1e plans in occupational benefits insurance: what you need to bear in mind

1e plans, which allow insured persons to choose their individual strategy from a limited number of investment strategies, led a shadowy existence for a long time. This changed in 2017 when key issues were regulated and, in particular, capital protection on withdrawal was dropped. Following these adjustments, 1e plans became much more widespread and are being offered by more and more companies together with the basic fund as part of an attractive pension solution. 

Capital protection no longer applies

In principle, the employer decides whether and for which insured persons 1e plans are offered. All insured persons who have a sufficiently high income are then automatically insured in the 1e plan. The employer can provide up to a maximum of 10 selectable investment strategies. One of these must be low-risk due to the elimination of capital protection. Ultimately, this means that insured persons receive exactly the funds they have saved in their individual retirement accounts after all investment years when they leave the company.

If a 1e plan is integrated into the pension solution, insured persons benefit in full from the opportunities on the capital markets, but also bear the investment risk for this part of the retirement provision themselves. This also applies to the retirement assets transferred from a basic fund to the 1e Foundation. Investment returns are credited in full to the capital. This means that no redistribution effects, such as retirement losses or reductions in the technical interest rate, have to be co-financed in the pension capital of the pensions.

The previous capital protection on the transferred retirement assets is completely eliminated. In the very unlikely extreme case, it would even be conceivable that the insured persons would have lost a large part of these retirement assets at the time of leaving the 1e Foundation due to investment losses. If the funds have already been included in the pension plan or an early withdrawal for home ownership is planned, it is better for the insured person to transfer no retirement assets or at least a correspondingly reduced amount from the basic fund to the 1e Foundation.

Risk-averse policyholders

For younger policyholders in particular, the 1e plan offers an opportunity to benefit from higher returns in the longer term. However, according to WTW market experience, on average one in five policyholders has invested in the low-risk strategy. This means that considerable potential returns remain untapped. The "life cycle" investment (more investment risk in younger years if compatible with life planning, reduction of investment risk as retirement approaches), which is made possible by a 1e plan, appears to be rarely implemented in practice.

Whatever the reason for the decision, insured persons usually have to accept a lower return or interest rate in the low-risk strategy than they would have received in their basic fund. Increased communication with policyholders, as well as the use of information services by policyholders, can highlight the advantages of the "life cycle" investment.

Attention when changing pension fund

If insured persons change or leave their employer, it should be noted that a termination benefit is due when they leave the 1e Foundation. The value of the pension assets at the time of leaving must be transferred to the pension fund of any new employer or to a vested benefits institution, depending on the insured person's future career. In practice, termination benefits are generally paid out in the form of cash. This means that, as a rule, all securities are liquidated upon departure. A transfer of securities is difficult to implement, but is not legally prohibited.

For insured persons who are invested in a higher-risk investment strategy, this may mean that they are forced to sell investments at an unfavourable time and thus incur large losses. The 1e Foundation can make provision in its regulations for insured persons to remain in the Foundation as external members for a limited period. The retirement assets then remain invested unchanged. However, this only applies as long as there is no new insurance with the pension fund of a new employer. Nevertheless, it is recommended that, depending on the market environment, insured persons examine this option and thus postpone the sale of their investments.

Change of strategy before retirement

As retirement approaches, higher-risk strategies should be abandoned in favor of the low-risk strategy. Low-risk strategies generate low or even negative returns until retirement. In order to benefit from a higher-risk strategy in the end, correspondingly higher returns must be achieved in the period before the change of strategy. On retirement, the 1e foundations provide for a capital payout. Insured persons therefore bear the longevity risk on the retirement capital themselves or hedge it in the form of a retirement pension. This is generally expensive and is associated with very low conversion rates. It makes sense to coordinate retirement provision when retiring from the basic fund with that from the 1e Foundation. The combination of pension withdrawals from the basic fund and lump-sum benefits from the 1e plan can make perfect economic sense.

This must be observed

Entry into 1e plan

• Detailed review/information on whether the transfer of retirement assets makes sense

Accumulation of retirement capital

• Observe the strategy of the "life cycle" system
• Use the information offered in this regard

Change of pension fund

• Consider remaining in the existing 1e foundation for a limited period of time

Retirement

• Timely switch to a low-risk strategy
• Reconciliation pension plan 1e foundation with basic fund

Author:

Stephan Wildner is Managing Director at WTW Switzerland and Fiona Stocker is a pension fund expert at SKPE.

The consulting firm WTW offers data-supported, evidence-based solutions in the areas of employees, risk and capital that make companies more resilient, motivate employees and optimize performance.