The LPP explained: what the law requires of a Vaud SME director
Entry threshold, coordination deduction, old-age credits, affiliation: the LPP rules that apply to the director of a Vaud SME, with step-by-step calculations.
Who must be insured: entry threshold and the director's status
A Sàrl (limited liability company) manager who pays himself CHF 8'000 a month, i.e. CHF 96'000 a year, and an employee of the same company paid CHF 3'000 a month, i.e. CHF 36'000 a year, are not in the same position under the LPP. The first is well above the entry threshold. The second is also above it, but only just, which greatly changes his insured salary.
The rule is set out in Article 7 of the Federal Act on Occupational Old-Age, Survivors' and Invalidity Pension Provision (LPP, RS 831.40). Any employee whose annual AVS (old-age and survivors' insurance) salary exceeds the entry threshold and who has reached the age of 17 is subject to compulsory insurance for the death and disability risks. Old-age insurance begins on 1 January following the 24th birthday. The amount of the entry threshold is set by law and adjusted by the Federal Council. It stands at CHF 22'680 a year under the values in force until 2026 (to be checked on ofas.admin.ch before publication, the LPP reform adopted by Parliament having been rejected in the popular vote of September 2024).
The director's status determines the obligation. The manager of a Sàrl or the director of an SA (public limited company) who receives a salary from his company is an employee within the meaning of the AVS. He is therefore compulsorily insured under the LPP as a director, provided his salary exceeds the threshold. The self-employed person, by contrast, is not subject to the obligation. He may join an occupational pension institution on a voluntary basis, under Article 44 LPP, or join the substitute institution.
Under Article 7 LPP, an employee whose annual AVS salary exceeds the entry threshold of CHF 22'680 (value to be checked on ofas.admin.ch) is compulsorily insured under occupational pension provision.
Persons in secondary employment, employees hired for three months or less and persons who are 70% or more disabled within the meaning of the AI (disability insurance) are exempt from the obligation (Art. 1j of the Ordinance on Occupational Old-Age, Survivors' and Invalidity Pension Provision, OPP 2, RS 831.441.1).
The coordinated salary: from the AVS salary to the insured salary
The manager on CHF 96'000 a year will note that his insured LPP salary is not equal to his AVS salary. The difference comes from the coordination deduction, which avoids covering twice the part of the salary already guaranteed by the AVS/AI.
Under Article 8 LPP, the part of the annual salary lying between the coordination deduction and the upper limit constitutes the coordinated salary. The coordination deduction amounts to seven-eighths of the maximum AVS old-age pension, i.e. CHF 26'460 a year. The upper limit of the annual salary taken into account is CHF 88'200. The maximum coordinated salary is therefore CHF 61'740. A minimum coordinated salary of CHF 3'675 applies where the calculation gives a lower amount. These amounts are those in force until 2026 (to be checked on ofas.admin.ch before publication).
Example 1, minimum LPP scheme, Sàrl manager:
Annual AVS salary: CHF 96'000
Salary capped at the upper limit: CHF 88'200
Coordination deduction: CHF 26'460
Coordinated salary: CHF 88'200 less CHF 26'460, i.e. CHF 61'740
Example 2, minimum LPP scheme, employee on CHF 3'000 a month:
Annual AVS salary: CHF 36'000
Coordination deduction: CHF 26'460
Coordinated salary: CHF 36'000 less CHF 26'460, i.e. CHF 9'540
These two examples illustrate the minimum LPP scheme only. The pension fund's regulations may provide for a reduced coordination deduction, proportionate to the activity rate, or abolish the deduction. The insured salary is then calculated according to the regulatory plan, which takes precedence over the statutory figure.
Under Article 8 LPP, the coordinated salary is the part of the AVS salary lying between CHF 26'460 and CHF 88'200 a year, i.e. a maximum of CHF 61'740 under the minimum scheme (values to be checked on ofas.admin.ch).
Step
Timing
Detail
1. Annual AVS salary
Starting point
Manager: CHF 96'000 (CHF 8'000 a month). Employee: CHF 36'000 (CHF 3'000 a month). Both exceed the entry threshold of CHF 22'680. (Company / employer)
2. Capping at the upper limit
Limit: CHF 88'200
Manager: CHF 96'000 is capped at CHF 88'200. Employee: no capping, the salary of CHF 36'000 remains below the limit. (Pension fund)
3. Coordination deduction
CHF 26'460 a year
Seven-eighths of the maximum AVS old-age pension, deducted to avoid covering twice the part already guaranteed by the AVS/AI (Art. 8 LPP). Manager: CHF 88'200 less CHF 26'460. Employee: CHF 36'000 less CHF 26'460. (Pension fund)
4. Coordinated salary (minimum LPP scheme)
Result
Manager: CHF 61'740 (statutory maximum). Employee: CHF 9'540. A minimum coordinated salary of CHF 3'675 applies if the calculation gives a lower amount. (Pension fund)
5. Caveat: the fund's regulations take precedence
To be checked in the plan
The regulations may provide for a reduced deduction (proportionate to the activity rate) or an abolished one. The insured salary is then calculated according to the regulatory plan, which takes precedence over the statutory figure. The examples illustrate the minimum LPP scheme only. (Pension fund regulations)
1. Annual AVS salary
TimingStarting point
DetailManager: CHF 96'000 (CHF 8'000 a month). Employee: CHF 36'000 (CHF 3'000 a month). Both exceed the entry threshold of CHF 22'680. (Company / employer)
2. Capping at the upper limit
TimingLimit: CHF 88'200
DetailManager: CHF 96'000 is capped at CHF 88'200. Employee: no capping, the salary of CHF 36'000 remains below the limit. (Pension fund)
3. Coordination deduction
TimingCHF 26'460 a year
DetailSeven-eighths of the maximum AVS old-age pension, deducted to avoid covering twice the part already guaranteed by the AVS/AI (Art. 8 LPP). Manager: CHF 88'200 less CHF 26'460. Employee: CHF 36'000 less CHF 26'460. (Pension fund)
4. Coordinated salary (minimum LPP scheme)
TimingResult
DetailManager: CHF 61'740 (statutory maximum). Employee: CHF 9'540. A minimum coordinated salary of CHF 3'675 applies if the calculation gives a lower amount. (Pension fund)
5. Caveat: the fund's regulations take precedence
TimingTo be checked in the plan
DetailThe regulations may provide for a reduced deduction (proportionate to the activity rate) or an abolished one. The insured salary is then calculated according to the regulatory plan, which takes precedence over the statutory figure. The examples illustrate the minimum LPP scheme only. (Pension fund regulations)
From the AVS salary to the coordinated salary: the deduction of CHF 26'460 reduces CHF 96'000 to CHF 61'740 for the manager, and CHF 36'000 to CHF 9'540 for
Key takeaway
The same coordination deduction of CHF 26'460 reduces the manager's insured salary by 36% (from CHF 96'000 to CHF 61'740) but the employee's by 74% (from CHF 36'000 to CHF 9'540), since the fund's regulations may provide for a reduced or abolished deduction and take precedence over the statutory figure.
Source: Art. 7 and 8 LPP (RS 831.40) — fedlex.admin.ch. Amounts in force until 2026, to be checked on ofas.admin.ch
Contributions: old-age credits and how they are shared
On the manager's payslip, the 'occupational pension' line results from two components: the old-age credit, which feeds the old-age savings balance, and the premium for the death and disability risks together with costs, set by the fund.
Article 16 LPP sets the rates of the old-age credit as a percentage of the coordinated salary, according to age:
from 25 to 34 years: 7%
from 35 to 44 years: 10%
from 45 to 54 years: 15%
from 55 to 65 years: 18%
These rates are those of the minimum scheme currently in force (to be checked on ofas.admin.ch before publication). They apply to the coordinated salary, not to the AVS salary.
Article 66 LPP requires the employer to pay at least half of total contributions. The employer must transfer them to the pension institution, after deducting the employee's share from the salary.
Annual credit: CHF 61'740 multiplied by 15%, i.e. CHF 9'261
Minimum equal split: CHF 4'630.50 borne by the company, CHF 4'630.50 borne by the manager
The manager of a Sàrl occupies both roles. He bears the employer's share economically through his company, which weighs on the company's result. This amount is added to the AVS/AI/APG/AC social charges.
On the salary certificate (form 11), the employee's share appears at item 10, 'Occupational pension contributions, 2nd pillar', under the deductions. The exact amounts, risk premiums and costs depend on the pension fund's regulations.
Under Article 16 LPP, the minimum old-age credit rises from 7% of the coordinated salary between ages 25 and 34 to 18% between ages 55 and 65 (rates to be checked on ofas.admin.ch).
Age bracket 45 to 54 years, applied to the coordinated salary and not to the AVS salary
Annual credit
CHF 9'261
CHF 61'740 multiplied by 15%
Company's share
CHF 4'630.50
Half of the credit, borne by the employer
Manager's share
CHF 4'630.50
Half of the credit, deducted from salary. Minimum equal split, Art. 66 LPP
Range of old-age credit rates (Art. 16 LPP)
7% to 18%
7% from 25 to 34 years, 10% from 35 to 44 years, 15% from 45 to 54 years, 18% from 55 to 65 years. Risk premiums and costs in addition, according to the fund's regulations
ContextAge bracket 45 to 54 years, applied to the coordinated salary and not to the AVS salary
Annual credit
ValueCHF 9'261
ContextCHF 61'740 multiplied by 15%
Company's share
ValueCHF 4'630.50
ContextHalf of the credit, borne by the employer
Manager's share
ValueCHF 4'630.50
ContextHalf of the credit, deducted from salary. Minimum equal split, Art. 66 LPP
Range of old-age credit rates (Art. 16 LPP)
Value7% to 18%
Context7% from 25 to 34 years, 10% from 35 to 44 years, 15% from 45 to 54 years, 18% from 55 to 65 years. Risk premiums and costs in addition, according to the fund's regulations
Under the minimum scheme, the annual credit for the 46-year-old manager is CHF 9'261, split equally between the company and himself
Key takeaway
On a coordinated salary of CHF 61'740, the 15% rate applicable at age 46 gives a credit of CHF 9'261, which the company and the manager each fund to the extent of CHF 4'630.50.
Source: Art. 8, 16 and 66 LPP (RS 831.40) — fedlex.admin.ch. Values to be checked on ofas.admin.ch before publication
The obligation to join a pension fund
A director who hires his first employee above the entry threshold must affiliate his company without delay. He cannot keep the contributions within the business.
Article 11 LPP requires every employer employing staff subject to compulsory insurance to join a registered pension institution. The employer chooses this institution with the agreement of his staff, or their representatives, and concludes a written affiliation contract. Affiliation takes effect retroactively from the date on which the obligation arose.
If the employer does not affiliate, the AVS compensation fund affiliates him automatically with the substitute institution (Art. 11, para. 3 LPP). It cannot be circumvented. The substitute institution invoices the defaulting employer for the contributions due, with interest and costs.
The pension institution must be entered in the register of occupational pension provision (Art. 48 LPP). It is subject to supervision by the competent authority. For Vaud private-law institutions, this is the Western Switzerland LPP and Foundations Supervisory Authority (AS-SO), headquartered in Lausanne (to be checked on as-so.ch). Each institution is also audited by an auditing body and an accredited occupational pension expert.
The LPP guarantee fund guarantees statutory benefits in the event of a pension institution's insolvency (Art. 56 LPP). It covers benefits up to a limit equivalent to one and a half times the maximum LPP salary, i.e. CHF 132'300 in 2026 (to be checked on ofas.admin.ch).
Under Article 11 LPP, an employer who employs staff subject to compulsory insurance must join a registered pension institution, failing which the compensation fund affiliates him automatically with the substitute institution.
The director's choices: minimum scheme, supra-mandatory scheme
The manager of the Sàrl decides, together with the pension institution, the extent of his cover. The LPP sets a floor. It does not impose a ceiling.
The minimum LPP scheme applies the statutory rules described above. The supra-mandatory plan, or comprehensive plan, provides higher benefits: a higher insured salary, no coordination deduction, more generous credits, or even taking into account salary above CHF 88'200. Most funds offer a comprehensive plan. The fund's regulations then take precedence over the statutory figures in this article, and the supra-mandatory portion is not subject to the statutory minimum conversion rate.
The buy-in of years of insurance is provided for in Article 79b LPP. It allows a pension gap to be filled, within the limits of the fund's regulations. The amounts bought in are deductible from taxable income, subject to the three-year blocking period applicable to capital withdrawals following a buy-in (Art. 79b, para. 3 LPP). The maximum buy-in amount is calculated from the pension certificate. Only the fund can confirm it.
As regards capital withdrawals, the Vaud Act on Cantonal Direct Taxes (LI, RSV 642.11) subjects capital benefits from pension provision to a tax separate from ordinary income, at a reduced rate. The applicable scale is to be checked with the Cantonal Tax Administration (vd.ch/themes/etat-droit-finances/impots/). Article 38 of the Federal Act on the Harmonisation of Direct Taxes (LHID, RS 642.14) frames this principle.
For both buy-ins and capital withdrawals, the director's individual situation is a matter for the pension fund and a pension specialist. For the general framework of the 2nd pillar, our guide to the LPP and the 2nd pillar in Switzerland (fr-questce-que-la-lpp-votre-guide-du-2e-pilier-en-suisse) sets out the fundamentals.
Deadlines and non-compliance risks
A Sàrl that reports its salaries late to the pension fund exposes the manager to corrections, or even to charges. The annual calendar must therefore be kept.
Salaries are reported at the start of the year, generally between January and March, depending on the fund's regulations. The employer communicates each employee's AVS salary, entries, departures and changes in activity rate. The fund calculates the insured salaries and issues the contribution statements. The personal pension certificate is issued each year.
The risks in the event of default are of several kinds:
Late payment of contributions: default interest and reminder charges according to the fund's regulations. Unpaid contributions are recovered through debt enforcement proceedings.
Failure to affiliate: retroactive automatic affiliation with the substitute institution, with invoicing of back contributions.
Employees not reported: the employee concerned is not covered against the death and disability risks until the report has been made, which may engage the employer's liability.
Contribution to costs: the substitute institution invoices the defaulting employer a contribution to administrative costs, the amount of which depends on its regulations (to be checked on chaeis.ch).
Monitoring of affiliation is carried out by the AVS compensation fund. During its employer audits, it checks that the business is affiliated to a pension institution for its staff subject to the obligation (Art. 11, para. 2 LPP). For the Canton of Vaud, the contact is the Vaud Cantonal AVS Compensation Fund or the professional fund to which the business is attached.
Compliance checklist:
Affiliation contract signed with a registered pension institution
Regulations and pension plan received and kept
Annual salary declaration submitted on time
Check of each employee's insured salary against the threshold and the coordination deduction
Contributions deducted from salaries and transferred on time
Salary certificate issued with the employee's share correctly entered
This document describes the general legal framework. Particular cases are dealt with together with the pension fund or a pension specialist.
"This article is provided for information purposes only. It does not constitute personalised legal, tax or financial advice, nor any guarantee of accuracy or completeness; for any question concerning your occupational pension provision (LPP), please consult a specialist or your pension fund before making any decision."
FAQ
A manager employed by his own Sàrl is subject to the LPP as soon as his annual AVS salary exceeds the entry threshold, set at CHF 22'680 under the values in force (to be checked on ofas.admin.ch). Below that, affiliation remains possible if the fund's regulations provide for it.
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