BVG Glossary

In occupational retirement provision, the OASI annual salary is generally used as the basis for calculating the insured annual salary. The OASI annual salary includes all remuneration that your employees receive for work performed: hourly, daily, weekly and monthly wages, piece-rate pay, piecework and premium wages, including premiums and compensation for overtime, night work and deputy work.

The term purchase here does not refer to daily purchases in a supermarket, but buying into the pension fund voluntarily. This will improve your retirement benefits while reducing your tax burden in the year you make the payments. So buying into the pension fund pays off twice. As a rule, there is potential for buying in if the BVG contributions are missing for some years, or if the salary has increased significantly: for example, after a change of position or a period of part-time work. From a tax perspective, it often makes sense to stagger purchases over several years to break the progression. The maximum possible contribution is determined by the regulations of your pension fund. Your pension certificate will show you if there is any potential for buying in. Whether, when and in what graduation a buy-in to the pension fund makes sense depends on many factors - it is therefore best to look into this with your pension advisor.

There is a lot of money in the occupational retirement provision, because it is where all employees save for their old age. The savings are invested for each individual insured in such a way that they have as much capital as possible at their disposal after retirement. At the same time, the pension funds can also make a noticeable contribution to sustainability with the funds invested. That is why the Vita Collective Foundation has set itself the goal of investing its portfolio in a completely carbon neutral manner by 2050. This means that the Vita Collective Foundation invests in such a way that the sum of all investments does not generate any carbon emissions. Among other things, it invests in green bonds, in which the issuers undertake to use the funds received to finance ecological projects - for example, renewable energies. Carbon neutrality cannot be achieved overnight, but usually takes place gradually over a period of years or decades. The aim is to contribute to the goals of the Paris Climate Agreement.

According to the BVG, the basis for calculating monthly contributions for occupational retirement provision is not the entire income. In this case, the proportion of the salary that is insured is that which is between 22,050 and 88,200 Swiss francs. The amounts up to 25,725 francs are covered by the 1st pillar (OASI). That is why this part of the salary is excluded from calculation of the BVG by means of the coordination deduction.

A sample calculation:
Annual income:	CHF 80,000
Coordination deduction:	- CHF 25,725
Insured salary:	CHF 54,905

The pension fund contributions are dependent on the the insured salary. The coordination deduction always corresponds to seven-eighths of the maximum annual OASI pension.

If income is higher than 88,200 Swiss francs, this can be voluntarily covered in the occupational retirement provision by means of non-compulsory contributions. In the case of part-time employees with a correspondingly lower income, the coordination deduction may result in them making significantly lower contributions in relation to their total income The result of this may be that correspondingly smaller benefits are paid out upon reaching retirement age. To partially counteract this, some progressive pension funds adapt the coordination deduction to the duration of employment. This leads to a higher insured salary, so that higher pension fund contributions ultimately lead to higher insured benefits from the 2nd pillar.

In the case of pension funds, the coverage ratio corresponds to the ratio between the effectively available assets and the liabilities on a particular cut-off date. It thus provides information about the percentage by which the liabilities of a pension fund are covered by its assets. With a coverage ratio of 100 percent, the pension fund has sufficient financial means to meet all entitlements to benefits at a particular time. However, there is no buffer. The coverage ratio would have to be over 100 percent to do that.

In fact, the coverage ratio is only a technical figure, because even with a coverage ratio of less than 100 percent it will never happen that all insured persons will all retire at the same time, for example. Even so, a high coverage ratio demonstrates that a pension fund is financially strong and can meet all its obligations with no difficulty. A pension fund with a high coverage ratio also has a higher risk tolerance and can, for example, afford to pursue a more risky investment strategy with greater potential returns, because there are enough funds available to cushion any fluctuations on the financial markets.

The regular retirement age in Switzerland is currently 64 for women and 65 for men. However, there is also the option to take early retirement. With Vita, for example, this is already possible from the age of 58. However, women and men can also work longer – beyond the regular retirement age. This is possible until they reach the age of 70 at the latest. Either way, plan the timing of your retirement well in advance and talk with your employer about it. In general, the following applies: The longer you work and pay into your pension fund, the higher the capital you will save for your pension to then draw from later on.

A disability pension is paid to people who are partially unable or no longer able to work due to illness or accident on a permanent basis. If an accident is the cause of the disability, benefits are paid by the disability insurance (DI) and the employer's accident insurance. If the disability occurs due to an illness, the benefits from the DI and the employer's pension fund come into play. In both cases, the pension fund takes over the payment of contributions after a waiting period, so that payments can continue to be made for retirement benefits. Depending on the degree of impairment, those affected receive a pro rata pension. In both the 1st and 2nd pillars, pensions are only paid out from a degree of disability of 40 percent. With Vita, however, a pension is paid from a degree of disability of 25 percent. A full pension is paid from a disability level of 70 percent. Benefits under the occupational retirement provision (2nd pillar) are based on the degree of disability determined by the DI authority. Both the 1st and 2nd pillar have a target of around 60 percent of the last salary. For many people, however, benefits from the 1st and 2nd pillars alone do not prove sufficient to maintain their accustomed standard of living in the event of disability. Because of this, protection can be supplemented by a private disability pension under the 3rd pillar.

What happens to pension savings in the second pillar following a divorce? In principal, the pension fund assets are divided in two, with each party receiving half. The same applies for registered partnerships. However, only the monies paid in between the date of the marriage and the date when divorce proceedings started are divided. The pension savings balance prior to the marriage is not considered. This so-called pension settlement is also known as splitting. All pension savings are considered for the calculation of the exact amount. These include voluntary contributions into the pension fund, provided that these were not paid from one party’s own assets, as well as possible early withdrawals for the purchase of an owner-occupied residential property. Where the latter applies, it must be noted who retains the property following the divorce. This will also be taken into account in the splitting process.

The basic principle of the 2nd pillar is that every employee saves for him/herself and gets the money paid out after retirement. But the system is increasingly facing difficulties, so that the investment income of active insured persons has to be used in part for the pensions of pensioners. And an ever greater redistribution is taking place gradually. There are several reasons for this:

• People in Switzerland are getting older and older, while at the same time significantly fewer children are being born. As a result, the ratio between employed and retired persons is changing, according to the Federal Statistical Office: In 1991, there were 28 pensioners per 100 employed persons. In 2019, the number had already increased to 35. According to the forecast of the Federal Office, in 2040, there could already be as many as 50 pensioners for every 100 employed persons.
• In 1985, the year that mandatory occupational retirement provision was introduced, a 65-year-old man still had an average life expectancy of 15 years; today it is already 20 years. The money saved must therefore be sufficient for a longer period of time.
• Furthermore, the founders of occupational retirement provision assumed that pension fund assets could earn an average interest rate of 5% over the long term. But that has not been the case for many years: Interest rates are so low that pension capital is growing noticeably slower than originally planned.
• Both factors, higher life expectancy and poorer interest rates, mean that the conversion rate of 6.8 percent set by law for the mandatory part is now much too high. This means that the saved capital is no longer sufficient for the longer period of retirement.

In this situation, funding gaps arise for the pension funds. In order to be able to pay out the promised pensions today, the pension funds have to shift or simply redistribute part of the investment income from the employed to the retired. In addition to this, the pension funds are forced to lower the conversion rate on the super-mandatory retirement assets. As a result, companies with high wage levels and generous pension fund benefits co-finance other companies that have low wage levels and offer only minimum benefits to their insured.

Vita therefore strongly advocates fairplay in occupational retirement provision: To ensure that today's working people and, above all, our children can also rely on the second pillar, it must be modernized in a sustainable manner.

Gaps in retirement provision can arise for various reasons. In the 1st pillar, the OASI, we say there is a contribution gap if a person has not paid contributions or received education or care credits every year. In the 2nd pillar, the occupational retirement provision, gaps can arise due to part-time employment, for example. Retirement provision gaps in both pillars also threaten people who came from abroad and, for example, did not move to Switzerland until they were 30. It is possible to close gaps in the 2nd pillar by buying into the pension fund. Because benefits from the 1st and 2nd pillars often only amount to about 60 percent of the previous income when the person reaches old age, it is advisable to supplement old-age retirement provision with a solution in the 3rd pillar. In addition to retirement savings, life risks such as disability and death can also be covered in the 3rd pillar.

The generation table shows the mortality probability or statistical life expectancy, including life expectancy from the time of retirement. This information is the basis for calculating the conversion rate in the occupational retirement provision. If life expectancy is systematically assumed to be too low, pension recipients will receive too high a pension per year. The money they will have saved for their own pension during their working life shall then not last until the end of their life. However, because the pension is guaranteed until death, the missing capital must either be earned through investment, or it will need to be redistributed from the employed to the pensioners. Such redistribution is occurring today - because conversion rates are not being adjusted to reflect increased life expectancies and the low interest rates. Because of the historically low interest rates, investments will only generate a lower return.

The investment strategy determines how a pension fund invests its members’ money in the financial market. Legal requirements and guidelines must be adhered to when doing so. These are stipulated in Ordinance 2 on Occupational Pensions (BVV 2) in particular. The art lies in investing the money prudently under these conditions and, at the same time, maximizing returns. A pension fund’s investment strategy is therefore decisive for the returns that can be achieved with the pension fund assets and thus has influence on the retirement assets of individual insured persons. Ultimately, it is the level of returns achieved and the pension fund’s financial situation that determine the retirement provision assets’ interest rate.

When it comes to pension fund assets, the rule is: more is more. The higher the interest rate, the more capital the respective person can save until retirement. The interest rate is so important for the development of the capital that it is even called the "third contributor" - in addition to the employer and employee contributions. Since the mid-1990s, inflation-adjusted interest rates, i.e. real interest rates, have steadily declined in Switzerland and have been at a very low level since 2015. This is all the more important because the pension funds invest a considerable part of the pension assets in low-risk bonds, which they are legally obliged to do. However, the interest rate on bonds is strongly linked to the real interest rate. In times of low interest rates, the need for reform in occupational retirement provision becomes even more noticeable.

In occupational retirement provision, we distinguish between mandatory coverage and the super-mandatory part. Anyone earning more than 21,510 Swiss francs per year (as of 2021) is subject to mandatory insurance and must pay into the 2nd pillar together with their employer. These contributions are used on the one hand to build up capital for old age, and on the other to protect against the consequences of disability and death. Annual salaries between 21,510 and 86,040 Swiss francs (as of 2021) are insured under occupational retirement provision. This is referred to as BVG mandatory coverage. If a person earns more than 86,040 Swiss francs per year, this is the super-mandatory part. In contrast to the mandatory coverage, the legislator does not stipulate any requirements for the super-mandatory part regarding the contribution amount, interest rate and conversion rate. In the super-mandatory part, the pension plans have greater room to maneuver.

The conversion rate is used to calculate the annual pension from the retirement savings in occupational retirement provision. The basis for it includes, but is not limited to, the statistical life expectancy at the time of retirement and the guaranteed minimum interest rate, which is in turn based on the expected returns for the pension capital in the financial markets. The statutory minimum conversion rate determines the minimum permissible value of this percentage in the obligatory part of occupational retirement provision (according to the BVG). The minimum conversion rate is set by legislators. It is significantly higher than it should be mathematically because the capital required for financing a pension is insufficient based on the minimum conversion rate for an entire lifetime. The conversion rate of 6.8 percent includes a guarantee that is no longer realistic at the current time. In fact, a conversion rate of 6.8 percent requires a return of approximately 5 percent or a guaranteed minimum interest rate of 4 percent, which is something that has not been achieved for a long time. Other rules apply for the non-obligatory component of occupational retirement provision. In this area, foundations are allowed to set the amount of the conversion rate themselves. Consequently, significantly lower conversion rates can be set for the non-obligatory component.

In the Swiss social security system, occupational retirement provision belongs to the 2nd of three pillars and supplements the OASI and DI benefits in the 1st pillar. While the 1st pillar ensures the subsistence needs of the insured and their dependents in old age, in the event of disability or death, the 2nd pillar serves to enable the insured to maintain their accustomed standard of living. After retirement, for many people the benefits from the first and second pillars together amount to around 60 percent of the (gross) income earned before the insured event. In order to close any pension gaps or to fulfill individual wishes after retirement, it is possible to make your own provisions using the 3rd pillar. The 3rd pillar thus supplements the retirement provisions of the 1st and 2nd pillars. The 3rd pillar is divided into the restricted pension plan (3a) and the unrestricted pension plan (3b). Pillar 3a is specifically promoted through tax measures. Pillar 3b is an unrestricted pension plan, meaning that it is not tied to retirement and can therefore also be used to achieve medium- or long-term savings goals. But what many often don't realize is that in the 1st pillar, everyone saves together, while in the 2nd and 3rd pillars, everyone saves for themselves. This means that you can normally only access your retirement assets after retiring. But the money is yours all the time.

Working part-time is popular in Switzerland. But people who work part-time often have to contend with a significantly lower BVG pension in old age. Why is this? To be accepted in a pension fund, you have to earn at least CHF 22,050 per year. If you earn less, you are not insured under BVG. But even if you have several part-time positions and earn more than CHF 22,050 per year, you can still expect a lower BVG pension. Why? The reason is the so-called coordination deduction. It prevents contributions on a person's annual salary up to the amount of CHF 25,725 being paid twice, or in other words for both the first and the second pillar. With this in mind, CHF 25,725 is deducted from the annual salary. This determines the salary that is insured in the second pillar. The coordination deduction is applied individually to each annual salary. For part-time employees with a total annual salary of more than CHF 25,725, there are two options to ensure this deduction is only applied once. Either they insure themselves with the Confederation's substitute pension plan. This means that the coordination deduction is only deducted proportionately from each income. Or they can specify the pension fund of one employer as the BVG institute and ask other pension funds to pay in contributions there.

You receive your pension certificate every year from your pension fund. It provides detailed information about your occupational retirement provision. It also contains details about your insured salary and the benefits in the event of death, old age or disability. In addition, you will find information regarding the contributions that you and your employer pay into the pension fund and regarding the amount of your expected retirement capital – including in the event of early retirement. And finally, it provides information on whether you can buy into the pension fund voluntarily and how high this amount is.

Money from the pillar 2 can be withdrawn early to finance home ownership. But only residential property for your own occupation. This is set out in the ordinance on the promotion of home ownership. These funds can be used as follows: to buy or to build residential property, to pay back a mortgage loan, to buy shares in a cooperative housing association and to renovate your property or to make value-adding investments. The minimum amount for such an advance withdrawal is CHF 20,000. If you are married or are living in a registered partnership, you can only make an early withdrawal of this kind if your partner consents in writing. You must also bear in mind that, depending on the pension plan, future benefits in the event of death, disability and retirement are reduced if you make an early withdrawal of pension fund assets. This is because an early withdrawal lowers your retirement assets.

Occupational retirement provision – the second pillar – has been established in law without any amendments since 1985. It sets out how retirement capital saved during one's working life is converted into a pension. However, circumstances have changed considerably since that time. First, we now live longer on average. Second, the number of pensioners is increasing compared with those in employment. And third, the conversion rate is (too) high. It determines how retirement assets in the second pillar are converted into a pension. It currently stands at 6.8 percent. All of these factors mean that pension funds have coverage gaps with respect to BVG pensions. In order to close such gaps, people currently in employment are forced to forego part of the return on their retirement capital. This leads to undesired redistribution from individuals who are now in work to pensioners.

After retirement, you are entitled to a lifelong pension. A distinction is made between two types of pensions: the AHV and the BVG pension. The amount of your AHV pension depends on how long you have paid AHV contributions and what your average annual income was. In order to receive a full pension, you must have paid AHV contributions for 44 years. If you have a contribution gap, your AHV pension will be reduced on a percentage basis. In the case of the BVG pension, the amount depends, on the one hand, on the contributions you and your employer have paid in during your working life, i.e. on your annual retirement credits, and any voluntary higher contributions or purchases. On the other hand, the regulations of your pension fund also influence the payout, because they may also provide for higher benefits. After your retirement, the BVG pension is usually paid out in the form of a lifelong pension. However, you can also to withdraw a lump sum or choose a mixed form - such as a partial lump-sum payment and a reduced life-long annual pension. In order to supplement the pension income from the AHV and BVG pension after retirement, it is advisable to make personal retirement provision in the 3rd pillar. The 3rd pillar offers various options for investing money and making provisions for old age, such as a retirement pension or a payment plan.

Survivor benefit is an old-fashioned technical term for payments from the 1st or 2nd pillar in the event of death. These payments go to the dependents of the deceased person, namely to the widow or widower and their children up to a certain age. As a rule, these are pension payments. In the 1st pillar, the state pension, there are various restrictions, for example, childless women only receive the widow's pension if they were at least 45 years old and were married for at least five years. Men only receive the widower's pension if they have children under the age of 18. In the case of both sexes, the pension payment to the surviving spouse ceases in the event of remarriage. In the 2nd pillar, payments are also made to widowers or widows and to orphans. Depending on the pension fund regulations, children receive an orphans' pension either until the age of 18, or until the age of 20, or as long as they are completing their first professional training, but no longer than until the age of 25. With many pension funds, partners are also covered; with others, a marriage must have existed for five years for a pension to be paid out. A lump-sum death benefit is often also insured, which is paid out once.

Mandatory retirement provision in Switzerland consists of the 1st and 2nd pillars. The benefits from these two pillars are intended to cover our financial needs and finance our accustomed standard of living after retirement. To ensure this is possible, the benefits of the two pillars should amount to 60 percent of the last salary prior to retirement. Because they replace this proportion of the last salary, we talk about the replacement rate when referring to them. Since the interest earned in occupational retirement provision was higher than assumed by the legislator for many years, the replacement rate was actually exceeded.

Pension funds invest the retirement provision assets of the insured and upon retirement either pay out pensions or make a capital payment. The gainfully employed receive interest on their saved balance. The pension capital of the pensioners likewise continues to earn interest. This is based on the so-called technical interest rate: it serves as an assumption based on how high the interest payments on the saved pension capital can be for guaranteed future pension payments. Consequently, the technical interest rate has a major influence on the conversion rate: if this conversion rate is calculated unrealistically or the economic conditions change, the pension savings of the insured person may no longer be adequate on their own. Redistribution becomes necessary to finance the life-long guaranteed retirement pension. Regularly reviewing and, if necessary, adjusting the technical interest rate is important for pension funds, because it plays a major role in their sustainable financing.