A vested benefits account, what is that?

Introduction

My wife Zoé quit her job this morning. Her human resources director reminded her: “Do not forget to take care of your vested benefits account!”. Puzzled, she did not know what to do with this information, so I thought to myself that I should elaborate on this subject a little.

When one quits their job, they also leave the pension fund in which their second pillar was preciously kept. 

If you haven’t read our articles on 2nd pillar contributions or the BVG certificate, here’s a quick reminder of what makes up your vested benefits account: When you work for a company, you are legally obliged to put part of your salary directly aside to build up your pension. Part of these savings will go into the 1st pillar (AVS) and the remainder, generally the largest part, will go directly into your 2nd pillar (LPP). So, without necessarily knowing it, you will be making monthly contributions to build up your LPP assets. Over time, and with a great deal of effort, you will build up real capital that will be yours today as well as tomorrow. You cannot use it freely, but it is yours.

After leaving your job, whether to leave Switzerland, change careers, or start your own business, the pension fund of your former employer is no longer authorized to keep your LPP capital. At this point, they will ask you a crucial question: “Where should we transfer your LPP assets?” This request can be straightforward, as in this example, or more subtly phrased, such as the enigmatic: “Don’t forget to handle your vested benefits!”—a phrase Zoé encountered.

The term “vested benefits” refers to your LPP assets, which are ready to be transferred—a useful first clarification! But then, how should you respond to your pension fund?

In theory, the answer is simple: you need to provide them with the details of the pension fund of your new employer. In practice, however, as we will see later, several alternatives are available to you.

But before exploring these options, let’s take a moment to understand the situations that lead to the creation of a vested benefits account.

What is a vested benefits account?

Simply put, a vested benefits account corresponds to your 2nd pillar assets that are no longer directly managed by an employer-affiliated pension fund. These assets fully belong to you, but they are locked and cannot be directly transferred to your personal bank account. It is therefore a protected savings account, intended to secure your retirement, but temporarily immobilized until a new destination is assigned to it.

Where can you open a vested benefits account?

Vested benefits accounts are not ordinary bank accounts. Since this is locked savings, they must be entrusted to a vested benefits foundation. You have two main options:

1. An insurance company: via a vested benefits policy.
2. A bank: via a vested benefits account.

These two solutions offer different advantages depending on your needs and your medium- or long-term financial goals. We will detail their specific features later to help you make an informed decision.

Who has vested benefits accounts?

Before it was called a “vested benefits account”, your capital was called “BVG assets” or “2nd pillar capital”. It will continue to bear this name as long as it is in a pension fund, as long as you continue to grow this capital and, finally, as long as you remain insured. Then, for a number of reasons, mainly three, this money will leave your pension fund and become “vested benefits”.

Leaving your current job

If you are retiring, this capital will be converted into a pension or paid directly into your current account. On the other hand, if you leave your job without retiring, you will be obliged to withdraw your BVG assets and transfer them (for a shorter or longer period) to a vested benefits account.

Divorce

When you divorce, the general rule is that the 2nd pillars are shared equally between the ex-spouses. You will need to open a vested benefits account to receive these BVG assets.

A pension fund too full

When you change employer, you should, in principle, transfer your 2nd pillar assets to your new employer’s pension fund. In some cases, the new pension fund and its rules may not allow you to transfer such a large amount. You will be able to contribute the maximum authorised, and the remainder will end up in a vested benefits account.

What can you do with your vested benefits account?

Vested benefits account and change of job

As explained above, in most cases, changing jobs (in Switzerland) means changing pension funds (unless both your employers have the same pension fund). In principle, there is only one option open to you, but some people decide to opt for a second one.

Rerouting your vested benefits to your new pension fund

Though you can usually expect the HR department of your new employer to remind you, it is your responsibility to inform your previous pension fund of the transfer. 

Should you forget, the amount will not vanish into thin air but will rather be transferred to an institution which bears the sweat name of “Substitute Occupational Benefit Institution”.

This case is frequent, nothing bad, but it does create extra paperwork to handle. 

Keep it between us, but if you do not feel like doing it, let us know, we will deal with the whole thing as quickly as possible. 

If part of your wealth has already passed through the Substitute Occupational Benefit Institution Foundation (Fondation institution supplétive LPP), make sure it hasn’t stayed there because, let’s be honest, it’s not hard to find a better investment option. 

Rerouting your vested benefits assets to an invested vested benefits policy or account 

The law required for employees who change employers to arrange for their assets to be retrieved to their new pension fund. But it does not penalise those who do not follow this rule. Peculiar right? Indeed, this introduced what is called a grey zone. 

It is thus possible to hand over your assets to a financial institution (bank or insurance) instead of your new pension fund in order to make your money yield more profit while you patiently wait for the best moment to take it out. This possibility is not systematically the best thing to do, both options and their advantages should be compared: 

• The interest rate paid out by your asset manager v. the new pension fund 
• The increase in insurance coverage (disability, death, old age) the retrieving of your assets to your new pension fund represents 
• The financial strength of your new pension fund 
• The fiscal aspect of splitting your pension plan for when you will withdraw it 
• Etc…

Once again: if you are unsure about how to proceed, or if you have doubts about whether some of your vested benefits are somewhere on the loose, let us know, we will take care of everything!

If by chance you opt for this solution, we strongly advise you to ask your former pension fund to split your capital into two parts (with the distribution of your choice). If necessary, this will allow you to withdraw your assets separately, thereby reducing the tax payable on 2nd pillar withdrawals.

Divorce and vested benefits accounts

If, after a divorce, you have received part of your ex-spouse’s assets, you may be able to open a vested benefits account or policy to leave this money until a withdrawal situation arises:

• Buying your main home
• Reaching retirement age (or 5 years before)
• A permanent departure from Switzerland
• Starting a self-employed activity

What is the impact of keeping part of your LPP assets in a vested benefits account as you approach retirement?

LPP assets held in a vested benefits account are just as much yours as those still managed by your current employer’s pension fund. At retirement, these assets will be entirely returned to you. However, there is a significant difference in how you can access them.

Within pension funds, it is generally possible — and sometimes even mandatory under stricter regulations — to receive a lifetime annuity, guaranteeing a steady income for as long as you live. In contrast, this option is almost never available with vested benefits accounts. Vested benefits foundations, with very few exceptions, do not pay out annuities. This means that, upon retirement, the funds accumulated in your vested benefits accounts will be paid out as a lump sum. It then becomes your responsibility to manage this amount to ensure financial security throughout your retirement.

If you prefer the security of a lifetime annuity over a lump sum payment, it is essential to confirm, before reaching retirement age, that all your funds are consolidated in the pension fund of your last employer. For those still undecided, this article provides all the necessary insights to make an informed choice: Withdraw your second pillar as an annuity or a lump sum.

Finally, you should know that your bank (apart from some small banks) has a vested benefits foundation that will be happy to accept your money. Now, if you have the time and inclination to find out more, you should know that it can be worthwhile (economically) to choose your account carefully.

And as always, if you find yourself in one of these situations, don’t hesitate to contact us. We’ll take the time to answer all your questions.

How FBKConseils can help you with your LPP assets or vested benefits accounts?

A personalized introductory meeting

While our articles and YouTube channel address many questions, we understand that every situation is unique. You may still have specific concerns or particular needs. During this initial complimentary 20-minute meeting, you’ll have the opportunity to ask all your questions and receive tailored advice for your case.

Investing your second pillar assets

If, for any reason, your assets can no longer remain in a pension fund, FBKConseils is here to guide you every step of the way. We answer all your questions, present suitable options, work with you to define your risk profile, and, most importantly, handle the necessary administrative tasks to make your investment project a reality.