Retirement provision in Switzerland: Pillar 3a is important for employee benefits insurance

"Solidarity in employee benefits insurance is under severe strain"  

Retirement provision in Switzerland is out of kilter. In this interview, pension experts Markus Stierli and Rocco Baldinger discuss solutions for state pension provision ("AHV"), employee benefits insurance ("second pillar"), and tied pension provision ("Pillar 3a"). They explain why personal responsibility is the only practical model at present. 

Following the rejection of the "Pensions 2020" reform package in Switzerland, new proposals known as "AHV 21" are set to be voted on. Once again, the plan is to increase the retirement age for women. How likely is it that AHV 21 will be supported by a majority of voters?  

Markus Stierli: The increase is necessary for the longer term, having been an issue for the past 40 years. The fact that baby boomers are now reaching retirement means the urgency is all the greater. A retirement age of 65 for women is likewise increasingly capable of winning majority support, even if various interests continue to resist. 

Rocco Baldinger: In my view an increased retirement age for women will only command a majority if there is burden sharing. Men will have to buy into it. Specifically, this could mean gradually increasing the general retirement age to 66, with men reaching this new retirement age first. 

One of the aims is to bring in a flexible retirement age for AHV pensions: age 62 at the earliest and age 70 at the latest. What's your view on that? 

Rocco Baldinger: It's the right thing to do. We are an aging society. Voters are fully aware that future pensions will only be financially sustainable if they carry on working for longer. If we are to retain our exemplary, balanced pension system, there is an urgent need for reform. Some EU countries have already taken such a step. 

Markus Stierli: If no contributions are made in the final years because someone retires early, this has major financial implications. Fact is, savings contributions are often higher in the final years before reaching the retirement age. These contributions are then missing from the second pillar. But working for longer is not acceptable from a labor-union perspective. This will make it difficult to implement a more flexible system – even though this is necessary. The question of who works until when is likely to become the problem. 

In employee benefits insurance, we are seeing an unfair and unprecedented redistribution from pension savers to pension recipients. 

Rocco Baldinger

And what's your view on the additional funding of AHV pensions through an increase in value added tax? 

Markus Stierli: The additional financing is now even more urgent than at the time of the vote on the "Pensions 2020" reform package. The situation has also been exacerbated by the difficult investment year in 2018. I think the planned measure is a workable compromise. That was also shown by the TRAF tax reform, which was approved by voters on May 19, 2019. This will mean an additional CHF 2 billion being pumped into the AHV every year. Together with the planned increase in value added tax as part of the AHV 21 proposal, this should provide some respite for the AHV. 

Rocco Baldinger: To be honest, this only addresses the symptoms. It only plugs the gap in the first pillar in the short term. However, there are also challenges in the second pillar. Here, we are currently seeing an unfair and unprecedented redistribution from pension savers to pension recipients. In 2017, for example, around CHF 7 billion were redistributed from young to old. That equates to around 15% of the contributions made during that payment period. These figures show that solidarity is under severe strain. Urgent action is needed in employee benefits insurance. 

Markus Stierli is an accredited pensions actuary

Markus Stierli, pension expert 

Markus Stierli is Head of the Pensions Competence Center at Credit Suisse. 

Solutions for the extra-mandatory portion of employee pension funds, such as the Credit Suisse Collective Foundation 1e, are becoming increasingly popular. Does this reflect a trend toward personal responsibility rather than solidarity in Swiss retirement provision? 

Markus Stierli: A degree of solidarity is fully accepted within the second pillar. However, insured object to the redistribution – particularly in years with good investment returns, as they don't benefit from them. That's why we're seeing a trend toward personal responsibility in retirement provision as well. 

Personal responsibility is also possible within the third pillar if the money is invested in securities rather than being left in a Pension account – 3rd pillar. The latter currently generates very little interest. Nevertheless, barely 24% of all tied pension assets are invested in securities solutions according to the latest Credit Suisse study on retirement provision. Why is that? 


Rocco Baldinger: Given the lengthy investment horizon, the third pillar would actually be ideal for a fund or investment solution. Yet many people fail to take up this option – partly due to lack of awareness, and partly owing to fears of excessive risk in the financial market. But if you look at the lengthy investment horizon and include inflation in your personal retirement planning, it is safe to say that not taking any risk constitutes the biggest risk.

At the same time, personal responsibility is still not given the attention it deserves when it comes to social security in retirement. Surprisingly, it is precisely at that point that an astonishing fatalistic belief in government prevails. People's view seems to be "the government will make sure I'm alright." Indeed such an attitude has actually been rewarded in the past, given the delays in implementing reforms. However, this will certainly not continue. 

The possibility of making retroactive Pillar 3a payments would create fairness. 

Markus Stierli

The study on retirement provision also shows that the proportion of gainfully employed persons who regularly contribute to tied pension provision is particularly low among women at just 51%. How could women be encouraged to provide more for themselves via Pillar 3a? 

Rocco Baldinger: Women still bear the greater burden when raising children, and therefore frequently work part-time. This has consequences for employee benefits insurance and private pension provision. If they increase their working hours again at a later date, the gaps in their second-pillar provision can be partially ironed out through retroactive contributions. However, that is not the case with the third pillar. This is unfair and contradicts the principle of equal treatment in the Swiss pension system. The Verein Vorsorge Schweiz (Swiss retirement provision association) is making a political push in this area. The plan is to make it possible to close gaps in Pillar 3a provision in order to ensure continuous private retirement provision. 

Markus Stierli: An important reason for the low proportion of women is indeed the fact that it is not possible to make retroactive payments into Pillar 3a. Anyone who takes time out, for example due to parental leave or education, cannot pay any contributions into Pillar 3a and cannot close the gap at a later date either. The possibility of making retroactive contributions would create fairness. 


Rocco Baldinger is an expert on the second and third pillars

Rocco Baldinger, Credit Suisse pension expert 

Rocco Baldinger is a board member of the Swiss Pension Association (Verein Vorsorge Schweiz).

Some politicians are calling for an increase in the maximum Pillar 3a contribution amount. What's your view on that? 

Markus Stierli: It wouldn't command majority support. Fact is, it is people with a high disposable income that would be the main beneficiaries. Part-time employees or employees who take a career break would not benefit. 

Rocco Baldinger: The total amount that could be contributed over a lifetime of employment isn't too low. The weak point lies in the gaps that have been mentioned. This is the aspect that politicians need to tackle.

One last question: How confident are you that the above-mentioned problems within the three pillars of retirement provision in Switzerland can be resolved before it is too late? 

Markus Stierli: The recent votes on retirement provision in Switzerland showed that changes have little chance of being approved by a majority of voters. Why is that? Pension recipients and people who are close to retirement age obviously don't want things to change. Yet reducing the conversion rate within employee pension funds would be a common-sense move. However, people in gainful employment also need to buy into the decision. So, the problem needs to be solved in stages. 

Rocco Baldinger: At the same time, however, moves in this direction are also being made by pension recipients. One current example is the "Vorsorge JA – aber fair" initiative, which aims to allow reductions to existing pensions in the second pillar. This is fueling hopes that a sustainable, fair system of retirement provision can be secured in Switzerland. 

Markus Stierli: With the AHV it's a mathematical certainty that the sums won't add up. New financing models are needed. Within the second pillar, the pressure on yields due to demographic aging is becoming greater and greater. This shows that the challenges are enormous in scale. People in work need to exercise personal responsibility now, for example with tied pension provision. 

Would you like to take the initiative with regard to your retirement provision? 

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