BVG conversion rate
Retirement assets in the occupational pension plan (pension fund) can be compared to a cake: The conversion rate determines the size of the slices of cake that we may cut each year following retirement. The lower the conversion rate, the smaller the slices. And with smaller slices, the cake will last correspondingly longer. As an example, with retirement assets of 100,000 CHF and a conversion rate of 6.8%, you will receive an annual pension of 6,800 CHF.
6.8 percent – that is the current legal conversion rate for the compulsory BVG component. This means that the cake will be divided into 15 pieces or – without interest – that it will all be eaten up after around 15 years. For a long time, this calculation worked out well, since 15 years was the average life expectancy after retirement. But the picture today is rather different: A man in 1960 could expect to enjoy his retirement for 13 years, but today it is already 19 years. With higher interest rates, additional slices of cake can be placed on the plate, but if interest rates are as low as they are currently this will always be difficult. Furthermore, there are also other factors that influence the size of the cake slices: for example, the age structure of those insured in the pension fund and the return that can be expected from the retirement provision assets. And here we come full circle again: With high conversion rates there is not much investment wiggle room, the return will be correspondingly lower and the cake smaller, as will the pension payments. With lower conversion rates, the pension funds have more room to maneuver in order to invest the money and the insured persons can ultimately benefit from larger slices of cake – i.e. higher pension payments.
While a man could look forward to 13 years of retirement in 1960, he now has 20 years ahead of him.
The cover ratio of various pension funds is often erroneously used in public discourse as a comparison or evaluation criterion, to determine whether it is a “good” or “bad” fund. However, various assumptions need to be made when calculating the cover ratio. These are individually determined by each pension fund. Precisely because of this, the cover ratio is not an objective criterion. The foundation board decides which assumptions are to be made at the same time as it determines the cover ratio. For example, the future interest rate applied to the retirement assets for the retirement pension is assumed. It is therefore not merely the obligations and available capital that are relevant, but much more the assumptions that are made. Furthermore, the age structure and risk tolerance of a pension fund is also relevant in order to properly interpret the cover ratio. The direct comparison of cover ratios of two pension funds thus produces a distorted picture, because the assumptions for the accounting are mostly unknown and one can vary markedly from another.
Vested termination benefit
Vested termination benefit – can you draw upon this money freely? Eventually yes. But not today: The vested termination benefit refers to the retirement assets you have accumulated in the pension fund up to the current time. Contributions deducted directly from your salary are paid directly into your personal pension account in the occupational pension scheme. Your employer additionally pays in at least the same amount again, the so-called equal financing. Perhaps you have voluntarily paid in extra money (“buy-in”) or brought in other money from previous employers (“rollover”). Furthermore, your savings earn interest in the pension fund. Should a job change be on the cards, you will take this money with you and the balance rolled over to the new employer’s pension provider. Anyone who becomes unemployed or who is temporarily between jobs parks their money in a vested termination benefit account. You can open one of these at a bank, insurance company or a substitute occupational benefit institution. But capital can be paid out prior to retirement only in exceptional cases: For example, if you become self-employed or finance a residential property in which you live. Otherwise, you need to wait until you reach retirement age.
In this situation, a financing gap emerges in the pension funds. Part of the investment income from those of working age must be shifted to redistribute to the pensioners in order to keep payment promises that cannot be financed by their respective pension funds. Collective foundations are therefore also forced to reduce the conversion rates for the supplementary retirement assets. As a result, companies with high salaries and generous retirement benefits also finance other companies with lower salary levels and offer their own insured persons only the bare minimum in terms of benefits.