Women need to be careful about their retirement provision when working part-time or on a career break

Women: Think about your retirement provision if working part-time work or taking a career break

Part-time work and employment interruptions are key reasons why women invest less in Pillar 3a, according to a new study by Credit Suisse. However, it is particularly important for them to increase their exposure to this pillar in order to compensate for the loss of the AHV and BVG pension due to reduced contributions.

In Switzerland, six out of ten women work part time Some of them take time out entirely from their professional lives for several years. Both courses of action reduce income from gainful employment, and means that women pay less into Pillar 3a, according to the findings of the Credit Suisse study "Mind the gap: Part time, timeout, pension shortfalls".

Significantly more women work part time than men

Level of employment (in %) of women and men in comparison (2018)

Source: SFSO – Swiss Labor Force Survey (SLFS)

Women work part time three times as much than men

Flexible modes of working are particularly popular among women. They work part time around three times more frequently than men. The reasons are often family related. Besides career-related disadvantages, part-time work and time off mainly lead to lower income. This not only limits the options for private pension provision, but has severe consequences especially for AHV and the BVG pension. The pension gaps are striking. If they are not closed in time, they can significantly affect retirement pension and the standard of living after retirement.

Example calculation: Impact of maternity leave and part-time work on pension

In our example, if a 30-year-old teacher takes a six-year family break and then works eight years at 60%, this will have a serious impact on their pension. Compared with 100% employment, this will reduce their pension fund assets by approximately CHF 95,000, and their Pillar 3a assets by around CHF 80,000. As a result of career break and part-time work, the teacher will have to contend with a 14% reduction in their gross income after retirement.

Performance of Pillar 3a and pension fund assets with no career breaks

Asset performance with no career breaks

Asset growth in the 2nd and 3rd pillars on a salary of CHF 70,000 rising to CHF 100,000. This is based on an assumed annual contribution of CHF 6,826 into Pillar 3a and average interest/return of 2% annually.

Source: Study "Mind the gap: Part time, timeout, pension shortfalls" publ. Credit Suisse, 2019.

Impact of career break and part-time work on Pillar 3a and pension fund

Career break and part-time work markedly impact the accumulation of pension savings

Assuming the same person in the example above takes a 6-year work break and then works for eight years at 60 percent, retirement capital will be significantly reduced.

Source: Study "Mind the gap: Part time, timeout, pension shortfalls" publ. Credit Suisse, 2019.

State pension (Pillar 1): Working part time reduces AHV pension

To receive a full AHV pension of CHF 2,390, insured persons must have an average annual salary of CHF 86,040 and have fully paid in. Only a tiny handful of part-time employees achieve this. In particular, insured persons without children run the risk of receiving only the AHV minimum pension of CHF 1,195 in old age.

Childcare credits or credits for time spent caring for relatives can boost an AHV pension

Parents or carers of family members may count their childcare credits and credits for time spent caring for relatives toward their pension. They can be as much as three times the annual AHV minimum pension upon retirement – the amount for 2021 is CHF 43,020. This will boost their AHV pension without any contributions being paid. However, there is a cap at up to the current maximum pension in the year of retirement. Although childcare credits are automatically counted, credits for time spent caring for relatives must be registered with the cantonal compensation office at the residence of the person in need of care.

Important: Avoid contribution gaps

Those who do not work or have a very small level of employment will be required to pay the annual AHV minimum contribution of CHF 503. Every missing year will reduce the AHV pension by 2.27%. Ask the compensation office for a statement of your individual AHV account. If you find you have a contribution gap, you will still be able to close it within five years after it arose.

Employee benefits insurance (BVG): Part-time employees are at a disadvantage

The lower the part-time level of employment and salary, the more severe the impact on retirement income. This applies in particular to the savings under the 2nd pillar. Employers only have to enroll employees with an annual income of at least CHF 21,510 into the pension fund (minimum income required for enrollment in an employee benefits plan). The "coordination deduction" also makes a big difference to part-time employees' BVG pensions. It is currently CHF 25,095 and utilized by approximately half of Swiss pension funds. It is deducted from the salary before it becomes liable for contributions. 

Example calculation: Impact of the coordination deduction

The impact of the coordination deduction is to significantly reduce the pension fund benefits of part-time employees. For example, if a full-time employee receives an annual salary of CHF 70,000, they will have an insured BVG salary of CHF 44,905 (CHF 70,000 minus a coordination deduction of CHF 25,095). On a 50% level of employment, only CHF 9,905 is insured. While the actual salary is reduced by half, the pensionable salary will be reduced by more than three quarters.

Impact of the coordination deduction on full-time and part-time work

The coordination deduction has a greater impact on a part-time worker

Source: Credit Suisse, 2021

More than one part-time job: Consolidate pension funds

Occupational retirement provision is especially squeezed if someone is employed by different employers on two or more smaller part-time contracts. In this case, the coordination deduction falls due several times or the annual salary often does not even reach the minimum income required for enrolment in an employee benefits plan. Depending on the pension fund regulations, however, it is possible for some institutions to merge the various low wages, as long as cumulatively they are above the minimum income threshold. This means the coordination deduction is applied only once and the pensionable salary is correspondingly higher. If this option is not available, part-time employees can join the Substitute Occupational Benefit Institution. A possible pension gap can also be reduced by a purchasing pension benefits.  However, the potential amount is limited and depends in turn on the current pensionable salary.

Career breaks hinder the building up of a 2nd and 3rd pillar

Compared with part-time employment, it is not possible to pay into the 2nd or 3rd second pillar when on a career break. If you are not employed anywhere nor are self-employed, you can only pay the AHV minimum amount. However, being on even the smallest level of employment means you can make at least a small contribution to your retirement provision by paying into Pillar 3a.Employed persons without a pension fund can pay in the same as self-employed persons, i.e. up to 20% of net earned income (net of AHV/IV/EO/ALV), but only up to a maximum of CHF 34,416 per year. For example, in the case of net earned income of CHF 15,000, the employee may pay a maximum of CHF 3,000 per year into Pillar 3a. If your salary is not sufficient for this, having a partner who is earning more can help.

Using Pillar 3a to help reduce pension gaps

Part-time work has a direct impact on the future pension from AHV and BVG, a topic that affects women most of all. To maintain their accustomed standard of living in retirement, it is therefore all the more important for female part-time employees to exhaust the opportunities from private pension provision as best they can. The sooner they start 3a saving, the more they will benefit from a long-term investment horizon and the subsequent compound interest effect. They can also save on taxes at the same time. Even smaller regular deposits are worthwhile.

Impact of career breaks and part-time work on retirement pension in the case of dual-earner, childless couples 

Jan Schüpbach, co-author of the pension study "Mind the gap: Part-time, timeout, pension shortfalls" on the findings of the study.

AHV and BVG under pressure

It is become ever more important to consider Pillar 3 for retirement provision, not least as state and employee benefits insurance are increasingly under pressure.Even today, the benefit target of mandatory employee benefits insurance, that AHV and the pension fund together cover around 60% of the last salary, is often not achieved. Going by the rule of thumb, 80% of the last income is needed to continue enjoying the lifestyle one is accustomed to – this goal is often not achieved, especially in the case of higher incomes, even if the 3a maximum amount is consistently paid in. And the trend towards falling conversion rates in the extra-mandatory component of employee benefits insurance is still running its course.