SLI Pension Benchmarking Study 2023
In the ever-changing world of retirement planning, 1e plans have become a popular choice for the flexibility it brings to Swiss pension funds, insured members, and employers. Rooted in Article 1e of the ordinance of occupational pension plans (BVV2) since 2017, 1e plans are designed, within the second pillar, to offer high earners a better alignment of investment options to their risk tolerance for parts of their salary that exceed a threshold (CHF 132,300 in 2024). What sets the 1e plan apart is its distinctive feature: a shift from annuities to lump sums payments only and empowering each employee to align their investment strategies with their individual risk tolerance versus regular mandatory Swiss pension plans.
Notably, international corporations have taken a keen interest in 1e plans, also drawn by its accounting simplicity, as there are no longer plan obligations to report on their balance sheets under IFRS and US GAAP. While our SLI® Pension Benchmarking study in 2017 revealed only one company offering a 1e plan, this number had expanded to eight companies by the 2021 study. But interestingly, this number has remained unchanged in our latest 2023 study. This calls for reflection on whether the rapid ascent of interest rates is reducing the demand for risk mitigation or if alternative pension models like variable pensions are gaining prominence, potentially lessening the need for 1e plans. Or alternatively, the companies most eager to implement these plans to align to their global pension policy all did so shortly after the change in the law in 2017 and future implementations will be considered less frequently. Nonetheless, with the recent inflation pressure on pension Foundations to maybe increase pensions, it remains to be seen if this recent stabilization in uptake is only temporary.
Looking at our recent study and the changes in lump sums and pensions at retirement over time, we are pleased to see that total benefits remain quite stable over the last four studies. We see a slight increase in the average retirement lump sums at age 65 and a small reduction in the average pensions at age 65 since the 2021 study. The fact is that the decline in retirement pensions come mainly from this long trend of reducing the plan’s retirement conversion rate. However, with bond yields having increased drastically during 2023 and early 2024, it now begs the question whether pension Foundations will consider increasing their technical rates and thus potentially the conversion rates in the future.
The landscape of retirement planning continues to transform, and 1e plans, with their more individualized approach, remain an important option for Swiss supplementary pension arrangements. We continue to expect that the evolution of these 1e plans will depend on improved technology and legislation changes in Switzerland in the years ahead.
Read the entire study report here.
WTW’s Pension Index decreased by 0.5% during Q3/2023.
