BVG conversion rate
A piece of cake? Retirement assets for occupational retirement provision (pension fund) can be compared with a cake. The conversion rate determines the size of the pieces that we are allowed to cut each year. The lower the conversion rate, the smaller the pieces. And the cake naturally lasts longer when the pieces are small.
The statutory conversion rate for the mandatory BVG part is currently 6.8 percent. This means that after about 15 years, the cake is all gone. For a long time, this calculation proved accurate, since 15 years was the average number of years left to live after retirement. But that has all changed now. While a man could look forward to 13 years of retirement in 1960, he now has 20 years ahead of him. Because we are living much longer today and therefore need to make our cake last that much longer, the younger insured who are still working have to help out and lend a hand in making the cake last a little longer. This is done through contributions that are deducted from their salary. Incidentally, there are other factors that influence how big the pieces of cake are, such as the age structure and the anticipated returns.
While a man could look forward to 13 years of retirement in 1960, he now has 20 years ahead of him.
Vested benefits – can you freely withdraw this money? At some point, you certainly can. But not yet. Vested benefits are the retirement assets that you have saved so far in the pension fund. Contributions for occupational retirement provision are deducted from your salary each month and your employer tops them up by at least the same amount. You or your previous employer may have voluntarily paid in additional money ("purchases"). Furthermore, your savings earn interest in the pension fund. If you change jobs you take this money with you; the assets are transferred to the pension plan of your new employer. If you become unemployed or are economically inactive for a temporary period, the money is parked in a vested benefits account. Such an account can be opened with a bank, an insurance company or with the auxiliary fund. Only in a few cases can you have this amount paid out – if you are self-employed, for instance. Everyone else must wait until retirement.
Coordination means synchronization. The coordination deduction synchronizes benefits from pillar 1 and pillar 2. This is because part of your annual salary is already safeguarded through benefits from the pillar 1 (AHV) – currently amounting to CHF 24,675. This corresponds to 7/8 of the maximum annual AHV retirement pension. So, to calculate your contributions to the pension fund, this amount is deducted from your gross annual salary. Your retirement benefits from pillar 2 are then correspondingly lower. In order to make the whole thing even more complicated, this rule applies to salaries of more than CHF 21,150 and below CHF 84,600. What remains is called the coordinated wage. Those earning less than this do not have to pay any contributions, but have no protection through pillar 2. Those earning just above the entry threshold of more than CHF 21,150 have the rounded amount of CHF 3,525 per annum as the minimum insured wage. And those earning more than CHF 84,600 have to check whether their pension fund also provides benefits for this part of the salary. Salary components of more than CHF 84,600 are referred to as "voluntary contributions". It is not mandatory to insure these parts of the salary.
Shopping is fun – and you can also do some shopping in your pension fund. A surprising number of people have contribution gaps in their pension provision – because of spending a long time at university, studying abroad, or taking parental leave. Many are not even aware of the fact. Even a salary increase offers potential for retrospectively adapting insurance benefits to the new salary. Those who voluntarily pay in additional money can fill any contribution gaps, improve their retirement benefits, and reduce their tax burden at the same time, since the amount paid to purchase benefits can be directly deducted from your taxable income when you submit your tax return.
BVG minimum interest rate
By law, every pension fund has to generate at least 1 percent interest for its insured; this is the current BVG minimum interest rate. Depending on the pension fund, the insured can also benefit from higher interest earned.
Insurance risks: old age, disability, and death
The older generation of today seems remarkably young. Anyone who has ever been disgracefully overtaken by a 75-year-old whistling merrily on a mountain hike on a sunny autumn day is aware of this. Because older people are so fit nowadays, they live much longer than their forefathers. This longevity is a fine thing for the individual. But for the group of insured it is proving to be a financial challenge because advanced age also means more pension payments. Because individuals can hardly predict their personal life expectancy, occupational retirement provision covers the longevity risk through an insurance solution. The other two risks, disability and death, are also covered by the pension fund. This means that it also makes a financial contribution if an insured person becomes disabled or even dies before reaching retirement age.
Gross or net?
Imagine that you earn CHF 60,000 according to your employment contract. This is your gross annual salary. Of this, 5.125 percent is deducted from your salary for AHV/IV and benefits paid under the Loss of Earnings Compensation Scheme (maternity leave, military service etc.) if you are an employee, plus 1.1 percent for unemployment insurance, i.e. CHF 3,735 in total. Your employer pays in the same amount, bringing up the total to 12.45 percent. So far, everything is fairly easy to understand. It gets more complicated when it comes to the BVG. The basis here is the salary after the coordination deduction, what is known as the coordinated wage – see under Coordination deduction. This would be CHF 35,325 in our example. If a 35-year-old insured person pays 6 percent of this amount into the pension fund, for example, this would amount to CHF 2,120, corresponding to around 3.5 percent of this person's gross salary. The employer, incidentally, pays in the same amount. So in total CHF 3,735 is deducted from the gross salary for pillar 1 and CHF 2,120 for pillar 2. The remainder is the net income of CHF 54,145, roughly 90 percent of the gross income. And this is still not the net amount, since you still have to pay tax, health insurance, and rent etc. from this.