A practical guide to occupational benefits/

Transcription

1 BVG Handbook A practical guide to occupational benefits/ Explanations of Pillar 2 legislation January 2015

2 Chapter overview BVG Handbook 1 Origin and development of occupational benefits insurance in Switzerland 3 Historic aspects of social insurance The three-pillar system of Switzerland 2 Purpose, scope and conditions 7 Purpose and scope Conditions 3 Insured benefits 11 Savings process / retirement assets Retirement benefits Disability benefits Survivors benefits 4 Financing 16 Principle Transparency Retirement benefits Shortfall in coverage Risk benefits Guarantee Fund 5 Coordination with national social insurance 19 Principle Coordination in case of disability Coordination in case of death 6 Vesting 23 Principle Special considerations Vested benefits Duty to inform 7 Promotion of residential property ownership 28 Principle Pledging Definition of purpose Duty of information Early withdrawal Making an early withdrawal 8 Organization 33 Occupational benefits institutions Supervision of occupational benefits institutions 9 National Substitute Pension Plan 39 BVG National Substitute Pension Plan 10 Tax treatment 41 Tax laws on occupational benefits Tax treatment of occupational benefits institutions Tax treatment of employees, self-employed persons, and employers 11 Investment regulations 43 Investments AXA Winterthur assumes no responsibility for the completeness and accuracy of the information given. The laws and ordinances currently in force are binding in each case. 2

3 1. Origin and development of occupational benefits in Switzerland Chapter 1 Milestones in social insurance Before 1850 Charitable institutions, guilds, mutual assistance organizations, and poor laws marked the beginning of social insurance in Switzerland The factory law set the first social standard in Switzerland Railroad and shipping legislation contained the first legal provisions on employee pension funds Swiss Constitution The acceptance of Art. 34 bis in the Swiss Constitution marked the cornerstone in the development of social insurance at the federal level. The federal government was tasked with establishing a national health and accident insurance plan Military insurance was introduced Health and accident insurance was introduced and became the basis of compulsory accident insurance For the first time, factory law contained mandatory provisions on factory pension funds Swiss Constitution Art. 34 quater was added to the Swiss Constitution. The federal government was tasked with establishing old age and survivors insurance (AHV) and disability insurance (IV). Some cantons had already set up their own insurance Revision of the With the revision of the SCO, occupational benefits insurance was given a Swiss Code of legal basis, whereby the government sought to establish pension funds Obligations (SCO) and guarantee employees rights. However, the legislation proved to be incomplete Swiss Constitution Art. 34 quinquies on the protection of the family became part of the Swiss Constitution. Article 4 called for mandatory maternity insurance AHVG The Federal Law on Old Age and Survivors Insurance (AHV) entered into force after it was approved by an overwhelming majority in the referendum of July 6, Unemployment insurance was introduced. Compulsory insurance remained the remit of the cantons EOG The Federal Law on Income Compensation was enacted to compensate persons serving in the army, civilian service and civil defense (EOG) FLG The Federal Law on Family Allowances in the Agricultural Sector (FLG) entered into force. AXA Life Ltd 3

4 1958 Revision of the SCO The revision of the SCO and the CC required occupational benefits and the Civil Code (CC) institutions and companies to be separated and enacted regulations on entitlement to vested benefits IVG The Federal Law on Disability Insurance (IVG) entered into force ELG The Federal Law on Supplementary Benefits to Old Age, Survivors and Disability Pensions (ELG) entered into force Revision of the SCO With the revision of employment contract law (part of the Swiss Constitution), the provisions on occupational benefits were amended and included in a separate subsection. The revision mainly focused on introducing regulations on vested benefits. Chapter BV With the revision of Art. 34 quater, the three-pillar concept became anchored (Swiss Constitution) in the Swiss Constitution. This meant that occupational benefits insurance became the mandatory Pillar 2 of this concept, next to Pillar 1 (AHV and IV). This paved the way for the introduction of mandatory occupational benefits insurance AVIG The Federal Law on Mandatory Unemployment Insurance and Compensation in Cases of Insolvency (AVIG) entered into force UVG The Federal Law on Accident Insurance (UVG) entered into force, marking the separation of laws on health and accident insurance and stipulating mandatory accident coverage for all employees BVG The Federal Law on Occupational Retirement, Survivors and Disability Pension Plans (BVG ) entered into force. It was based on the concept of occupational benefits and introduced new, guaranteed minimum benefits that became mandatory for all employees MVG The new Federal Law on Military Insurance (MVG ) entered into force FZG The Federal Law on Vesting in Pension Plans (FZG) entered into force WEF The federal law was intended to encourage the use of vested pension accruals for home ownership (partial revision of BVG and SCO) KVG With the introduction of the Federal Law on Health Insurance (KVG), all persons living in Switzerland became subject to compulsory basic health insurance. The Federal Law on Insurance Contracts (VVG ) governs voluntary supplementary insurance coverage Tenth revision of The tenth AHV revision implemented the principle of equal treatment AHV legislation of men and women and introduced, among other things, the change from married couples pensions to individual pensions (splitting) and the gradual increase in the retirement age of women from 62 to BVG Ordinance The Ordinance on Mandatory Occupational Benefits Insurance for Unemployed Persons (insurance coverage against the risks of death and disability) entered into force Revision of the The new Constitution was accepted. The three-pillar concept became Swiss Constitution anchored in Art AXA Life Ltd 4

5 2003 ATSG The Federal Law on the General Part of the Social Insurance Law (ATSG) entered into force. It harmonized the provisions and introduced uniform designations and procedures in the various types of social insurance. Chapter Fourth revision of The fourth IV revision mainly concerned the financial consolidation of the IV the IV. It introduced specific amendments to benefits while increasing supervision by the federal government at the same time. It also simplified organizational aspects and procedures First revision of The occupational benefits insurance implemented the provisions designed the BVG to ensure transparency in how pension funds are managed and insured persons are informed First revision of the The BVG revision aimed to harmonize provisions for men and women, BVG, remediation lower the minimum income required for enrollment in an occupational pension plan, adjust the coordination deduction and the conversion rate, introduce a widower s pension, and harmonize pension thresholds with the IV. At the same time, the remediation enacted measures to address any shortfalls in coverage in occupational benefits institutions. First and foremost, these measures sought to levy restructuring contributions while reducing the BVG minimum interest rate at the same time Revision EO The revision of the Federal Law on Income Compensation granted farreaching benefits to working mothers First revision of Tax-relevant provisions on occupational benefits insurance were put into the BVG force. These addressed, in particular, occupational benefits insurance, the pensionable salary, and the purchase of additional benefits Structural reforms More stringent provisions to improve pension fund governance and transparency entered into force Structural reforms On January 1, 2012, provisions on supervisory structures entered into force. They mainly focus on strengthening and restructuring the supervisory system by means of an independent Supreme Supervisory Commission for Occupational Benefits and with detailed regulations for investment foundations. AXA Life Ltd 5

6 Chapter 1 The three-pillar system of Switzerland (Art of the Swiss Constitution) Principle The main elements of the three-pillar system of Switzerland: State pension (Pillar 1) Occupational benefits (Pillar 2) Private pension (Pillar 3) Pillar 1 Pillar 1, the national AHV IV pension system, is designed to provide coverage at the subsistence level. The maximum pension may not exceed twice the minimum pension. Supplementary benefits are paid out within the framework of Pillar 1. Recipients of an AHV and IV pension who have a low income may claim supplementary benefits. Together with the AHV and IV benefits as well as the other income, these supplements aim to secure the livelihood of the elderly, surviving spouses and partners, and disabled persons. Pillar 2 Pillar 2 constitutes occupational benefits and, together with the benefits from Pillar 1, is intended to ensure the continuation of the accustomed living standard. The Federal Law on Occupational Retirement, Survivors and Disability Pension Plans (BVG) defines the minimum requirements that must be met within the framework of Pillar 2. Many occupational benefits institutions offer benefits exceeding the minimum statutory provisions. Pillar 3 Pillar 3, or private pension provision, is intended to close any gaps in coverage by taking an insured person s individual requirements into consideration. While anyone can complement their coverage within the scope of the regulations, certain limitations nevertheless apply in the case of tied pensions, which also enjoy considerable tax privileges. A Pillar 3 benefits plan may even become a requirement for insured persons with higher incomes in order to continue their accustomed standard of living. Three-pillar system Pillar 1 Pillar 2 Pillar 3 Government pension Occupational benefits Private pension Secure livelihood Maintain the accustomed living standard Individual benefits AHV IV Supplementary benefits Mandatory benefits Extramandatory benefits Tied pension (Pillar 3a)* Flexible pension (Pillar 3b) * with additional tax advantages AXA Life Ltd 6

7 2. Purpose, scope and conditions Chapter 2 Purpose and scope Purpose (Art. 113 par. 2a of the Constitution, Art. 1 BVG ) The objective of the BVG is to complement the benefits from the Federal Old Age and Survivors Insurance and Disability Insurance (AHV IV) in order to ensure that people can maintain their accustomed standard of living. The pensionable salary under the occupational benefits insurance may not exceed the salary subject to AHV contributions. Principles of occupational benefits (Art. 1 par. 1 and 3 BVG; Art. 1, 1a, 1b, 1c, 1d, 1e, 1f, 1g, 1h, 1i BVV2 ; final provisions of the amendment to the BVV2 of June 10, 2005) The provisions referred to above are based on the principles of appropriateness, collectivity, equal treatment, and predictability, as well as on the insurance principle all of which are implemented in occupational benefits insurance. This means that tax-privileged occupational benefits insurance is managed separately from private pension and other insurance plans, with the aim of preventing insured persons from obtaining excessive tax privileges under Pillar 2. Appropriateness A pension plan is deemed appropriate if the regulatory benefits do not exceed 70 % of the most recent salary subject to AHV contributions, or if the total regulatory savings contributions paid by the employer and the employees are less than 25 % of all insurable salaries subject to AHV contributions. To prevent insured persons with salaries of more than CHF 84,600 (upper threshold under compulsory insurance) from being overinsured, the total retirement benefits under the occupational benefits insurance and the AHV may not exceed 85 % of the most recent salary subject to AHV contributions before retirement. If the pension plan includes any lump-sum payment, the appropriateness of the plan must be determined based on the corresponding retirement benefits. If an employer concludes affiliation contracts with several occupational benefits institutions and its employees are thus insured with more than one institution, all occupational benefits relationships must remain within the scope of what is deemed reasonable. Self-employed individuals who have taken out occupational benefits insurance voluntarily must also observe the principle of appropriateness. If an insured person draws retirement benefits before reaching the regular retirement age, the benefits will be reduced. The regulations of the occupational benefits institution can allow insured persons to compensate any reductions in part or in full through the purchase of additional benefits. If the insured person has purchased the maximum in additional benefits but does not retire early, the regulatory benefits limit may not be exceeded by more than 5 %. AXA Life Ltd 7

8 Chapter 2 Collectivity Employers must allocate their employees into one or more groups under the occupational benefits insurance. A group of insured employees is called a collective, whose membership is governed by objective criteria (for example employees / management employees). Every insured person who fulfills the specific criteria must be admitted to the group in question. The principle of collectivity is also upheld if only one person is insured at a specific time but regulations provide for the possibility of admitting other persons to the group. This possibility does not exist under voluntary insurance of a self-employed individual. Equal treatment The same regulatory conditions must apply to all members of a collective. Definition The pension fund regulations of an occupational benefits institution must define the insured benefits, financing of benefits, conditions for entitlement, pension plans, different groups of insured in the various plans. Insurance principle At least 6 % of all employer contributions to the occupational benefits insurance must be used to finance the risk benefits for death and disability. Minimum retirement age An insured person can retire at the earliest at age 58. Earlier retirement is possible in the event of operational reorganizations and for persons exercising a profession where public security demands retirement at an even earlier age. This provision entered into force on January 1, The law makes an exception for occupational benefits institutions that granted retirement earlier than at age 58 before this provision entered into force: up to December 31, 2010 these institutions allowed insured persons who where already insured with the institution on December 31, 2005 to retire before age 58. Insured persons (Art. 2 5, BVG; Art. 1j, 28 BVV2 ) The BVG distinguishes between those mandatorily and those voluntarily insured, as well as between employees and self-employed persons. Mandatory insurance of employees Employees are subject to mandatory insurance in accordance with the BVG if they have an employment contract, are subject to AHV IV insurance, are 17 or older, have an annual income that exceeds the BVG entry threshold, have not yet reached retirement age. AXA Life Ltd 8

9 Chapter 2 Excluded from mandatory insurance are: Employees whose employer is not subject to AHV contributions, Employees with an employment contract of not more than 3 months, Employees with a second income who are already mandatorily covered in their principal occupation or who are primarily self-employed, Employees who are at least 70 % disabled as defined by the IV, Family members of the head of an agricultural enterprise who work in this enterprise, Employees who already have sufficient pension coverage abroad and whose employment in Switzerland is not or probably not permanent. Mandatory insurance of self-employed persons The BVG was primarily enacted as a form of protection for employees. The law does not mention any mandatory coverage for self-employed persons. One or several professional associations representing the majority of insured persons may petition the Federal Council to make it mandatory for such persons to be insured. Up to now, this has never been the case. Voluntary insurance Self-employed persons and employees not subject to mandatory pension fund insurance can have themselves insured voluntarily by joining a company or association s pension fund, or by becoming affiliated with the National Substitute Pension Plan foundation. Mandatory insurance for unemployed persons As of July 1, 1997, unemployed persons must be mandatorily insured if they fulfill the prerequisites for daily benefits from the unemployment insurance and their relevant daily earnings (unemployment compensation, plus earnings and income from a work program) exceed CHF The benefits include a death and disability insurance (without retirement benefits). Conditions Insured risks (Art. 2, par. 3; Art. 7, par. 1 BVG ) Men and women who are subject to mandatory insurance are covered against the risks of death and disability starting on January 1 after the year in which they reached age 17, and for retirement benefits starting on January 1 after the year in which they reached age 24. Recipients of daily benefits from the unemployment insurance are covered against the risks of death and disability. Old age Death Death Disability Disability Age /65 AXA Life Ltd 9

10 Chapter 2 Beginning and end of the mandatory insurance (Art. 10 BVG, Art. 6 BVV2 ) Mandatory insurance commences with the beginning of employment; for recipients of daily benefits from the unemployment insurance, it begins when unemployment compensation is paid for the first time. Mandatory insurance ends under the following conditions: The insured reaches regular retirement age. The employment relationship ends. The insured earns less than the minimum salary. The insured is no longer eligible for daily unemployment benefits because the specified period has expired. Coordinated earnings (Art. 8 9 BVG ; Art. 3 5 BVV2 ) In general, insured earnings are based on AHV earnings. As a rule, these are calculated based on the estimated or most recent annual AHV earnings known at the beginning of the year. In the latter case, any changes that have been agreed for the new year must be taken into account. If employment begins during the year or is valid for only a limited period (e.g. persons with a one-year permit), monthly or hourly wages are recalculated as annual earnings in accordance with the level of employment. The AHV earnings less the coordination deduction make up the coordinated earnings, which have a lower and upper limit. For unemployed persons, the daily earnings form the basis for the calculation. The following BVG thresholds have been valid since January 1, Entry threshold = 6 8 of the maximum AHV retirement pension Coordination deduction = 7 8 of the maximum AHV retirement pension Minimum pensionable salary = 1 8 of the maximum AHV retirement pension Maximum pensionable salary = 3 times the maximum AHV retirement pension less the coordination deduction The AHV IV limits are, as a rule, adjusted to inflation every 2 years. The federal government aligns the BVG limits regularly with those of the AHV. Coordinated salary (as of ) Max. pensionable BVG salary CHF 84,600 Extra-mandatory occupational benefits AHV salary Coordination deduction CHF 24,675 Entry threshold CHF 21,150 BVG Mandatory occupational benefits BVG pensionable salary = coordinated salary min. CHF 3,525 max. CHF 59,925 AHV State pension AXA Life Ltd 10

11 3. Insured benefits Chapter 3 Savings process / retirement assets (Art. 15, 16, BVG ; Art. 11, par. 1 2; Art. 12, 13 BVV2 ) The mandatory insurance is based on a savings process that begins on January 1 following the year in which the person completes age 24 and that lasts at the most until completion of age 65 for men or 64 for women. The retirement assets accrue through annual retirement credits and other payments, for example transferred vested benefits. The accrued capital (retirement assets) bears interest for the time that an insured person is a member of the occupational benefits institution. The Federal Council sets the minimum rate of interest (1.75 % as of January 1, 2014). The retirement credits are determined as a percentage of the coordinated (pensionable) earnings. The amount of these credits depends on the insured person s age. Insured person s age Woman / man / 65 Retirement credits as % of the coordinated earnings 7 % 10 % 15 % 18 % From age 25, a male can thus accrue retirement assets (without interest) amounting to 500 % of his coordinated earnings (10 years at 7 %, 10 years at 10 %, 10 years at 15 % and 10 years at 18 %). From age 25, a female (working until age 64) can expect to earn retirement assets without interest of only 482 % of her coordinated earnings, because the last period of retirement credit of 18 % lasts only 9 years. The retirement assets (including interest) that accrue in this manner form the basis for determining the retirement pension. The disability and survivors pensions at the time of an insured event are calculated based on the accrued retirement assets plus the sum of the future retirement credits, without interest. Retirement benefits Beneficiaries (Art. 13, 17, 22 par. 3 BVG; Art. 1i, 62a BVV2 ) Retirement pension Entitlement to a retirement pension applies to women upon completion of age 64 men upon completion of age 65 Exceptions The regulations of an occupational benefits institution may include provisions for early (from age 58) or deferred retirement, in which case benefits are adjusted commensurately. AXA Life Ltd 11

12 Chapter 3 Pensioner s child s pension Beneficiaries of retirement benefits are also entitled to a pension for their children who are below age 18 or currently in school or training,* or who are disabled at a level of at least 70 %.* * At the most up to age 25. Amount of retirement benefits (Art. 14, 17, 19a, Art. 36 par. 2 BVG ) Retirement pensions The amount of the retirement pension depends on the accrued retirement assets (retirement credits plus interest) at retirement age. Under the mandatory occupational benefits insurance, retirement assets are converted into a pension using the conversion rate set by the Federal Council. In the course of the next 10 years, the conversion rate will gradually be decreased from 7.2 % to 6.8 % (as of January 1, 2013: men 6.85 % / women 6.8 %). Annual retirement credits with interest Retirement assets at retirement age with interest Retirement pension: Conversion rate x retirement assets Age 25 64/65 Pensioner s child s pension The retirement pension forms the basis for calculating a pensioner s child s pension, which equals 20 % of the retirement pension per child during the entitlement period. Special considerations Reversionary spouse s pension: Upon the death of a spouse after retirement, the surviving spouse receives a pension amounting to 60 % of the retirement pension. A partner registered in accordance with the Federal Law on the Registration of Partnerships for Same-Sex Couples of June 18, 2004, is treated the same as a spouse. Reversionary orphan s pension: 20 % of the retirement pension. Current retirement pensions must be adjusted to inflation within the scope of an occupational benefits institution s financial possibilities. Lump sum payment of the retirement pension (Art. 37 BVG) Retirement benefits are generally paid as a pension. If permitted under the regulations, benefits may be drawn as a lump sum instead of as a pension. One quarter of the BVG retirement assets can always be withdrawn as a lump sum. If the insured person is married, a lump sum payment is permissible only if the spouse or registered partner gives his or her written consent. If the retirement pension is less than 10 % of the minimum AHV retirement pension, the occupational benefits institution can pay a lump sum instead of a pension. AXA Life Ltd 12

13 Chapter 3 Disability benefits Beneficiaries (Art. 22, 23, 25, 26 par. 1 BVG ) Disability pensions Entitlement to a disability pension falls under the provisions of the IV, i.e. a pension is usually paid only if the insured is at least 40 % disabled and has not yet reached retirement age. To be eligible, the insured person must have been covered at the time of the event that caused the disability. Persons with a congenital defect or who became disabled while not yet of age are entitled to a disability pension if they were at least 20 % but not more than 40 % incapacitated when they started working and insured for at least 40 % at the time of the illness / injury that caused the incapacity for work. Disabled person s child s pension Persons entitled to a disability pension are also entitled to a pension for their children, provided these have not yet reached age 18 or are still in school or training,* or are at least 70 % disabled.* * Maximum up to age 25. Amount of disability benefits (Art. 24, 25, 36, par. 1 BVG; Art. 4, 14, 15, 18 BVV2, ordinance of Sept. 16, 1987, on the adjustment of the current survivors and disability benefits to inflation, transitional regulation pursuant to the amendment of October 3, 2003 [f]) Disability pensions The calculation relies on projections of retirement assets because the insured person has not yet reached retirement age. These consist of the capital accrued (with interest) up to the start of disability plus any future retirement credits without interest. The projected retirement assets are converted into a disability pension using the same conversion rate as for the retirement pension. Annual retirement credits plus interest Projected retirement credits without interest Projected retirement assets Disability pension: Conversion rate x projected retirement assets Age 25 Start of 64/65 disability Pensions for disabled persons children This pension equals 20 % of the disability pension per child. Special considerations Mandatory disability pensions that have been in effect for over 3 years are adjusted to inflation according to the directives of the Federal Council, up to completion of age 64 for women and completion of age 65 for men. Insured persons with a disability of at least 40 % are entitled to a quarter disability pension, with a disability of 50 % to half a disability pension, with a disability of 60 % to a three-quarter disability pension, and with a disability of 70 % or more to the full disability pension. Reversionary spouse s pension: 60 % of the disability pension. Reversionary orphan s pension: 20 % of the disability pension. AXA Life Ltd 13

14 Chapter 3 Lump sum withdrawal of the disability pension (Art. 37, par. 3 and 4 BVG ) Under the regulations, a person entitled to a pension may request a lump sum payment instead of a disability pension. If the disability pension is less than 10 % of the minimum AHV retirement pension, the occupational benefits institution may pay a lump sum instead of a pension. Survivors benefits Beneficiaries (Art , 22 BVG; Art. 20 BVV2 ) General prerequisites A surviving partner is entitled to survivors benefits if the decedent was insured or received a retirement or disability pension from the occupational benefits institution at the time of death. Surviving spouse s pensions If a married insured person dies, the surviving spouse is entitled to a surviving spouse s pension until the time of remarriage or death, provided this person is required to support one or more children, has reached age 45 and the marriage lasted for at least 5 years. If none of these conditions applies, the surviving spouse receives a lumpsum payment of three annual pensions. These requirements apply also to the registered partner. The divorced spouse is treated the same as the widow or widower after the death of the former spouse, provided their marriage lasted at least 10 years and the divorced spouse was awarded a pension or lump-sum payment instead of a lifelong pension in the divorce settlement. This rule applies also to a former registered partner after the registered partnership has been dissolved. Orphans pensions If an insured person dies, his or her children are entitled to an orphan s pension if they are below age 18 or are still in school or training,* or if they are at least 70 % disabled.* * At most up to age 25. AXA Life Ltd 14

15 Chapter 3 Amount of survivors benefits (Art. 21, 36 BVG, ordinance of Sept. 16, 1987 on the adjustment of the current survivors and disability benefits to inflation) Surviving spouse s pension Orphan s pension before retirement 60 % of the disability pension 20 % of the disability pension after retirement 60 % of the retirement pension 20 % of the retirement pension Special consideration Mandatory survivors pensions that have been in effect for more than three years are adjusted to cost-of-living increases in accordance with the directives of the Federal Council up to completion of age 64 for women and completion of age 65 for men. Lump-sum payment of surviving spouse s pension (Art. 37, par. 1, 3, 4, 5 BVG) Survivors benefits are generally paid as pensions. However, the surviving spouse s pension may be drawn as a lump sum if stipulated in the regulations. A registered partner is treated the same as a spouse. If the widow s or widower s pension is less than 6 % or the orphan s pension less than 2 % of the minimum AHV retirement pension, the occupational benefits institution can pay a lump sum instead of a pension. AXA Life Ltd 15

16 4. Financing Chapter 4 Principle (Art BVG ) All occupational benefits must be financed. The occupational benefits institution specifies the overall amount in contributions and decides how these are to be divided between the employer and its employees. The components of the overall contribution includes the cost of retirement benefits risk benefits (death, disability), including cost-of-living adjustments payments to the Guarantee Fund administrative costs. The regulations must specify the amount of employer and employee contributions. The employer s contribution must equal the total in contributions of all of its employees. On the other hand, the occupational benefits institution must obtain the employer s consent when levying employer contributions of more than 50 % of overall contributions. The employer is responsible for all contributions owed to the occupational benefits institution, which is entitled to charge the employer interest in arrears for late contribution payments. The employer deducts the amount in employee contributions specified in the regulations from employees salaries. The employer can collect voluntary contributions in order to increase its contribution reserves with the occupational benefits institution. These can be used to pay employer contributions at a later time. Retirement benefits (Art. 16 BVG; Art. 13 and Art. 62a, par. 2b BVV2) Retirement credits provide the basis for financing the retirement benefits. The annual retirement credits (beginning at age 25) are calculated based on the following rates. Incremental retirement credits (as a percentage of the coordinated earnings) 18% 15% 10% 7% Age women/men /65 The age used for calculating the retirement credits is the calendar year less the year in which the person was born. AXA Life Ltd 16

17 Chapter 4 Risk benefits The annual risk premiums (from age 18) are based on the amount in benefits due in the case of death or disability. They also include the cost of adjusting mandatory survivors and disability benefits to costs-of-living increases. Transparency (Art. 65a BVG; Art. 48b 48e BVV2) Occupational benefits institutions must observe the principle of transparency in their contribution system, financing, capital investments and accounting. This aims to ensure that their financial situation is apparent and that institutions can guarantee payment of all their benefit obligations. Furthermore, they must fulfill the duty to provide information to the insured, and the governing body must be able to perform its management function on the basis of equal employer and employee representation. Shortfall in coverage (Art. 65, 65c, 65d, 65e BVG ; Art. 44, 44a and 44b BVV2) Occupational benefits institutions must ensure that they can meet their obligations at all times. A shortfall in coverage arises if an institution s assets are insufficient for covering its liabilities (obligations to the insured). A temporary shortfall in coverage and temporary non-compliance with the principle of security is permissible if a) there are guarantees that the statutory benefits can be paid when they fall due, and b) the occupational benefits institution takes measures to eliminate the shortfall in coverage within a reasonable period. Measures to eliminate the shortfall must be based on a regulatory principle, be appropriate and commensurate with the level of the shortfall, and be part of a balanced overall concept. If other measures are insufficient to reach these objectives, the occupational benefits institution may for the duration of the shortfall demand additional restructuring contributions from the employer and employees. The employer s contribution must equal at least the total contributions of all its employees. These contributions are not part of the vested benefits; undercut the minimum interest rate pursuant to Art. 15 par. 2 BVG (but not for longer than 5 years); levy contributions on pension recipients. This measure must be used in a restrictive manner; pensions cannot be reduced permanently. The BVG minimum benefits must be guaranteed; place a limit on the time and amount of early withdrawals or refuse these altogether if their purpose is to repay a mortgage loan; impose a restriction of use on the funds in the separate employer contribution reserve account and allocate funds from the regular employer contribution reserves to this account. AXA Life Ltd 17

18 Chapter 4 Guarantee Fund (Art BVG; ordinance of June 22, 1998 on the BVG Guarantee Fund, Art. 1 par. 2 FZG) The Guarantee Fund fulfills two basic functions: It provides subsidies to registered occupational benefits institutions with an unfavorable age structure, i.e. where the sum of the retirement credits exceeds 14 % of the sum of the corresponding coordinated earnings. It secures entitled persons benefits in accordance with regulations if the occupational benefits institution becomes insolvent. However, this guarantee is limited to the maximum benefit calculated from a specified salary of one and a half times the upper BVG limit, currently CHF 126,900. The Guarantee Fund also compensates the National Substitute Pension Plan for costs that cannot be transferred to those who incur them. All occupational benefits institutions subject to the Federal Law on Vesting in Pension Plans (FZG) of December 17, 1993 are affiliated with the BVG Guarantee Fund and participate in its funding. These occupational benefits institutions guarantee entitlement to benefits in accordance with the regulations. Subsidies for an unfavorable age structure and payments for the compensation fund offices are funded with contributions from the registered occupational benefits institutions based on the sum of the coordinated earnings (as of age 25). The other benefits are funded by all occupational benefits institutions that are subject to the FZG. The contributions are charged based on the sum of the vested benefits in accordance with the FZG (as of December 31) plus 10 times the amount of the current pensions. Occupational benefits institution Occupational benefits institution Occupational benefits institution Contributions Guarantee Fund foundation Subsidies to Occupational benefits payments to Registered occupational benefits institutions with an unfavorable age structure Insolvent pension funds AXA Life Ltd 18

19 5. Coordination with social insurance Chapter 5 Principle Purpose and targets of the coordination (Art. 34a BVG) Social insurance laws include numerous provisions that are intended to harmonize different systems. As a whole, these provisions constitute Swiss coordination law. Coordination provisions are meant to eliminate the disadvantages that invariably will arise when different social insurance measures, rules, and regulations are in force simultaneously. With a view to establishing a general coordination norm, the Federal Council issues directives in order to prevent insured persons or their survivors from taking unjustified advantage of the system when benefits are paid from several sources. In the event of a benefit case, persons entitled to a pension are thus prevented from gaining a financial advantage. Procedure in the case of over-compensation (Art. 34a BVG; Art BVV2) The occupational benefits institution can reduce the survivors and disability benefits insofar as they, together with other benefits received, exceed 90 % of the eligible lost earnings. Retirement benefits, however, may not be reduced. The occupational benefits institution may also set a higher limit, but not above 100 %, for tax reasons. Presumed loss of earnings (Art. 24, par. 1 BVV2) In general, this refers to earnings the insured person would have received at the time of the calculation if no adverse event had occurred. If the calculation is made some time after the insured event, the most recent annual salary can be multiplied with an earnings index. AXA Life Ltd 19

20 Chapter 5 Coordination in case of disability Disability due to illness (Art. 34a BVG) If an insured person becomes ill, the employer will initially continue to pay the full salary (obligation of continued salary payment under the SCO). The period of continued salary payment depends on the period of employment. The employee can claim BVG benefits only when benefits from the Federal Disability Insurance (IV ) begin, generally after one year. Option without daily benefits insurance (statutory solution) 100% 80% 60% Benefits as a % of salary Salary Continued salary payment Possibly extra-mandatory benefits from the pension fund BVG benefits IV benefits BVG benefits AHV benefits 0% Start of disability 1 year Regular retirement Many employers take out daily benefits insurance to cover part of the costs for continued salary payments and to cover the gap in benefits between the end of the salary payment and the beginning of the IV and BVG benefits. The occupational benefits institution may postpone paying BVG benefits by one year if an employer has taken out daily benefits insurance for 730 days that covers at least 80 % of the earnings and at least half is financed by the employer. Option with daily benefits insurance 100% 80% 60% * Possibly extra-mandatory benefits from the pension fund Benefits as a % of salary 0% Salary Beginning of disability BVG benefits IV benefits BVG benefits AHV benefits Beginning of disability * Continued salary payments 1 year 2 years Regular retirement AXA Life Ltd 20

21 Chapter 5 Disability due to accident (Art. 34a BVG; Art. 24 and 25 BVV2) If an insurer is liable for benefit payments under Swiss accident insurance law (UVG ) because an insured person is disabled as a result of an accident, the BVG benefits are limited to the statutory minimum. Moreover, these benefits can be claimed only if they are less than 90 % of the eligible lost earnings together with any other benefits that are due. A benefit reduction or exclusion by the insurer because the insured person culpably caused the event leading to disability is not compensated by other benefits. Coordination with UVG for salaries of up to CHF 126,000 (UVG salary maximum) 100% 90% 80% Salary UVG benefits * Benefits as % of salary 0% IV benefits AHV benefits Start of disability 1 year Regular retirement * The accident insurance pays 80% of the salary. As soon as IV benefits become due, the accident insurance pays a supplementary pension of up to 90% of the salary. In general, no BVG benefits become due for earnings below the UVG maximum when coordinated with the UVG. Supplementary BVG benefits become effective only once this limit is exceeded. Coordination with UVG for salaries above CHF 126,000 (UVG earnings maximum) 100% * BVG benefits Salary UVG benefits ** Benefits as % of salary 0% IV benefits AHV benefits Start of disability 1 year Regular retirement * Employer s obligation to continue salary payments of the difference between 4 5 of the salary * and the UVG benefits. ** The accident insurance covers 80% of the UVG earnings maximum. As soon as IV benefits are due, the accident insurance pays a supplementary pension of up to 90% of the UVG salary maximum. AXA Life Ltd 21

22 Chapter 5 Coordination in case of death Death due to illness If an insured person dies from an illness, the surviving dependents will receive both AHV and BVG benefits. If this results in over-compensation, the BVG benefits may be reduced accordingly. Death due to accident If an accident insurer is obligated to pay benefits under accident insurance law (UVG) upon the death of an insured person due to accident, the BVG benefits are limited to the legal minimum. Moreover, entitlement to these benefits exists only if they do not exceed 90 % of the presumed lost earnings together with any other survivors benefits that are due. Any benefit reduction or exclusion by the accident or military insurer because the insured person culpably caused the event leading to disability is not compensated by other benefits. AXA Life Ltd 22

23 6. Vesting Chapter 6 Principle (Art. 27 BVG ; Art. 1 FZG) The Federal Law on Vesting in Pension Plans (FZG), which has been in force since January 1, 1995, sets out the basic rules on the transfer of benefits and governs insured persons entitlement when they withdraw from an occupational benefits institution (vested benefits case). This law applies to all occupational benefits institutions that pay benefits upon retirement, death, or disability (benefits case) on the basis of regulatory provisions. The goal of the FZG is to maintain the insured person s accrued occupational benefits coverage. It primarily serves to determine the amount due upon withdrawal, referred to hereinafter as vested benefits. These are calculated in different ways depending on whether the fund offers a defined contribution plan or a defined benefit plan. The law also determines the minimum vested benefits a withdrawing insured person may claim in any situation. Vested benefits Definition (Art. 2, par. 1 and 2 FZG ) Insured persons who withdraw from the occupational benefits institution before an insured event occurs (vested benefits case) are entitled to vested benefits. The occupational benefits institution specifies in its regulations how vested benefits are calculated. Calculation of vested benefits (Art. 2, par. 2; Art. 15, par. 1 3; Art. 16 FZG; Art. 5 FZV) Every occupational benefits institution must specify in its regulations if it will manage vested benefits under the legal provisions valid for a defined benefit plan or a defined contribution plan, because vested benefits are calculated differently in each of these cases. Defined contribution plan Here, occupational benefits are calculated based on the contribution amount, which is set in advance. In the case of such pension funds, withdrawing insured persons are entitled to the savings assets / actuarial reserves (also known as retirement assets) that have accrued. In other words, insured persons receive all savings contributions that have been credited (employer and employee contributions), their single premiums, and all interest that has accrued. AXA Life Ltd 23

24 Chapter 6 Defined benefit plan In a defined benefit plan, the occupational benefit amount is set at a certain level (e.g. as a percentage of the earnings) and contributions are then calculated so as to reach this level. In these pension funds, vested benefits correspond to the present value of the accrued benefits. In other words, the vested benefits equal the amount the insured person would need, based on underlying actuarial factors, for purchasing the same benefits with the same pension fund at the time of the withdrawal. Benefits are calculated as follows: The accrued benefit amount equals the insured benefits multiplied by the eligible insurance term divided by the possible insurance term; The vested benefit amount equals the accrued benefits multiplied by the regulatory present value rate, which must be calculated in accordance with accepted actuarial principles. The insured benefits are described in the regulations and calculated based on the possible insurance term. The eligible insurance term is the sum of the contribution years and any additional insurance term that may have been purchased. It begins at the earliest with the payment of contributions towards the retirement benefits. The possible insurance term begins at the same time as the eligible insurance term and ends when the insured person reaches the regular retirement age. Minimum amount (Art. 17 FZG ; Art. 6 FZV) The vested benefit law guarantees insured persons a minimum benefit amount when withdrawing from an occupational benefits institution. This amount consists of any vested benefits brought in when joining, including interest, any contributions by the insured during the contribution period (savings and risk contributions), without interest, a supplement on these contributions by the insured person. The supplement is 4 % of the personal contributions at age 21 and increases by a further 4 % annually. The insured person s age is calculated as the calendar year minus the year of birth. The maximum supplement of 100 % (i.e. double the insured person s own contributions) is thus achieved when this person reaches age 45. Example Age at withdrawal Supplement on the insured s contributions 21 years 4 % 25 years 20 % 30 years 40 % 35 years 60 % 40 years 80 % 45 years and more 100 % AXA Life Ltd 24

25 Chapter 6 If the insured person paid only risk contributions for a certain period, these are not taken into account when calculating the minimum vested benefits amount. When calculating the minimum amount, the occupational benefits institution can deduct from insured persons contributions the risk portion as well as the amounts for the administrative costs, the Guarantee Fund, and any funds needed for eliminating any shortfall in coverage, provided these amounts have been specified in the regulations and the need for deducting them is explained in the annual financial statements or notes. In this case, the occupational benefits institution must take the insured person s savings contribution as well as the interest into consideration. Guarantee of mandatory occupational benefits (Art. 18 FZG; Art. 15 BVG) Registered occupational benefits institutions must pay at least the retirement assets in accordance with the BVG to an insured person upon withdrawal. Comparative calculation (Art. 8, par. 1; Art FZG) When an insured person withdraws, the occupational benefits institution must make three calculations (possibly four if it violates the one-third rule) and pay the highest of the three amounts: Defined contribution plan Vested benefit amount (pursuant to Art. 15 FZG) Defined benefit plan Vested benefit amount (pursuant to Art. 16 FZG) The one-third rule (in accordance with Art. 17 FZG) states that at least one third of all regulatory contributions must be considered as the employee contribution. Minimum amount (under Art. 17 FZG) Retirement assets BVG (under Art. 18 FZG) Regulatory vested benefits What happens with vested benefits? (Art. 3, par. 1; Art. 4 FZG; Art. 1, par. 2; Art. 10, 12 FZV) If an insured person joins a new occupational benefits institution, the former one must transfer all vested benefits to the new one. Insured persons who do not join a new occupational benefits institution must inform the former one if they wish to maintain their coverage in the form of a paid-up policy or a vested benefits account. In the absence of notification, the occupational benefits institution must transfer the vested benefits, with interest, to the National Substitute Pension Plan no earlier than six months and no later than two years from the time of the change. AXA Life Ltd 25

26 Chapter 6 Special considerations Provisos based on health (Art. 14 FZG ; Art. 11 FZV, Art. 331c SCO) A proviso means that benefits for certain risks are either fully or partly excluded from the insurance coverage. In the minimum insurance coverage specified in the BVG, no provisos are permissible. Such provisos are permissible in the extra-mandatory part of the insurance; however, they may not exceed a five-year period. Furthermore, the coverage an insured person acquires through vested benefits brought in from a previous benefits provider may not be reduced by a new proviso based on health. The new occupational benefits institution can continue a proviso that was imposed by the former institution, in which case it must factor in the time the proviso was in effect at the former institution. Cash payment (Art. 5; Art. 25f FZG; Art. 14 FZV, second supplementary agreement of March 8, 1989, between the Principality of Liechtenstein and the federal government on social insurance, effective since August 14, 2002; agreement of June 21, 1999, between the federal government and the European Community and its member states on the free movement of persons, effective as of June 1, 2002) There are three situations in which insured persons can request to have their vested benefits paid out in cash: Upon leaving Switzerland permanently (the Principality of Liechtenstein is regarded as part of Switzerland for this purpose). Upon becoming self-employed, in which case the person is no longer subject to mandatory occupational benefits insurance. If the vested benefits amount is less than one year s contribution. Married insured persons must obtain the written consent of their spouse for a cash payment. A registered partner who asks to have the amount paid out in cash must obtain the other partner s written consent as well. As of June 1, 2007, the compulsory portion of the vested benefits can no longer be paid out in cash if the insured person leaves Switzerland and becomes subject to the compulsory insurance of an EU / EFTA member state against the risks of old age, death and disability. Divorce (Art. 22 FZG ; Art. 1, par. 3 FZV, Art. 22a d FZG; Art. 122 ZGB, Art ZPO) In the case of divorce, the vested benefits accrued during the marriage will be divided. The occupational benefits institution is obligated to notify the court of the amount in accrued vested benefits that must be divided. The court will then notify the occupational benefits institution of the amount to be transferred. The spouse who must transfer part of his or her accrued vested benefits has the possibility to repurchase an equal amount in benefits, in which case the amount is tax-deductible. The provisions on divorce apply analogously if a registered partnership is dissolved by a court. AXA Life Ltd 26