Occupational pension provision (BVG) today and what will change with the reform

About a year ago, the Swiss electorate was allowed to vote on the AHV reform, which was narrowly accepted at the time.

After a clear "yes" to the BVG reform on 17 March 2023 by the National Council and the Council of States, various trade unions, the SP and the Greens launched a referendum and submitted over 140,000 signatures against the reform at the end of June. Now, in spring 2024, the 2nd pillar will also be put to the vote with the BVG reform. In the following article, we show you the most important changes and explain why a reform will be inevitable sooner or later.

The entry threshold and the coordination deduction

Many people in Switzerland work part-time. In 2022, they accounted for more than a third of all employed persons. The popularity of part-time work is steadily increasing, as between 2012 and 2022 the number of part-time workers increased more than three times as much as the number of full-time workers. However, today's model is still geared towards full-time positions, considering the entry threshold and the coordination deduction. Only those who earn at least CHF 22,050 per year today are compulsorily insured with a pension fund through their employer. This applies per employment relationship. If, for example, a person has two jobs, each earning CHF 1,500 per month, he or she remains below the entry threshold, although the total is above the threshold.

The situation is similar with the coordination deduction. The purpose of the coordination deduction is to ensure that the pension fund only levies contributions on income components that are not already covered by the first pillar of the pension scheme. This ensures that salary components are not insured twice. Currently, this amounts to CHF 25,725, 7/8 of the maximum AHV retirement pension. The annual income minus the coordination deduction results in the insured salary. This forms the basis for the calculation of benefits and savings contributions in the second pillar. Some companies already adjust the coordination deduction to the workload, but they are not legally obliged to do so and therefore there are still many companies that do not take the workload into account. For example, if someone earns CHF 35,000 per year today, the insured salary is only CHF 9,275. This leads to significantly lower contributions and lower pension benefits. This applies per employment relationship, i.e. if someone with two part-time jobs earns more than the entry threshold in each case, the coordination deduction is also made per relationship.

The insured BVG annual salary is set at 80 percent of the AHV salary (up to CHF 88,200). Federal Social Insurance Office: LOB reform

The retirement credits are to be adjusted

The transitional generations cover the first 15 cohorts after the reform comes into force. The amount of the pension supplement depends on the year of birth and the pension credit balance. Details on the transition generations or under BBI 2a. Art 47b to 47f.

With the flatter graduation of old-age credits, older workers would have lower non-wage costs for the employer and would thus be on a par with those aged 45 and over in terms of costs.

Since the savings credit in percentages would be lower after the reform, a negative difference may result depending on income. This must be checked individually, as the insured salary also changes with the old-age credits. If your AHV salary is lower, you will tend to receive higher savings credits after the reform. With a higher salary, one would tend to save less due to the future savings credits of 14 %.

Reduction of the conversion rate

An important factor in the calculation of the retirement pension is the conversion rate. But what is the conversion rate actually? With the conversion rate, the pension fund converts the retirement assets into a permanent retirement pension. With the current statutory minimum conversion rate of 6.8 %, this would be a pension of CHF 6,800 per year for a retirement capital of CHF 100,000. With the reform, this rate will be reduced to 6 % and would thus result in an annual pension of CHF 6,000. This measure is intended to take account of increasing life expectancy. In the past, the old-age pension had to last an average of 14 years after retirement; today it is over 20 years. Current pensioners would not be affected by this reduction; these pensions would remain the same.

It is important to know that the statutory minimum conversion rate only applies to the compulsory part of the retirement assets and salaries up to CHF 88,200. However, many insured persons also have a so-called extra-mandatory part in the pension fund. In this part, the pension funds are allowed to set the conversion rate themselves. Therefore, when making a voluntary purchase into the pension fund, it is also necessary to check to which pot the purchase is credited and how it earns interest. Depending on the model, other investment options may yield a higher return. In addition, the condition of the pension fund should always be checked when making a purchase.

Supplement for the transition generations

The transitional generations include the first 15 cohorts after the reform came into force. The supplements are paid for life, but the supplement is reduced after the death of the person drawing it and is not transferred to the surviving spouse.

*relates to approx. 25% of insured persons in the transition generation
** concerns approx. 50% of the insured in the transition generation

Source: BSV, Reform of the occupational benefit scheme

The higher the retirement capital saved in the pension fund, the smaller the supplement. Anyone with pension assets of over CHF 441,000 will no longer receive a supplement.

These surcharges alone cost CHF 0.8 billion annually and thus amount to around CHF 12 billion after the 15 years of the transitional generations. According to the referendum bill, the total costs are calculated at CHF 2.1 billion annually. The costs are financed, among other things, by subsidies from the national security fund. This in turn leads to the pension funds increasing their wage contributions by 0.24%. Parity (50% AN and 50% AG) by the actively insured.

Who will benefit from the reform and can the challenges in occupational pension provision be overcome?

The challenges are, on the one hand, the significantly longer life expectancy, which is already in the last articles and the weaker capital markets. The reduction of the conversion rate from 6.8 % to 6.0 % at least counteracts these two points somewhat. However, only 12 to 16 % of the pension funds are affected: the institutions close to the BVG and those with the compulsory solution. The current model does not correspond to today's social reality. A first reform will at least support people with low incomes, part-time jobs and those with several employment relationships. For all those who are already affiliated to an above-average pension fund, the changes will hardly be noticeable.

Will this reform be enough? Probably not. Certainly, this will have to be reassessed from time to time in the future. But it is a first sign that the points of criticism from the AHV reform will be addressed and that words will be followed by deeds. For the time being, however, the voters will decide on the reform in 2024.

Once again, it becomes clear that personal retirement provision should not be put on the back burner and that the topic must be tackled on one's own initiative in order to be able to continue the desired standard of living in old age or to fulfil one's long-awaited dreams.

How your financial planner can help you

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