A brief explanation of the Swiss pension system

The Swiss pen­si­on system is based on three pil­lars. The­re is a sta­te, an occup­a­tio­nal and a pri­va­te pen­si­on plan. In this arti­cle we exp­lain how the indi­vi­du­al pen­si­on sche­mes work and how they com­ple­ment each other.

3‑Pillar System of the Swiss Social Secu­ri­ty System

The 1st pillar: AHV — the state pension

Old-age and sur­vi­vors’ insuran­ce (OASI = Ger­man AHV) is the first pil­lar of the Swiss three-pil­lar system. The aim of the first pil­lar is to cover sub­si­stence needs in old age or in the event of death (orphans’ and widows’ pen­si­ons). If the AHV pen­si­on is not suf­fi­ci­ent to cover the mini­mum living costs, sup­ple­men­ta­ry bene­fits can be app­lied for. Sup­ple­men­ta­ry bene­fits are finan­ced joint­ly by the con­fe­de­ra­ti­on and the can­tons. No wage con­tri­bu­ti­ons may be levied to finan­ce sup­ple­men­ta­ry bene­fits.

The AHV ope­ra­tes on the pay-as-you-go princip­le. The employees finan­ce the pen­si­ons with their con­tri­bu­ti­ons. The working popu­la­ti­on pro­vi­des for tho­se who have reti­red. It is also known as an inter-genera­tio­nal con­tract: the genera­ti­on that makes con­tri­bu­ti­ons today is depen­dent in future on the next genera­ti­on doing the same. Sin­ce the inter­ge­nera­tio­nal con­tract is an ima­gi­na­ry con­struct, dis­cus­sions are con­stant­ly spar­ked off as to whe­ther the next genera­ti­on will still be able to finan­ce the gro­wing num­ber of pen­sio­ners.

AHV pay-as-you-go system with annu­al defi­cit

Employ­ers and employees finan­ce the AHV con­tri­bu­ti­ons on a soli­da­ri­ty basis. Both pay 4.2 % of their gross wages. In addi­ti­on, the­re are also con­tri­bu­ti­ons to disa­bi­li­ty insuran­ce (IV) and inco­me com­pen­sa­ti­on (EO). AHV, IV and EO tog­e­ther result in a wage deduc­tion of 5.125 %. The employ­er regu­lar­ly trans­fers the con­tri­bu­ti­ons to the can­to­nal Aus­gleichs­kas­se, the indu­stry Aus­gleichs­kas­se or the asso­cia­ti­on Aus­gleichs­kas­se. If you have any doubts about your employer’s credit­wort­hi­ness, you can ask the com­pen­sa­ti­on fund whe­ther the con­tri­bu­ti­ons have been trans­fer­red.

AHV, IV and EO con­tri­bu­ti­ons are paid on the enti­re inco­me. The­re is no upper limit. The bene­fits, howe­ver, are limi­ted. In the case of the AHV pen­si­on, they amount to a mini­mum of CHF 1’185 and a maxi­mum of CHF 2’370 per mon­th for sin­gle peop­le. Mar­ried peop­le recei­ve a com­bi­ned pen­si­on of bet­ween 2’370 and 3’555 francs per mon­th. The AHV reti­re­ment pen­si­on must be app­lied for. If you want to know how much the pen­si­on will be, you can ask the Aus­gleichs­kas­se for an advan­ce cal­cu­la­ti­on.

Die 2. Säule: BVG – die berufliche Vorsorge

BVG is the abbre­via­ti­on for the ger­man term “Beruf­li­che Alters‑, Hin­ter­las­se­nen- und Inva­li­denvorsor­ge-Gesetz” (Eng­lisch OASI). Occup­a­tio­nal pen­si­on sche­mes sup­ple­ment the AHV. Tog­e­ther, the AHV and the pen­si­on fund (BVG) are inten­ded to enab­le the insu­red per­son to con­ti­nue his or her accu­sto­med stan­dard of living after reti­re­ment (pen­si­on of 60% of the last insu­red sala­ry).

The occup­a­tio­nal pen­si­on sche­me ope­ra­tes on a defi­ned con­ti­bu­ti­on system. Ever­yo­ne saves their own reti­re­ment assets during their working life. On reti­re­ment, the reti­re­ment assets are con­ver­ted into a life-long pen­si­on. The con­ver­si­on rate is at least 6.8 per­cent for the man­da­to­ry por­ti­on. A reti­re­ment savings capi­tal of CHF 100’000 results in an annu­al pen­si­on of CHF 6’800*.

Due to the incre­a­sed life expec­tancy, the accu­mu­la­ted old-age savings are no lon­ger suf­fi­ci­ent to finan­ce pen­si­ons until the end of life. The acti­ve insu­red finan­ce this defi­cit. Their reti­re­ment savings are not credi­ted with the enti­re yield ear­ned. Part of the return on the reti­re­ment capi­tal is used to cover the pen­si­on defi­cit. The­re is a redis­tri­bu­ti­on from the working popu­la­ti­on to the pen­sio­ners. Read more about this in a com­men­ta­ry on the cur­rent pro­po­sals for the reform of the 2nd pil­lar.

* At least a quar­ter of the reti­re­ment assets can be with­drawn in the form of a lump sum at the time of reti­re­ment, or more if your pen­si­on fund allo­ws more.

Kapitaldeckungsverfahren der 2. Säule
2nd pil­lar fun­ded sche­mes with redis­tri­bu­ti­on effect

Most SMEs in Switz­er­land are affi­lia­ted to collec­ti­ve and joint insti­tu­ti­ons. Lar­ger com­pa­nies with several hund­red employees some­ti­mes have their own pen­si­on sche­mes. In both cases, the pen­si­on pro­tec­tion is pro­vi­ded by a foun­da­ti­on. The foun­da­ti­on defi­nes the pen­si­on plan, how high the con­tri­bu­ti­ons and bene­fits are. The pen­si­on plan must be wit­hin the legal gui­de­li­nes. The para­me­ters defi­ned by law (e.g. con­tri­bu­ti­ons, inte­rest, con­ver­si­on rate) are to be under­s­tood as mini­mum requi­re­ments. Pen­si­on sche­mes may pro­vi­de hig­her bene­fits as long as they remain appro­pria­te.

The 3rd pillar: 3a — private provision

Pen­si­on pro­vi­si­on with the restric­ted form of the third pil­lar (3a) is volun­ta­ry. You deci­de for yours­elf whe­ther you wish to build up a third pil­lar in addi­ti­on to the 1st and 2nd pil­lar. Every two years, the Federal Coun­cil deter­mi­nes the maxi­mum con­tri­bu­ti­on you can pay in and thus also deduct from your tax bill.

Vie­le Vor­tei­le spre­chen fürs frei­wil­li­ge Spa­ren mit der Säu­le 3a:

  • You can deduct the pay­ments from tax­able inco­me
  • You do not have to tax the inco­me on your 3a assets as inco­me. The reti­re­ment assets are also not tax­able (no wealth tax).
  • You can deci­de how much you want to depo­sit and how you want to invest the money. Howe­ver, if you imple­ment the 3rd pil­lar in the form of an insuran­ce poli­cy, you may be bound by the annu­al pay­ments.
  • You can with­draw the money in pil­lar 3a in advan­ce if you want to buy your own home, beco­me self-employ­ed or if you are emi­gra­ting.

It pays to start buil­ding a 3rd pil­lar as ear­ly as pos­si­ble, espe­cial­ly if you invest your 3a money in secu­ri­ties. Alt­hough the­re will cer­tain­ly be one or two eco­no­mic cri­ses bet­ween now and reti­re­ment, you can look past them with con­fi­dence thanks to the long invest­ment hori­zon. Expe­ri­ence shows that the stock mar­kets reco­ver after a cri­sis.

If you want to use 3a funds to buy your own home, the­re is the alter­na­ti­ve of pled­ging. Your 3a assets remain inve­sted. In addi­ti­on, unli­ke a lump-sum with­dra­wal, you do not have to pay taxes.

A distinc­tion is made bet­ween pil­lar 3a and pil­lar 3b, which refers to free saving. Pay­ments into the pil­lar 3b (e.g. into a savings account) are not tax-deduc­ti­ble.

writ­ten on 13.09.2019

Cur­r­ent­ly, fin­pen­si­on offers solu­ti­ons for vested bene­fit savings with secu­ri­ties and indi­vi­du­al manage­ment pen­si­on plans 1e. A 3a secu­ri­ties app is under deve­lo­p­ment.