There are many prejudices and half-truths surrounding occupational pensions in Switzerland. What is true and what is not?
The next vote on pensions is scheduled for September 22. Opinions are divided on the reform of the occupational pension scheme (BVG), and many voters are somewhat confused as to whether they should vote yes or no.
This is probably due in no small part to the complexity of the subject area, which confuses many people with its technical terms. At the same time, however, the pension fund represents the largest part of many people’s assets. It is therefore important to understand how the second pillar of the Swiss pension system works.
As surveys repeatedly show, many people lack knowledge about pension provision. As a result, some misconceptions about pension funds persist and persist. Here is a selection of them – as well as a brief explanation of whether each one is a complete myth or whether there is some truth in it.
1. “I probably won’t get my pension money anyway”
This assessment is very pessimistic and completely unfounded. Bálint Keserü from the consulting firm Aon points out that the contributions that the employee and his employer have paid into the pension fund are guaranteed by law – including the corresponding interest.
Many people are irritated that a pension fund achieves an investment performance of, for example, 10 percent in a good year, but that their pension savings only earn 5 percent interest in the same year, says Keserü. There is simply no one-to-one connection here. Anyone who criticizes this should note that pension funds have paid a positive interest on pension savings even in a bad investment year like 2022. The minimum interest rate in the mandatory occupational pension scheme is currently 1.25 percent.
The concern that the pension savings could be “gone” by the time you retire is often expressed by younger insured people who have a long time to go before they retire. In recent years, when the redistribution between active and retired people in pension funds was high and amounted to up to 7 billion francs per year, there was a starting point for this criticism.
However, according to the Occupational Pensions Supervisory Commission (OAK BV), the subsequent financing of existing pension obligations at the expense of active insured persons has been stopped in recent years. “The pension funds have done a large part of their homework,” says Laurent Schlaefli, head of the Profond pension fund and president of Inter-Pension, the association of independent collective and community institutions.
2. “Pension fund contributions are taxes or fees”
This is of course also wrong. A survey conducted by the Sotomo research institute on behalf of Zurich Switzerland and the Vita collective foundation in 2022 found that 28 percent of respondents perceived the salary deductions for occupational pensions as a kind of tax, as a kind of contribution to securing pensions in Switzerland.
“Many people do not realise that they are saving for themselves in the pension fund,” says Schlaefli. They do not know and do not realise that pension fund contributions are savings contributions. “Many employers even pay contributions of more than 50 percent. That is a hidden wage and it is certainly not taxes,” he says. Many employees do not even realise how generous their employers often are.
Such errors reveal the lack of pension knowledge that some people have, says Aon representative Willi Thurnherr. The insured get the money that is deducted from their wages back later as capital or a pension, hopefully with a significant return. “You can’t have this same money straight away and then again when you’re retired.” However, the pension industry should also be aware of its responsibility to explain to people how pension provision works in Switzerland – especially since it is a form of “compulsory savings”.
3. “A high conversion rate always brings more pension”
This is not always the case either. When you retire, your occupational pension is calculated from the capital you have saved and the pension fund’s conversion rate. For example, if someone has saved 700,000 francs in the fund and the conversion rate is 5 percent, then that person is entitled to an annual pension of 35,000 francs.
This already shows that, in addition to the conversion rate, the capital saved is also very relevant for the pension. That is why it is so important how the pension funds pay interest on the savings capital of their insured persons – after all, this is how the assets grow from year to year. However, there are big differences between pension institutions when it comes to the interest paid on retirement savings. Insured persons should also keep an eye on this.
The investment policy and the corresponding performance of pension funds is also an important factor that causes pension assets to grow faster or slower.
Thurnherr points out that a high conversion rate has to be financed – and in case of doubt it will be at the expense of the interest that a pension fund grants its insured members on their pension savings. “You can’t spend the same franc twice,” he says. Younger insured members in particular should be aware that it may harm them if their pension fund grants conversion rates that are too high. Ultimately, this leads to increased redistribution in favor of pensioners. And the interest on pension capital is then likely to be lower.
4. “It’s only worth making provisions when you’re older and earn a higher salary”
This is true, for example, for pension fund purchases. These are only worthwhile from the age of 50, as the tax savings achieved then have a greater effect when distributed proportionally over the remaining years until retirement. If you make purchases into the pension fund at a young age, the tax saving effect is diluted.
However, those who start saving and planning for the future early will find it easier to build up wealth. This is due to the miracle of compound interest. It ensures that the returns from an investment are reinvested and thus generate further returns. As a result, the effect increases from year to year.
5. “Those who earn the same amount, work the same amount and pay the same amount will also receive the same amount of pension”
This may be the case if you are insured in the same pension fund. However, if two employees are affiliated with different pension schemes, this is not the case. Pension funds have different conversion rates and different interest rates. Employers’ contributions also vary in terms of generosity.
“There are big differences between pension funds,” says Schlaefli. As a result, as an insured person, you should definitely find out how the benefits of your own fund compare to other pension funds. This is especially true if you change jobs. The benefits of the potential new pension fund must be taken into account.
6. “The second pillar applies to everyone”
That is not true. There are certain restrictions as to who is insured under occupational pension schemes and who is not.
As the Federal Social Insurance Office (FSIO) explains, the compulsory pension scheme in the BVG applies to all employees who are insured under the AHV and earn at least 22,050 francs per year. It begins when the person starts working and starts at the earliest when they turn 17.
If the people vote yes to the BVG reform, the entry threshold would be lowered from 22,050 to 19,845 francs. This is intended to improve the retirement provision of people with low incomes.
“Up until the age of 24, contributions only cover the risks of death and disability. From the age of 25, additional savings are made for an old-age pension,” the BSV explains. In addition, certain groups of people are not subject to compulsory pension provision. “Self-employed people can, but do not have to, take out second-pillar insurance,” says Keserü.
As the BSV explains, employees with a fixed-term employment contract of no more than three months are not subject to compulsory insurance, nor are family members working on their own farm. The same applies to people who are at least 70 percent unable to work according to the disability insurance (IV).
7. “I would prefer to be able to invest myself and thus achieve a higher return”
Some insured persons assume that they would achieve higher returns than their pension funds if they could only invest the pension funds themselves.
First of all, scientific studies speak against this, according to which many private investors achieve rather sobering returns on their investments.
Insured persons should also note that they have capital protection on their investments with the pension fund, says Thurnherr. A good example is the year 2022. Here, private investors often lost a lot of money with their investments in stocks or bonds, while their pension fund savings even received positive interest.
As an insured person, you have a safety net in the pension fund, says Schlaefli. “There is a risk that a fund will have to be restructured and you will have to make appropriate contributions. But this is relatively small,” he says.
“Private investors also have no access to many of the investments used by pension funds, such as private equity or infrastructure investments – and if they do, then at very high costs,” says Thurnherr. Large investors such as pension funds receive much better conditions from product providers than private investors and therefore also pay lower fees. Small investors, on the other hand, are “small fish” for them.
When criticizing the lower conversion rates of pension funds, one should also bear in mind that these rates are significantly lower if the money is invested privately in an insurance policy, says Thurnherr. Here, one can expect conversion rates in the order of 3 percent, he says.