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Education needed: Occupational retirement provision is underestimated

May 20, 2022

For many people, occupational retirement provision, our 2nd pillar, is the most important component of their income in old age. But its importance is underestimated, and often the interrelationships in the Swiss pension system are even misunderstood. This also has implications for the current discussion on redistribution. At the same time, there are indications that those who understand the system find the current redistribution unfair. What is the reason for this, and how might it be changed?

Education needed: Occupational retirement provision is underestimated

BVG makes up the lion's share of retirement provision – but most people are unaware of this

For most of us, occupational retirement provision (BVG) represents an important part of our personal assets and a large portion of our income in old age. This is because every working person uses it to save for their own pension. However, according to an important finding of the recent "Fairplay" study (in German), the majority of the population don't know this. For the second time, the Vita Joint Foundations and the Zurich Insurance Company Ltd, together with the Sotomo research institute, commissioned a representative survey of 1,600 people.

Half perceive BVG contributions as a fee or tax

One indication from the first study was clearly confirmed: Because BVG contributions are deducted directly from salaries, many people see them as a kind of tax or levy. Although BVG payroll deductions are paid into the personal retirement savings account, only 47 percent of employees perceive them as an investment in their own retirement savings capital. 28 percent see them as a kind of tax ("contribution to safeguard pensions in Switzerland") and 21 percent consider the contributions to be a fee that must be paid.

BVG salary percentage as ...

Structuring BVG as a salary deduction weakens the underlying idea

The structuring and naming of BVG contributions as a "salary deduction" contributes to the fact that only 43 percent perceive their own pension capital as part of their assets. If the money is interpreted as a kind of fee or tax, this weakens the underlying idea of occupational retirement provision as savings for old age. This is also unfortunate for employers. After all, they finance at least half of the contributions. Employees can only be made aware of this benefit if they recognize BVG as an investment for their own old age.

BVG: Importance is systematically underestimated/distorted perception

On average, people claiming their pension today already receive more money from the 2nd pillar (BVG) than from the 1st pillar (AHV). This trend is set to intensify, partly because more women are in the workforce. Nevertheless, the respondents to the Fairplay study believe that AHV is significantly more important for their financial security in old age: They assume a breakdown of around 44 percent (1st pillar), 33 percent (2nd pillar) and 22 percent (voluntary savings in the 3rd pillar). This means that the importance of BVG for retirement income is systematically underestimated.

Ignorance regarding retirement savings capital

This distorted perception fits in with the fact that only 17 percent of the working population know exactly how much money they have saved in their pension fund so far. This is comparable to someone not knowing their account balance. Even the fact that a personal pension certificate is sent out once a year does not change this. Because there is a lack of awareness of the 2nd pillar, its importance is underestimated and the perception of occupational retirement provision falls behind that of AHV.

BVG is usually not an issue when joining a company

The neglect of the 2nd pillar also has an impact in the application process: Of those surveyed who had taken on a new job in the past ten years, most did not consider retirement provision to be an issue. Only 22 percent considered their new employer's pension benefits to be of significance when joining the company. And just 18 percent considered occupational retirement provision during the application process.

Redistribution is considered unfair by the majority

There is a great need for reform in the 2nd pillar. This is because today around half of working people's investment income is used to finance existing pensions, which is not the way the system was designed. However, only one third of respondents are aware of this redistribution. For this reason, the respondents who pay contributions were informed about it. Subsequently, they were asked: "Do you think it's unfair for a portion of the performance or interest on your BVG retirement account to be used to pay for the pension benefits of the current generation of retirees?" On the basis of this information, 63 percent of these respondents found it unfair.

Is the redistribution of interest from your BVG retirement account unfair?

BVG: more visibility and co-determination

Large majorities of respondents are in favor of measures that strengthen the perception of BVG as the most important asset. More than 70 percent find the following three measures correct and sensible: 1. Launch an app that provides an overview of the personal retirement provision situation. 2. Provide the possibility for the personal choice of the pension fund. 3. Enable the opportunity for the personal choice of the investment strategy.

Financial knowledge promotes BVG understanding

There is a very strong correlation between knowledge about capital investments and knowledge about one's own retirement provision situation. Anyone who is well versed in financial products and investments is usually also well informed about their own retirement provision situation in the 2nd pillar. In other words: If you want to raise public awareness of the importance of the 2nd pillar, you have to invest in improving the population's general financial and investment knowledge.

Conclusion: Promote understanding, make interrelationships identifiable

It is worrying when the majority of working people do not understand why they pay contributions into the 2nd pillar – and what happens to that money. After all, anyone who wants to take responsibility for shaping their own future needs a basic understanding of the interrelationships in the Swiss pension system. That's why it's important to foster financial literacy at many levels: in schools, at work and through the media.

Broad majority for more visibility

A broad majority of the population, namely more than 70 percent of those surveyed, is in favor of more visibility and communication in occupational retirement provision. This is a great opportunity for committed and sustainably minded employers: For example, when they explain the role of the 2nd pillar at staff on-boarding sessions, they support their employees in shaping their financial lives. At the same time, they can provide transparency with regard to the benefits that they themselves offer and thus successfully position themselves as a responsible company.

Fairplay study: Serious gaps in knowledge of occupational retirement provision

Read about the consequences of this and the importance of educational work in the current representative study conducted by the Sotomo research institute on behalf of Vita Collective Foundations and Zurich. (Study available in German only)

Download fairplay study

Frequently asked questions

Unfortunately, this is unlikely. Conversion rates will need to (and are going to) fall. The current working population will be penalized twice over: They are currently losing money thanks to redistribution, but they are unlikely to get this back in future and will also receive a smaller pension thanks to the lower conversion rate.

Every month certain deductions are made from salaries, so employees receive a net payment that is less than that agreed in their employment contract. A distinction is made between two items: social security contributions and BVG. Social security contributions include AHV, which finances statutory retirement pensions and death benefits. IV supports people who can no longer be gainfully employed due to illness or accident. EO provides a wage replacement during military service or maternity leave. ALV is the abbreviation for unemployment insurance. This provides payments when someone becomes unemployed. What all these social security schemes have in common is that they are financed on a pay-as-you-go basis: All payments are put in a large pot, from which the beneficiaries receive their money. BVG, the 2nd pillar in the Swiss pension system, is financed differently: 2nd-pillar contributions do not flow to a state institution, but to the employer's pension fund. There, each and every insured person saves for themselves, in what is known as the funded model. However, there is also an insurance component for benefits in the event of death and disability. What both pillars have in common is that employers and employees pay contributions together, usually 50 percent each.

The overall picture is a bit more complex. The conversion rate is a percentage that is used to calculate the amount of the pension. Using the comparison of a cake, the conversion rate defines the number of slices of cake or the size of a slice. What is relevant is how much money can be "converted." A high conversion rate is of no use if there is little to convert. At the same time, high conversion rates have to be financed. If there is too little cake available for retired people, this must be redistributed from the investment income of the working population. Current workers are then penalized twice over: They have less money now and in future, and conversion rates will undoubtedly be lowered subsequently.

Fairplay in occupational retirement provision

Vita and Zurich are committed to fair and transparent occupational retirement provision. They also offer sustainable pension products and support you in choosing the right BVG solution.

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