s solvency.
In case a pension fund becomes insolvent, a so-called national ‘security fund’ guarantees the benefits of the pension fund based on a maximum insured salary of Sfr126,900 (corresponding to one-and-a-half times the maximum insured salary under the Occupation Benefits Act). The security fund is financed by pension funds.
Moreover, the supervisory authority controls the pension funds’ activities at all times so as to avoid insolvency where possible. The supervisory authority may take specific measures, including entrusting the management of a pension fund’s assets to a public authority or cancelling the decisions of a pension fund’s board.
Are employees’ pension rights protected in the event of a business transfer?
Pension funds are legally independent from employers and a business transfer should have no direct effect on an employee’s pension rights.
In the case of a business transfer, employee pension rights are, in principle, protected. The accrued retirement savings are transferred to the pension fund of the new employer. The employee rights to benefits are then calculated according to the applicable regulations of the new pension fund.
Under certain circumstances, employees can receive more or fewer benefits than they have accrued. This is particularly so when a partial liquidation occurs in the following situations:
- a large number of employees leave a company;
- a company is subject to restructuring with layoffs; or
- affiliation with a pension fund is terminated.
In the event of a partial liquidation, should the coverage rate be lower than 100%, the retirement savings of leaving employees will be proportionally reduced. However, such a reduction should not affect the minimum retirement savings as calculated under the Occupation Benefits Act, to the extent that the pension fund actually has sufficient assets to cover this amount.
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