The Swiss pension system rests on three pillars: the Federal Old-age, Survivors' and Invalidity Insurance (1st pillar), the occupational pension scheme (2nd pillar) and private pension schemes (3rd pillar).
Contents
Overview
†Funds paid into the 2nd and 3rd pillar may be paid out before without retiring when certain criteria are met.
First pillar
The basic pension insurance is known as Alters-, Hinterlassenen- und Invalidenversicherung (AHV) in German, Assurance vieillesse et survivants (AVS) in French and Assicurazione vecchiaia, superstiti e invalidità (AVS) in Italian.
According to article 112 of the Swiss federal Constitution, the first pillar should cover basic living expenses adequately. It is a PAYGO system, financed by contributions from employees and employers (4.2% of the employee’s income each), from the self-employed (7.8% of their income) and from the people not engaged in paid employment (between 392 and 19600 CHF a year in 2013). The authorities also contribute via direct funding, VAT and the revenues of the tax on gambling clubs. People’s contributions are collected and benefits are distributed by different bodies, some managed by the cantonal or federal authorities, some managed by union of employers, like the Fédération des Entreprises Romandes Genève.
The first pillar provides old age pensions as well as benefits for widowers and orphans.
The ordinary age of retirement is 65 years for men, 64 for women. It can be anticipated or postponed, with anticipation leading to decreased annuities, and postponement to increased annuities.
Payouts
While money paid into the first pillar does not have an upper limit (as it is a percentage of the income), the payout is determined by the number of years worked in Switzerland, and the average income. A correction factor takes inflation into account. For a full rent (which is between 1175 and 2250 CHF per month), it is required that the insured person pays into the 1st pillar every year from age 20 to 65 (or 64 for females). Each year spent abroad will reduce the rent by about 2.3 percent. To enjoy the maximum rent (which is 2250 CHF/month), the insured person must have earned, on average, at least 84'600 CHF per year.
The federal constitution stipulates that the 1st pillar must meet the basic needs of the insured people. Because of the rise in living costs, in 1966 the federal parliament enacted additional rents. They are flexible, and cover actual costs (e.g. health insurance, nursing home costs).
Anticipating the retirement will reduce the monthly rent, while continuing to work will increase it:
Second pillar
The occupational pension scheme is known as Berufliche Vorsorge in German, Prévoyance professionnelle in French and Previdenza professionale in Italian. In daily life, it is more often referred to as “the second pillar” (German: die Zweite Säule, French: le deuxième pilier, Italian: il secondo pilastro).
According to article 113 of the Swiss federal Constitution, “the occupational pension scheme, together with the Old-age, Survivors' and Invalidity Insurance, enables the insured person to maintain his or her previous lifestyle in an appropriate manner”.
It is a funded pension plan. It is compulsory for employees and is financed by both employees and employers. The sum of the contributions of the employer should be at least equal to the sum of the contributions of his employees.
It is also opened to the self-employed on a voluntary basis. The contributions differ according to the regulations of the institutions providing it. Pension funds are organised as foundations, which then invest in real estate, government bonds and company shares. They can be created by authorities or private corporations for their own personnel, by private companies, like insurance companies, and be opened to any company, or by trade unions, professional associations or union of employers, like the Fédération des Entreprises Romandes Genève, for their members.
The second pillar offers old age pensions. Some of the pension funds also provide benefits in case of disability and and to the next of kin in case of premature death. The funds in the second pillar can be used before retirement to buy a principal home, to start an independent activity, or when leaving Switzerland permanently. When changing employment, funds are transferred to the pension fund of the new employer. When unemployed, the funds are transferred into a savings account (so-called Freizügigkeitskonto in German).
Third pillar
The third pillar consists of private pension schemes provided by the private sector. They are optional and financed entirely by the insured person. So-called 3a schemes lead to less taxation and are regulated, while 3b are unregulated, and do not have any benefits regarding taxation.
3a
There are two schemes of pensions:
At the moment (2017), each employed person can pay up to 6768 CHF into 3a schemes every year. Freelance workers (who do not have to pay into the 2nd pillar) can invest up to 20% of their yearly income, but not more than 33840 CHF in a single year. It is legal to invest in several 3a schemes at the same time. In any case, the amount paid into all 3a schemes cannot exceed the yearly gross income.
Because both schemes lead to reduced income and property taxes, the funds can, similar to those of pillar 2, only be paid out in very limited circumstances:
As the 3a funds can only be dissolved at once (and not as a yearly or monthly annuity), it is advised to open several several 3a schemes whose funds can be used independently, step by step, as financial needs arise. And then, funds in 3a accounts can not be split, but only transferred as a whole to another 3a account.
If the insured person continues working beyond the age of pension, he or she can invest into the 3rd pillar up to the age of 70 or 69, respectively. After that age, the funds will be paid out compulsorily.
3b
Officially, 3b schemes do not exist, but in banking/investment parlance, any investments which are intended to fund retirement are called "3b scheme". They do not offer any taxation benefits, and are not regulated in the way 3a investments are.
Evolution of the system
The elevation of life expectancy challenges the Swiss pension system. The number of pensioners is increasing and the investment earnings is shrinking. The Federal Council (Swiss government) has put forward a global reform scheme called Prévoyance 2020 in French, encompassing the first and the second pillar. It aims at consolidating the system as well as at making the retirement age more flexible. The Federal council proposes to raise the retirement age for women from 64 to 65 and to raise the employer’s and employee’s contributions, as well as adapting diverse technical parameters. As a result, a person who has accumulated a capital of 500 000 on their second pillar would get a yearly second pillar rent of 30 000 instead of 34000. This reform hasn’t been approved by the parliament yet and, should it be accepted, wouldn’t enter into force before 2020.
International comparison
The Swiss pension system was ranked fifth best in the world in a study released by the University of Melbourne and Mercer in 2014, after the Danish, the Dutch, the Australian and the Swedish ones.