Invest your pillar 3a: You need to know these terms

Yes, that’s right. You can also invest your pillar 3a in securities. In the third pillar, it is not usually referred to as a custody account if you want to invest the 3a account in securities. This already shows that things work a little differently in the third pillar than in free assets, where the money is not blocked. The most important terms are explained below:

Pillar 3a in pension funds (incl. index funds)

A fund is a vehicle in which investors can invest. The process looks like this: You pay into the fund and the fund in turn invests the money in various shares, bonds and other investments such as property or commodities.

A pension fund, for its part, is specifically designed for pension provision. A pension fund must fulfil the BVV 2 guidelines. BVV 2 is the second ordinance on occupational pension provision. Because the third pillar is legally an appendage of the second pillar, the provisions also apply to the third pillar.

BVV 2 regulates how pension assets may be invested. For example, a maximum of 50 per cent may be invested in equities. Are you wondering why there are pension funds that allow more than 50 per cent in equities? This is because these limits can be exceeded if the pension fund member has the capacity to take risks.

Another feature of a pension fund is that it is tax-exempt. This means that a fund that only accepts pension assets does not have to pay tax on dividends and interest. However, it must have the appropriate structure and have an investor group control. If the fund accepts different monies (pension assets and others), it is “contaminated”. It can then no longer benefit from the tax advantage. You should therefore check the quality of a pension fund before making your choice.

Pension funds can only be bought or sold at the relevant bank or fund house. As these funds are not traded on the stock exchange, the term “subscription” and “redemption” is used instead of “purchase and sale”. Once a day, after the end of trading on the stock exchange, the fund determines the net asset value (NAV). The NAV is the price at which subscriptions and redemptions are made (plus or minus the spread).

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Pillar 3a in ETFs (Exchange Traded Funds)

ETF is the abbreviation for “Exchange Traded Fund”. Exchange refers to the stock exchange where a large number of transactions in various securities are processed every day. ETFs are therefore funds traded on the stock exchange.

Unlike pension funds, ETFs can be bought or sold at any time during the opening hours of the stock exchange. This means that there is not only a price fixing at the end of the day, but also many trading prices during the course of the day.

The price of an ETF fluctuates throughout the day. It is set by a market maker and is based on the current effective value of the fund and its investments. A market maker ensures that shares can be bought or sold at any time. This means that you can invest in the fund even if there is no one on the other side who wants to sell the fund.

There are many different providers that make it possible to invest the third pillar in ETFs. The pioneer in this field is VZ Vermögenszentrum, which is committed to not issuing its own funds because this is fraught with conflicts of interest. You have to imagine that when a bank issues its own funds, it has an interest in ensuring that its customers invest their money in these bank-owned funds, even if there are actually better funds on the market.

The VZ does not do this and yet investing the third pillar in ETFs is suboptimal. Because ETFs are traded on the stock exchange, they can be bought by anyone. It is not possible to check that the ETF is only fed with pension assets. This results in certain tax disadvantages.

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Pillar 3a in securities

Last but not least, what are securities? This term is less common in the pension sector because the pension business is usually conducted via funds. But why is this the case?

The reason is again to be found in BVV 2. Pension funds are not free to choose how to invest their assets. Apart from the investment restrictions already mentioned in the first chapter, the principle also applies that pension assets must be invested in a broadly diversified manner. This is also referred to as diversification.

The advantage of diversification is that you are less dependent on the success or failure of a single security. It can also be mathematically proven that spreading the risks and opportunities across several securities has a positive effect on the risk/return ratio. Up to a certain point, this increases less than the expected return.

It is therefore not a bad thing that the law stipulates that pension assets must be invested in a broadly diversified manner. A diversified investment strategy effectively has scientifically verifiable advantages over individual investments.

Now we have digressed a little. Back to the actual question. What is behind the term “securities”? Loosely translated, securities means that there is a piece of paper, a document, that has a certain value. The value is defined by the supply and demand of the security in question. If a company is successful and can increase its profits, then the demand for its shares will increase and the price will rise.

Shares: You buy part of a company, which gives you a say in the running of the company as well as a share in the profits.

Obligation: You lend money to the company in the form of a loan and receive a certain annual interest rate in return.

Real estate: You buy part of a property and participate in the net rental income.

Commodities: When you invest in gold, you are investing in commodities. The disadvantage of these investments is that they do not pay dividends or interest. Depending on your point of view, you can view commodities either as a store of value or as a pure speculative instrument because you expect higher prices. Depending on the form of the commodity, however, it also has an economic significance (gold, for example, is also processed into jewellery).

Cryptocurrencies: Cryptocurrencies have similar properties to commodities. The first crypto fund was authorised for distribution in Switzerland in 2021. Since then, finpension has been the only provider to allow part of pillar 3a to be invested in bitcoins and co.

Investment funds invest in such securities, and they can do so, but usually not directly, as is the case with free assets with a securities custody account, but via pension funds or ETFs. There are one or two providers that make it possible to invest directly in equities with pillar 3a, such as the Asset Centre: Pillar 3a with individual securities. The advantage of this model over ETFs is that you can save the fund fees. However, the diversification is very narrow and limited to Switzerland and the costs are still relatively high at 0.68 %. Another such provider is Zugerberg Finanz with its 3a product Revo. However, because its fees are not made transparent online and questions about withholding tax reclaim on US securities remain unanswered, we cannot recommend this product either.

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What is an investment strategy?

Pension funds and ETFs are often offered by new innovative providers in the form of investment strategies. In this chapter, we would like to explain what this means.

But we don’t want to make it any more complicated than it is. So let’s get straight to the point: investment strategies are a combination of different investment funds into one strategy.

The following table shows one such investment strategy offered by finpension. As you can see, there are different investment instruments for each asset class (liquidity, equities, bonds, property), which are weighted differently. In our example, the share of equities is 40 %.

finpension shares 40

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Read more about pillar 3a.