Maximize Your Pension Returns: How 1e Plans Empower High Earners in Switzerland

Planning for retirement within Switzerland’s occupational pension system (BVG) can be limiting for high earners. While the system effectively provides security for most employees, those with higher incomes often face capped returns and restricted investment choices. However, 1e pension plans offer a powerful alternative, providing greater flexibility and control over non-mandatory pension contributions.

In this article, we break down the structure of Switzerland’s 2nd pillar pension system, explain how 1e plans differ from traditional schemes, and highlight their advantages for both individuals and employers.

Overview of the Swiss occupational pension system (2^nd pillar)

Switzerland’s pension system is built on three pillars, with the 2nd pillar focusing on occupational pensions (BVG). This pillar aims to complement the state pension (1st pillar) to ensure individuals maintain their standard of living after retirement. It consists of two parts:

1. Mandatory Occupational Pension Scheme (BVG): Employees earning more than CHF 22,680 per year (as of January 1, 2025) are automatically enrolled in the mandatory occupational pension scheme. This threshold ensures that at least CHF 3,780 is insured under the BVG. Contributions are shared between the employer and the employee and apply to the insured portion of the salary up to CHF 90,720. Many pension funds follow a conservative investment strategy, although some also incorporate higher equity allocations or alternative investments.
2. Supplementary Occupational Pension Scheme: For income exceeding CHF 90,720, the supplementary occupational pension scheme begins. Employers can voluntarily make additional contributions to enhance their employees’ retirement benefits. From an income of CHF 136,080, individual 1e plans become available. These offer greater flexibility and allow for tailored investment strategies. While participation in this scheme is voluntary, it presents the opportunity for higher returns and customized retirement solutions.

It’s important to note that, for self-employed individuals, both the mandatory and non-mandatory portions of the 2^nd pillar are voluntary. However, if a self-employed person decides to join an occupational pension plan, they will also have to join the same mandatory occupational pension scheme for income below the CHF 136,080 threshold (i.e., they cannot immediately take advantage of the increased flexibility of the non-mandatory pension with their entire contribution amount that falls below the threshold).

What is a 1e pension plan?

A 1e pension plan is a special form of occupational pension in Switzerland that applies exclusively to the non-mandatory portion of your pension contributions (i.e., contributions from income above CHF 136,080). It is based on Article 1e of the Ordinance on Occupational Retirement, Survivors’ and Disability Pension Plans (BVV 2).

For income up to CHF 90,720, the mandatory occupational pension scheme (BVG) applies. Contributions are shared between the employer and the employee and are managed through a traditional pension fund.

For income exceeding CHF 90,720, there is an option to make additional contributions within the supplementary occupational pension scheme.

From an annual income of CHF 136,080, 1e pension plans become available. These offer greater flexibility and allow high earners to choose individual investment strategies.

1e pension plans must be managed in separate pension schemes within a pension fund. Employers decide whether to introduce a 1e plan. If such a plan exists, eligible employees can select their investment strategy within the plan. Without a 1e solution, the supplementary pension contributions are managed within the company’s regular pension fund.

What is the problem with traditional pension funds for high earners?

Traditional pension funds typically follow a collective investment strategy aimed at securing the long-term retirement benefits of all insured members. The primary focus is on stable returns to ensure reliable payments for retirement, disability, and survivors’ benefits.

To minimize investment risk and achieve stable returns, many pension funds adopt a balanced investment strategy with an emphasis on secure assets. However, depending on the risk profile and funding ratio, equities, real estate, or alternative investments may also be considered.

While this works well to reduce volatility and ensure a minimum pension after retirement, it also limits the potential for higher long-term returns, especially for high earners who are less risk averse and are seeking greater investment flexibility.

The main drawbacks of a traditional pension scheme for high earners include :

• Limited control: All contributions are managed under a standardized investment approach, regardless of individual goals or risk tolerance.
• Cross-subsidization: Returns generated by high earners are often used to subsidize the pensions of other insured persons.
• Low returns: Conservative investment strategies mean returns often fall below market averages and, in some cases, even below inflation rates.

In summary, high earners who wish to strategically build wealth over the long term are severely constrained within the traditional occupational pension system, and therefore need a better solution. This is where the 1e pension plan comes in.

How do 1e pension plans solve these problems?

As a high earner, a 1e pension plan offers you the ideal solution by allowing you to customize your pension investment strategies. Here’s how it addresses the aforementioned issues of traditional pension funds:

• Higher return potential: Increased exposure to equities and other high-growth investments can significantly boost your long-term returns.
• Flexibility: You decide how the non-mandatory portion of your pension is invested.
• No redistribution: No cross-subsidization means all returns belong solely to you.

What are the advantages of 1e pension plans for employees and employers?

1e pension plans offer a range of benefits for both employees and employers alike:

Benefits for employees

• Individual choice: Employees select from a range of investment strategies based on their personal risk tolerance and investment goals. Pension funds typically offer up to ten strategies, including at least one low-risk option.
• Full ownership: Employees are fully exposed to the risk and reward of their 1e pension investments. This means they receive 100% of the return from their investments, and these gains are credited directly to their individual pension accounts. In turn, the fund offers no minimum interest guarantee as with traditional occupational pensions, so the employee bears the entire risk of loss.
• No cross-subsidization: Unlike traditional pension funds, there is no redistribution of returns to other insured persons via collective reserves, ensuring that each employee benefits fully from their investment success.
• Tax Advantages: Contributions to 1e plans are tax-deductible, including voluntary purchases, as long as they do not exceed the legal maximum amount. This reduces taxable income.
• Higher returns: Employees can achieve improved retirement benefits through higher expected returns from personalized equity-based strategies.
• Transparency and control: Clear separation between personal returns and collective funds, allowing employees to monitor their investment performance directly.

Benefits for employers

• Reduces risk: 1e plans are fully contribution-based, meaning employers do not bear investment losses or underfunding risks (i.e., there are no minimum guaranteed benefits). The fund functions more as a savings tool than an insurance plan, and retirement benefits are usually paid out in the form of a lump sum, meaning the company need not maintain provisions for longevity risks.
• Lower premiums: Risk premiums for disability and death coverage are typically 25% lower, as 1e plans usually cover low-risk industries and personnel.
• Liability optimization: Since 1e plans are defined contribution solutions under IFRS and US GAAP standards, they do not need to be recorded as pension obligations on company balance sheets. This improves the company’s financial statements and reduces liabilities.
• Talent attraction and retention: Offering a 1e plan with flexible, high-return investment options is a powerful incentive to attract and retain top talent, especially senior executives and key employees.
• Efficient implementation: 1e solutions can be implemented quickly and cost-effectively as supplementary pension schemes.
• Flexible contributions: Employers can choose flexible contribution models to align with company goals and budgets.

Do I have to use a 1e pension plan if I earn more than CHF 136,080?

If you earn above CHF 136,080, you have three options for the income exceeding this threshold:

1. Traditional occupational pension:

Even if you earn above CHF 136,080, you can still contribute the excess income to the non-mandatory part of a traditional pension plan. This keeps your entire pension under the same conservative investment strategy. While this can result in lower long-term returns, it may be suitable for those who prioritize security and simplicity.

2. 1e pension plan:

If your employer offers a 1e plan, you can invest the supplementary portion there and choose from various investment strategies. Depending on the provider, options may include low-risk, balanced, or growth-oriented strategies. This is ideal for high earners seeking higher returns and willing to take on investment risk themselves.

3. Do not contribute at all:

You may also choose not to contribute the non-mandatory portion. Instead, you can invest or save the funds privately(e.g., through pillar 3a, real estate, or other private investments). This approach offers the most flexibility but misses out on the tax advantages available through occupational pension contributions.

Important: The mandatory portion of your salary (up to CHF 90,720) is always subject to the traditional occupational pension scheme. For income between CHF 90,720 and CHF 136,080, the supplementary pension contributions remain within the regular pension fund. From an income of CHF 136,080 onwards, you have greater flexibility, provided your employer offers a 1e pension plan.

How do 1e plans work for the self-employed?

Self-employed individuals in Switzerland are not required to participate in the occupational pension system. However, they can voluntarily join a pension fund. If a self-employed person (typically a sole proprietor) opts into an occupational pension scheme, the same thresholds apply: Income up to CHF 136,080 follows traditional pension fund rules, while income above that threshold can be allocated to a 1e plan. The self-employed individual will have to pay both the employer and employee contribution shares. For information on occupational pension options for the self-employed, read our full blog: Pension fund options for sole proprietors and the self-employed.

Another option is for self-employed individuals to instead set up a corporate structure (e.g., GmbH) and pay themselves a salary, structuring contributions to take advantage of 1e plans. In other words, this means the individual is no longer considered self-employed according to AHV standards and is instead seen as an employee in their own company.

While both sole proprietors and GmbH owners can access 1e plans for income above the threshold, GmbH owners often have more access to pension providers, better tax optimization opportunities through employer contributions, and simpler administrative processes.

One final option is to instead use Pillar 3a for additional retirement savings, though this comes with lower contribution limits.

An example: Using a GmbH to access 1e plans and optimize taxes

Anna is a self-employed IT consultant earning CHF 220,000 annually. To access 1e plans and maximize tax benefits, she forms a GmbH and pays herself a salary of CHF 220,000.

Under the BVG mandatory scheme, CHF 90,720 of the salary is insured. The portion of income exceeding this amount, up to CHF 136,080, can be covered through the supplementary occupational pension scheme.

From an annual income of CHF 136,080, Anna can invest the additional CHF 83,920 (220,000 – 136,080) into a 1e plan, which allows for individualized investment strategies with higher return potential.

Since employer contributions to the pension fund are tax-deductible, Anna benefits in two ways:

• Her GmbH can fully deduct employer contributions as a business expense.
• Her employee contributions reduce her personal taxable income.

This solution lowers both Anna’s personal tax burden and the tax liability of her GmbH, while also optimizing her retirement savings through investments in the 1e plan.

Who should consider a 1e plan?

1e pension plans are ideal for individuals and businesses seeking greater flexibility, higher return potential, and tax advantages in their occupational pension strategies. Here’s who can benefit most from a 1e plan:

• Long-term investors: Individuals with a long investment horizon benefit from the opportunity to earn higher returns with a 1e pension while maintaining the flexibility to adjust their risk profile over time.
• Executives and key personnel: Senior managers and high earners can use 1e plans to maximize their retirement savings through customizable investment strategies, while avoiding cross-subsidization common in traditional pension funds.
• Entrepreneurs and self-employed individuals: Business owners can access 1e plans for their non-mandatory pension contributions, either as a registered self-employed person contributing voluntarily or by setting up a corporate structure and paying themselves a salary above the required threshold. This approach offers tax advantages and the ability to choose an investment strategy that matches their financial goals.
• Employers seeking to attract and retain talent: Companies can use 1e plans to attract and retain senior employees by giving them more control over their pension investments.