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- Pension planning
- Pension fund
Occupational pension provision
In Switzerland, occupational pension provision is the second pillar in the Swiss three-pillar system. It is governed by the Federal Act on Occupational Old Age, Survivors’ and Invalidity Pension Provision (OPA). The pension provision brings together all measures that allow older people, surviving relatives and disabled people to continue their accustomed standard of living in the event of an insurance claim such as old age, death or invalidity together with the benefits from OASI and IV (first pillar). In accordance with the OPA, occupational pension provision is financed through a funded scheme, meaning everyone directly saves and pays for their own benefits and the employer pays at least half of the contributions. The OPA provides that employers that employ people with an insurance obligation must set up a provision institution (pension fund) or join one.
The first pension funds were founded as long as over a century ago. Back then, however, people joined the scheme voluntarily and it was only available to workers whose employers allowed them to take part. Although the OASI was introduced in 1948, occupational pension provision was not included in the constitution until 1972 and the OPA did not enter into force until 1985.
Provision institutions within occupational pension provision
Provision institutions under the OPA are normally organised under private law and take the legal form of a foundation. Provision institutions of public employers such as authorities, administrative bodies, state-owned companies and public bodies are normally organised under public law.
Larger companies normally run their own company pension fund with their specific pension plan; this pension fund manages the respective contributions, benefits and assets. However, Switzerland also has around 100 so-called collective foundations. A collective foundation is a merger of various companies with the purpose of meeting their respective pension obligations together. For every affiliated company, a collective foundation normally has its own set of rules which are tailored to that company’s needs.
Contribution obligations under the OPA
The OPA defines the minimum benefits in cases of old age, death and disability. The provision institutions are also free to go beyond the minimum benefits required by law. This is known as non-mandatory benefits provision. As a basic principle, the law generally lets the provision institutions choose the most suitable organisation, make-up and financing of these compulsory benefits, as described in Supplementary insurance.
Compulsory benefits under the OPA
As the second pillar is occupational pension provision, employees whose income is at least CHF 21,330 a year are insured. Their death and disability cover begins on 1 January after they reach 17 years of age and saving for retirement begins on 1 January after they reach 24 years of age. The entry threshold for compulsory insurance under the OPA is a salary of CHF 21,300. However, only the portion of the salary from CHF 24,885 up to and including CHF 85,320 is insured. This portion is called the coordinated salary or the OPA salary. This coordinated salary is still covered if it amounts to less than CHF 3,555 per year.
The employee and employer normally each pay half of the annual contribution payments to the pension fund. The amount of old-age credit increases gradually with age. If only seven per cent of the OPA salary is paid into the second pillar between the ages 25 and 34, 18 per cent will be paid from 55 years of age to retirement age. Up until retirement, these retirement savings bear interest at a rate set by the Federal Council every year (currently one percent).
Every year, employees receive information about the entitlements, coordinated salary, contribution rate, retirement assets and regulatory termination benefit (withdrawal benefit) in the form of a pension fund statement. This also shows the non-mandatory portion (contribution payment for the salary portion above the OPA limit of CHF 85,320) which does not have to be invested, at least not at the interest rate set by the Federal Council, and which is not subject to the prescribed conversion rate of 6.8 per cent either. The statement also mentions any gaps in your pension provision that could be covered by a pension fund purchase.
The retirement savings are normally paid out with a pension when a person reaches retirement age – 65 for men and 64 for women. For the compulsory benefits under the OPA, the pension amount is calculated using a conversion rate, which is currently set at 6.8 per cent. Retirement assets of CHF 100,000 thus amount to an annual pension of CHF 6,800. Partners’ pensions and retired persons’ children’s benefits are also insured.
However, instead of receiving a pension, pension fund assets can also be drawn wholly or partly as capital. There are many advantages and disadvantages to both options and the decision also largely depends on life expectancy, flexibility, the amount and security of your income, security for surviving relatives and the risk of longevity. Your best bet would be to consult an independent specialist at an early age to find an ideal solution for you.
Risk benefits: survivors’ and disability pensions
In addition to the savings portion, a risk portion is also covered with the occupational pension provision from the pension fund. The risk insurance comprises benefits in the event of disability and death and the cover starts on 1 January after a person’s 17th birthday. If a person is unable to work, a disability pension will be paid out after a waiting period of 12 months. The pension amount is made up of the retirement savings already available and future old-age credit (excluding interest, however). This sum will then be multiplied by the OPA conversion rate valid at the time. People who are unable to work are exempt from further contribution obligations but are still covered in the event of death.
If someone dies, the surviving spouse or registered partner is entitled to 60 per cent of the full disability pension, provided that they are responsible for the support of a child or are older than 45 years of age and the marriage or registered partnership has lasted more than five years. The children are also entitled to a child’s pension, which amounts to 20% of the full disability pension.
Opportunities for advance withdrawal
Employees who terminate their employment relationship are entitled to their retirement assets saved so far, known as a withdrawal benefit. This is normally directly transferred to the provision institution of the new employer. If the person is giving up work, the money will be transferred to a withdrawal benefits account, which it will stay in until they reach normal retirement age.
Payment of part or all of the retirement savings before reaching retirement age is only possible in the following cases:
- Withdrawing to purchase owner-occupied housing (encouragement of home ownership – WEF)
- Permanently leaving Switzerland. Exception: if you settle in an EU or EFTA country, only the non-mandatory part can be paid
- Taking up self-employment
Withdrawing in advance to support home ownership is only possible once every five years. Retirement assets can only be withdrawn in full up until 50 years of age, after which withdrawal is restricted. The amount you withdraw in advance normally needs to be paid back into the pension fund when you sell the property. Early withdrawal also reduces the retirement pension as well as the survivors’ and invalidity pensions. Alternatively, the capital can only be pledged and therefore not disbursed.
Investment criteria for pension funds
Pension funds in Switzerland work according to the capitalisation system. Unlike the first pillar, OASI, the pensions of today’s pensioners are not paid with the contributions of today’s workers here (so-called pay-as-you-go system), but rather every policyholder has their own retirement savings account, and they can find out about the current status of it at any time via their pension fund statement. The respective pension fund invests the capital paid in by the policyholder on the capital market, which then generates interest. A distinction is made between the target return (the return that needs to be generated with the capital to maintain the fund’s liability coverage) and the goal return (the goal return to accumulate reserves). The Ordinance on Occupational Old Age, Survivors’ and Invalidity Pension Provision (OPO 2) sets out investment rules that the pension funds must adhere to in this respect. These criteria are elaborated by the respective rules of the individual pension funds.
However, in the current low-interest-rate environment, pension funds are facing increasing problems finding low-risk forms of investment that guarantee to even reach their target return. Other problems facing the pension funds relate particularly to demographics: the population is getting older and older on average, which extends the average benefit duration, increasing the capital requirements of pension funds. The age pyramid is also changing with the ratio of employed people to pensioners shifting in favour of pensioners, which also gives rise to an increased need for capital. For politicians, these problems result in an acute need for reform – changes to the provision system are currently a topic of debate.
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