Retirement provision in Switzerland: What's the situation with the pension system?

Retirement provision in Switzerland. The essentials at a glance.

What will retirement provision in Switzerland look like in the future? And how can you prevent gaps in your pension provision? Read about the latest developments regarding AHV, pension funds, and the third pillar and how gainfully employed persons can best save for old age.

Swiss citizens are concerned about retirement provision

The state of retirement provision is a major concern for the Swiss population. This much is clear from the Credit Suisse Worry Barometer (PDF), in which the topic of pension provision/AHV is regularly among the top answers to questions about the most pressing problems. The reason for this is the problems in relation to mandatory employee benefits insurance, which are making Swiss citizens fearful of pension reductions.

Retirement provision in Switzerland faces major challenges

A key reason behind the continuing financing problems with mandatory employee benefits insurance is the demographic trend. Thanks to better nutrition and medical advances, the average life expectancy of women in Switzerland rose from 79.2 years to 84.9 years between 1981 and 2015. For men, it increased from 72.4 years to 80.7 years in the same period. In addition, older people feel fitter and younger than ever before. At the same time, the number of children per family decreased. This means that there are more and more retired people, while the number of gainfully employed persons who actually finance the pensions is steadily decreasing.

Swiss pension provision: Retired people feel younger and younger

Swiss pension provision: Retired people feel younger and younger

The chronological age of 65 in Switzerland now corresponds to a biological age of 51.
Source: United Nations (UN)/Credit Suisse

Swiss pension system being adjusted

As the baby boomer generation retires, this problem will become even more acute. By 2040, the ratio of pensioners to gainfully employed persons is expected to be just one to two. This brings the risk that pensions could fall in the long term and puts a strain on the solidarity between gainfully employed persons and those who are retired.

There is no option but to make changes to the pension system. We must prevent the financial burden on young gainfully employed persons from becoming excessive. In addition, the services provided must be brought into line with the changed economic framework conditions. After all, the interest-rate environment and economic uncertainty means that pension funds can no longer achieve the same high annual yields they did in the past.

The Swiss electorate approved the AHV 21 reform to overhaul the Swiss pension system by a very small majority on September 25, 2022, thus stabilizing the first pillar until 2030.

However, this is only a first step and will be insufficient on its own. More comprehensive reforms are needed – i.e. to the second pillar too – in order to achieve sustainable restructuring of the Swiss pension landscape.

Swiss pension provision: The number of retirees continues to rise

Swiss pension provision: The number of retirees continues to rise

In the next 15 years or so, there will be more people retiring than there are young people joining the labor market.
Sources: Swiss Federal Statistical Office, Credit Suisse

How will retirement provision develop in the future?

The pension system will have to look different in the future than it does today, not least due to the consequences of demographic developments. The AHV 21 reform takes this into account by creating incentives for a longer working life and making the reference age more flexible. However, it will be difficult to maintain the current level of pensions in the first and second pillar. In the case of mandatory employee benefits insurance, changes must therefore also take place in relation to the financing of pensions, such as a reduction in the conversion rate in the second pillar.

Personal responsibility for pension provision becoming increasingly important

Taking personal responsibility for your pension provision is now all the more important. It is also important to note that the earlier gainfully employed persons start planning their retirement provision, the better. Leaving retirement planning too late means you lose out on a lot of opportunities for optimization and can lead to pension gaps. And this can have noticeable financial consequences in old age. In addition, important decisions, such as the type of retirement pension or taking early retirement, should be considered five to ten years before retirement.

Likewise, voluntary retirement savings in the third pillar will continue to be a key aspect of personal pension provision. Here, too, it pays off in the long term if you start saving early. Anyone who can make regular contributions at a young age will benefit greatly in the long term thanks to the effect of compound interest. Even if you don't pay in the maximum amount.

Many gainfully employed persons do not use Pillar 3a 

Not only is Pillar 3a suitable for reducing any pension gaps in the first and second pillar, but it also allows you to make tax savings. Firstly, gainfully employed persons can deduct the contributions made from their taxable income; and secondly, there are also opportunities to make tax savings when withdrawing Pillar 3a capital. For example: If you have several 3a accounts and you withdraw your capital on a staggered basis instead of all at once, you can benefit from a lower overall tax burden, depending on the canton.

Nevertheless, many gainfully employed persons in Switzerland are not yet saving pension capital in Pillar 3a. According to a survey by the Swiss Federal Statistical Office, in 2019 some 38% of all gainfully employed persons between the ages of 25 and 64 made no contributions to their third pillar. This is particularly true for young gainfully employed persons and women.

Employment breaks are often the cause of gaps in pension provision

Retirement provision is particularly critical for gainfully employed persons who work part-time or who take longer employment breaks, for example because of maternity leave. These two factors increase the risk of pension gaps and thus financial losses after retirement. Even today, this still affects women in particular, as they tend to have flexible working patterns more often than men, or take breaks in gainful employment in order to fulfill family obligations.

Development of pension assets with no employment break

Development of pension assets with no employment break

Asset performance in the second and third pillars given salary progression of CHF 70,000 to CHF 100,000. This is based on an annual deposit into Pillar 3a of CHF 6,826 and an average interest rate/return of 2% p.a.
Source: Study: "Mind the gap: Part Time, Timeout, Pension Shortfalls" publ. Credit Suisse, 2019.

Career breaks and part-time work have a noticeable impact on the accumulation of pension assets

Career breaks and part-time work have a noticeable impact on the accumulation of pension assets

Assuming the same person in the example above takes a six-year career break and then works for eight years at 60%, retirement capital will be significantly reduced.
Source: Study: "Mind the gap: Part Time, Timeout, Pension Shortfalls" publ. Credit Suisse, 2019.

Potential consequences of career breaks and part-time work for pension provision

Consequences in the first pillar

Those who do not work or who work very little must pay the annual AHV minimum contribution. Otherwise, there will be a contribution gap, which will lead to a reduction of the AHV pension of 1/44 per missing contribution year. In principle, existing AHV contribution gaps can only be closed within five years of their occurrence.

Following the entry into force of the AHV 21 reform, from 2024 it will be possible for those who continue to work beyond the reference age of 65 to have the AHV contributions they pay taken into account when calculating the pension. This allows people to close earlier contribution gaps. However, a recalculation of this kind that takes into account AHV contributions paid after the reference age can only be requested once. The request should only be submitted once you are no longer employed or have reduced any working hours to such an extent that additional contributions no longer make a difference.

Consequences in the second pillar

The following applies in particular to pension funds: The lower the level of employment and salary, the more severe the impact on retirement income. Employers are only required to include their employees in a pension fund if the employee has an annual income of CHF 22,050 (as at 2023). The coordination deduction, which is currently CHF 25,725 (as at 2023), also has a major impact on the BVG pension of part-time employees. With many pension funds, the coordination deduction is deducted from the salary before it becomes liable for contributions. In the event of a career break, it is also not possible to deposit into the second pillar.

Gainfully employed persons with small workloads for various employers are particularly affected. It makes sense for them to combine their individual wages if the pension fund regulations allow this. As a result, the insured income is increased, and the coordination deduction is incurred only once. Any gaps in the second pillar can also be reduced by a subsequent purchase of pension benefits.

Consequences in the third pillar

In the case of part-time work or a career break, it is often not possible to make the full contributions to Pillar 3a. This is problematic, since these contributions cannot be paid in retrospectively to fill the gaps. This is why the third pillar cannot be used to cover any gaps in your mandatory employee benefits insurance. Political efforts are being made to enable retrospective contributions to be made in the future, however. Nevertheless, it remains to be seen whether this will be possible one day and when such a law would enter into force.