How does the occupational pension plan work? Who pays into it? And how is my pension from the pension fund calculated? We will answer all these questions in this article, using the most important terms relating to occupational pension plans. But, before we start, there is some background information about this pillar.
The occupational pension plan - also called pension fund - is the second of three pillars in the Swiss pension system. The first pillar is the AHV, the third is private pension provision through pillar 3a. With the occupational pension plan, you also save for your old age. In addition, the second pillar insures you against accidents, disability or death. To be able to pay into a pension fund, you must be employed and have an annual income of at least CHF 22,050. If you are employed, paying into the occupational pension scheme is mandatory. Your employer is responsible for this and pays at least half of the contributions. The other half is deducted directly from your salary. If you are self-employed, paying into the second pillar is voluntary.
The second pillar is founded on the Federal Law on Occupational Retirement, Survivors', and Disability Pension Plans, also known as the BVG. It states who is covered and under what circumstances. Furthermore, the law specifies how pension institutions (pension funds) must manage and invest the money of the insured. Parliament is currently revising the BVG. We will keep you updated on the most important changes.
And now let's start with the terms:
Retirement assets/retirement capital
Your savings in the second pillar to date. It consists of your salary contributions, your employer's contributions, interest and other vested benefits - i.e. credits from previous employment. Your current retirement assets are shown on your pension fund statement. Your retirement pension directly correlates with the size of your retirement assets: the higher your assets at the time of retirement, the higher your pension.
The money your pension fund pays you monthly or as a lump sum from the day you retire. The amount of this pension depends, among other things, on how much retirement capital you have saved. The principle is simple: the greater your capital, the higher your pension. The second factor that determines your retirement pension is the BVG conversion rate. Conversion... what? We will explain this term to you later. By the way: You will receive your retirement pension until the end of your life.
Contribution to BVG/deduction from BVG/savings contribution
The amount deducted from your salary each month and deposited into your pension fund. At least half of this contribution is paid by your employer. The other half is deducted directly from your salary. The overall amount of the BVG deduction is determined by your income and age. The contribution is as follows:
- 7 percent of the coordinated wage for 25 to 34 year olds
- 10 percent of the coordinated wage for 35 to 44 year olds
- 15 percent of the coordinated wage for 45 to 54 year olds
- 18 percent of the coordinated wage for 55 to 65 year olds.
Are you wondering what the coordinated wage is? We'll explain it to you under "Coordination deduction".
The coverage ratio provides information about a pension fund's state and financial situation. That means: It describes the relationship between a pension fund's existing pension assets and the assets required to cover all payer and pensioner claims. As a general rule, the higher the funding ratio, the better. The coverage ratio should be at least 100 percent. Ideally, it should be higher so that some financial reserves are available.
Is there a gap in your second pillar, for example, because you haven't worked in a long time or have been working at a low level? Then you can close this gap by making a so-called voluntary purchase - at least partially. You just make an additional payment into your second pillar with such a purchase. When filing your taxes, you can deduct this amount from your income. The maximum amount that can be paid in is specified in your pension fund's regulations. Note: you can only make such a purchase up to three years before retiring. If you want to make a purchase later, the tax office suspects you're only doing so to reduce your tax payment. You will then be required to repay the tax deduction. Good to know: It is always possible to buy into the pension fund. However, several experts advise deferring such a purchase until later in life in order to increase your return.
To be able to pay into your second pillar, you must have a minimum annual income from your employment. For 2023, this amount is 22,050 francs. If you earn less, you cannot pay into the pension fund. This threshold is a major hurdle for many women - because they are employed in low-paying jobs or in low-wage sectors or have several jobs.
Vested benefits account
If you quit your job and are not immediately hired by a new employer, your pension fund assets - in this case also called vested benefits - are deposited in a vested benefits account. You can open such a vested benefits account yourself at any bank of your choice.
Lump-sum payment/lump-sum withdrawal
You have the option to withdraw your retirement assets from the second pillar as a lump amount when you retire. Instead of a monthly pension, bigger sums can be paid out. The amount of funds you can withdraw at once is determined by your pension fund. The minimum is 25 percent of your assets. Some funds may allow you to remove half or all of your assets at once. Whether an annuity or a lump-sum withdrawal makes more sense depends on your individual situation. If you wish to pay off debts, such as a mortgage, or if you want to ensure that your full retirement savings will benefit your children in the event of your death, a payout may make sense. At the same time, you should keep in mind the tax implications of cashing out. The money you receive from your pension fund is taxable as income. The higher the income, the higher the taxes.
Capital cover method
The term may sound complicated, but it is founded on a basic principle: everyone saves for oneself. This is how the principle of the second pillar works - in contrast to the AHV, by the way. The latter works according to the principle of solidarity between the generations. The generation that is currently active in the labor market pays the pensions of those who have retired. In the second pillar, you save your own capital while you are working. The pension fund invests your money during this time, and as soon as you retire, your money is available to you again.
The coordination deduction is a predetermined sum withdrawn from your AHV-eligible wage. It is currently worth 25,725 francs. What's left after this deduction is the so-called coordinated salary, also known as the BVG salary. Pension contributions are deducted from this. Too complicated? Let us illustrate with an example:
80,000 francs annual salary subject to AHV contributions
- 25,725 francs coordination deduction
= 54,275 francs coordinated annual salary or BVG salary
/ 12 = 4522 francs monthly salary insured in the second pillar.
The contributions for your second pillar are deducted from this amount.
The coordination deduction as it is today has sifnificant drawbacks, especially for people with low incomes and part-time jobs. Therefore, in the current BVG reform it is being discussed to adjust the system. Here you can read why this adjustment is necessary and why the current system is particularly disadvantageous for women.
Minimum interest rate
You receive an interest rate from the pension fund for your retirement assets. The minimum interest rate is set by law. Currently, the minimum interest rate is one percent.
This refers to the maximum insured wage in the occupational pension plan. Currently, this amount is 88,200 francs per year. If your yearly salary is higher, the percentage of your salary above this level is exempt from compulsory insurance in the pension fund. In the next section, you will learn how you can still insure this amount of your salary. This is about the…
Here, the portion of the salary that exceeds the statutory upper limit of 88,200 Swiss francs is insured. The extra-mandatory benefits are voluntary benefits of the pension funds. The conditions (interest, conversion rate) under which your salary is insured here are not defined by law, but rather by the pension funds.
The conversion rate is one of the most important parameters when it comes to occupational pension plans. It is essentially the key to calculating your pension from your retirement capital - that is, all of your assets in the second pillar. The conversion rate for the legally required insured wage is set by law at 6.8 percent. This level, however, is being debated as part of the current BVG overhaul. Currently, a reduction to 6 percent is being considered. To demonstrate how the conversion rate works, consider the following example:
If your total retirement assets are 100,000 francs at the time of retirement, you will receive an annual retirement pension of 6800 francs at a conversion rate of 6.8 percent (calculation: 100,000*6.8%).
The extra-mandatory insured wage has a distinct, usually lower conversion rate. This rate is set by the pension funds. The principle still has two key distinctions. These are the following:
Split or enveloping conversion rate:
If you have portions of your salary that are insured as supplementary, your pension fund can calculate your pension using one of two methods: the split conversion rate or the enveloping conversion rate.
- Split conversion rate: In this case, your pension is calculated using two distinct conversion rates. The mandatory part with 6.8 percent, the extra-mandatory part with the conversion rate set by the pension fund. At the end, the two resulting amounts are added together to calculate your pension. As an illustration, consider the following:
200'000.- obligatory part *6,8% = 13'600.-
100'000.- extra-mandatory part *5% = 5000.-
Total annual pension: 18'600.-
- Enveloping conversion rate: In this case, your pension fund uses a so-called combined conversion rate. In this instance, the mandatory and non-mandatory components of your salary are calculated using the same conversion rate. Important: The result cannot be less than the 6.8% on the mandatory part. Here's an example of a 5% calculation:
300'000.- (compulsory and non-compulsory part together) *5% = 15'000.- annual pension. Although this is lower than with a split conversion rate, it is okay because it is higher than the 13,600 francs resulting from the mandatory part.
You can withdraw the money from your pension fund before you retire and have it paid out to you as a lump sum in the following cases:
- if you buy your own home.
- if you become self-employed.
- if you relocate permanently to another country.
- if you quit your job and do not take up a new one. In this case, the money is deposited in a vested benefits account.
- if you take early retirement.