Buying into the pension fund
The term purchase here does not refer to daily purchases in a supermarket, but buying into the pension fund voluntarily. This will improve your retirement benefits while reducing your tax burden in the year you make the payments. So buying into the pension fund pays off twice. As a rule, there is potential for buying in if the BVG contributions are missing for some years, or if the salary has increased significantly: for example, after a change of position or a period of part-time work. From a tax perspective, it often makes sense to stagger purchases over several years to break the progression. The maximum possible contribution is determined by the regulations of your pension fund. Your pension certificate will show you if there is any potential for buying in. Whether, when and in what graduation a buy-in to the pension fund makes sense depends on many factors - it is therefore best to look into this with your pension advisor.
There is a lot of money in the occupational retirement provision, because it is where all employees save for their old age. The savings are invested for each individual insured in such a way that they have as much capital as possible at their disposal after retirement. At the same time, the pension funds can also make a noticeable contribution to sustainability with the funds invested. That is why the Vita Collective Foundation has set itself the goal of investing its portfolio in a completely carbon neutral manner by 2050. This means that the Vita Collective Foundation invests in such a way that the sum of all investments does not generate any carbon emissions. Among other things, it invests in green bonds, in which the issuers undertake to use the funds received to finance ecological projects - for example, renewable energies. Carbon neutrality cannot be achieved overnight, but usually takes place gradually over a period of years or decades. The aim is to contribute to the goals of the Paris Climate Agreement.
Coordination deduction (coordinated salary)
According to the BVG, the basis for calculating monthly contributions for occupational retirement provision is not the entire income. In this case, the proportion of the salary that is insured is that which is between 21,510 and 86,040 Swiss francs. The amounts up to 25,095 francs are covered by the 1st pillar (OASI). That is why this part of the salary is excluded from calculation of the BVG by means of the coordination deduction.
|A sample calculation:|
|Annual income:||CHF 80,000|
|Coordination deduction:||- CHF 25,095|
|Insured salary:||CHF 54,905|
The pension fund contributions are dependent on the the insured salary. The coordination deduction always corresponds to seven-eighths of the maximum annual OASI pension.
If income is higher than 86,040 Swiss francs, this can be voluntarily covered in the occupational retirement provision by means of non-compulsory contributions. In the case of part-time employees with a correspondingly lower income, the coordination deduction may result in them making significantly lower contributions in relation to their total income The result of this may be that correspondingly smaller benefits are paid out upon reaching retirement age. To partially counteract this, some progressive pension funds adapt the coordination deduction to the duration of employment. This leads to a higher insured salary, so that higher pension fund contributions ultimately lead to higher insured benefits from the 2nd pillar.
In the case of pension funds, the cover ratio corresponds to the ratio between the effectively available assets and the liabilities on a particular cut-off date. It thus provides information about the percentage by which the liabilities of a pension fund are covered by its assets. With a cover ratio of 100 percent, the pension fund has sufficient financial means to meet all entitlements to benefits at a particular time. However, there is no buffer. The cover ratio would have to be over 100 percent to do that.
In fact, the cover ratio is only a technical figure, because even with a cover ratio of less than 100 percent it will never happen that all insured persons will all retire at the same time, for example. Even so, a high cover ratio demonstrates that a pension fund is financially strong and can meet all its obligations with no difficulty. A pension fund with a high cover ratio also has a higher risk tolerance and can, for example, afford to pursue a more risky investment strategy with greater potential returns, because there are enough funds available to cushion any fluctuations on the financial markets.
Date of retirement
The basic principle of the 2nd pillar is that every employee saves for him/herself and gets the money paid out after retirement. But the system is increasingly facing difficulties, so that the investment income of active insured persons has to be used in part for the pensions of pensioners. And an ever greater redistribution is taking place gradually. There are several reasons for this:
- People in Switzerland are getting older and older, while at the same time significantly fewer children are being born. As a result, the ratio between employed and retired persons is changing, according to the Federal Statistical Office: In 1991, there were 28 pensioners per 100 employed persons. In 2019, the number had already increased to 35. According to the forecast of the Federal Office, in 2040, there could already be as many as 50 pensioners for every 100 employed persons.
- In 1985, the year that mandatory occupational retirement provision was introduced, a 65-year-old man still had an average life expectancy of 15 years; today it is already 20 years. The money saved must therefore be sufficient for a longer period of time.
- Furthermore, the founders of occupational retirement provision assumed that pension fund assets could earn an average interest rate of 5% over the long term. But that has not been the case for many years: Interest rates are so low that pension capital is growing noticeably slower than originally planned.
- Both factors, higher life expectancy and poorer interest rates, mean that the conversion rate of 6.8 percent set by law for the mandatory part is now much too high. This means that the saved capital is no longer sufficient for the longer period of retirement.
In this situation, funding gaps arise for the pension funds. In order to be able to pay out the promised pensions today, the pension funds have to shift or simply redistribute part of the investment income from the employed to the retired. In addition to this, the pension funds are forced to lower the conversion rate on the super-mandatory retirement assets. As a result, companies with high wage levels and generous pension fund benefits co-finance other companies that have low wage levels and offer only minimum benefits to their insured.
Vita therefore strongly advocates fairplay in occupational retirement provision: To ensure that today's working people and, above all, our children can also rely on the second pillar, it must be modernized in a sustainable manner.
The generation table shows the mortality probability or statistical life expectancy, including life expectancy from the time of retirement. This information is the basis for calculating the conversion rate in the occupational retirement provision. If life expectancy is systematically assumed to be too low, pension recipients will receive too high a pension per year. The money they will have saved for their own pension during their working life shall then not last until the end of their life. However, because the pension is guaranteed until death, the missing capital must either be earned through investment, or it will need to be redistributed from the employed to the pensioners. Such redistribution is occurring today - because conversion rates are not being adjusted to reflect increased life expectancies and the low interest rates. Because of the historically low interest rates, investments will only generate a lower return.
The investment strategy determines how a pension fund invests its members’ money in the financial market. Legal requirements and guidelines must be adhered to when doing so. These are stipulated in Ordinance 2 on Occupational Pensions (BVV 2) in particular. The art lies in investing the money prudently under these conditions and, at the same time, maximizing returns. A pension fund’s investment strategy is therefore decisive for the returns that can be achieved with the pension fund assets and thus has influence on the retirement assets of individual insured persons. Ultimately, it is the level of returns achieved and the pension fund’s financial situation that determine the retirement provision assets’ interest rate.
Low interest rates
Minimum conversion rate
Occupational retirement provision
In the Swiss social security system, occupational retirement provision belongs to the 2nd of three pillars and supplements the OASI and DI benefits in the 1st pillar. While the 1st pillar ensures the subsistence needs of the insured and their dependents in old age, in the event of disability or death, the 2nd pillar serves to enable the insured to maintain their accustomed standard of living. After retirement, for many people the benefits from the first and second pillars together amount to around 60 percent of the (gross) income earned before the insured event. In order to close any pension gaps or to fulfill individual wishes after retirement, it is possible to make your own provisions using the 3rd pillar. The 3rd pillar thus supplements the retirement provisions of the 1st and 2nd pillars. The 3rd pillar is divided into the restricted pension plan (3a) and the unrestricted pension plan (3b). Pillar 3a is specifically promoted through tax measures. Pillar 3b is an unrestricted pension plan, meaning that it is not tied to retirement and can therefore also be used to achieve medium- or long-term savings goals. But what many often don't realize is that in the 1st pillar, everyone saves together, while in the 2nd and 3rd pillars, everyone saves for themselves. This means that you can normally only access your retirement assets after retiring. But the money is yours all the time.
Working part-time is popular in Switzerland. But people who work part-time often have to contend with a significantly lower BVG pension in old age. Why is this? To be accepted in a pension fund, you have to earn at least CHF 21,510 per year. If you earn less, you are not insured under BVG. But even if you have several part-time positions and earn more than CHF 21,510 per year, you can still expect a lower BVG pension. Why? The reason is the so-called coordination deduction. It prevents contributions on a person's annual salary up to the amount of CHF 25,095 being paid twice, or in other words for both the first and the second pillar. With this in mind, CHF 25,095 is deducted from the annual salary. This determines the salary that is insured in the second pillar. The coordination deduction is applied individually to each annual salary. For part-time employees with a total annual salary of more than CHF 25,095, there are two options to ensure this deduction is only applied once. Either they insure themselves with the Confederation's substitute pension plan. This means that the coordination deduction is only deducted proportionately from each income. Or they can specify the pension fund of one employer as the BVG institute and ask other pension funds to pay in contributions there.