Reforms in the Swiss pension system are overdue.
The Swiss pension system needs reforms and is facing major changes. What do employees who wish to best provide for their retirement years need to know now? Désirée von Michaelis, Head of Wealth Planning at Credit Suisse, talks in the interview about the state of pension provision in Switzerland and provides tips for personal retirement planning.
Ms. von Michaelis, what is the state of the Swiss pension system?
It is generally good, especially when compared against systems in other countries. However, the demographic trend and the long period of low interest rates are challenging the system. In addition, any attempts at reform in the past 20 years failed at the ballot box – meaning that we are not really making any progress in advancing the system.
Are reforms in the first and second pillars therefore urgent?
That's true – they're urgently needed and overdue. In the first pillar, pension payments are already larger than the contributions paid each year. If we don't resolve this financial imbalance at some point, taxpayers will have to bear the burden at some point.
The second pillar also needs reform since people are living increasingly longer and withdrawing their pensions for a longer time. With the current conversion rates, the contributions paid are no longer sufficient to cover the pensions. This especially applies to the mandatory portion of pension fund provision, for which the conversion rate is legally set at 6.8 percent. There, a redistribution from gainfully employed persons to pension recipients takes place.
What are the specific solutions for the two pillars?
In AHV, the discussion is centered on the AHV 21 reform, including the increase of the AHV age for women and the question of how the transitional age groups can be compensated for this. Another point of discussion is how incentives for working beyond the legal retirement age can be created and how AHV withdrawal can be made more flexible. A third topic is additional financing through an increase of the value-added tax.
And in the second pillar?
Here, the reduction of the conversion rate is a key topic. This ultimately means that in the future, anyone withdrawing a pension will receive less money from the accrued retirement capital. Furthermore, the reduction of the coordination deduction and an adjustment of the retirement credit are also being discussed.
A lower coordination deduction would be especially important for persons with low salaries and part-time positions, who often can only contribute little or nothing to the second pillar – a topic relevant for many women. The harmonization of retirement credits would ensure lower wage costs for older employees starting at age 55, enabling them to remain attractive for employers.
But does that mean that employees must expect a reduction in retirement provision benefits?
Yes, especially in the pension fund. Even without reforms, persons retiring over the next couple of decades can expect pensions to be 25 to 30 percent lower than those drawn by persons who retired in 2010. This makes private pension provision all the more important.
How can insured parties optimize their private pension provision?
There are various ways, as current studies show. In the second pillar, you can improve your retirement pension through higher savings contributions, provided the employer enables this. Or you can close an existing pension gap by buying into your own pension fund. High-earning employees also have access to 1e plans with some employers. These have two advantages: You can choose the investment strategy and the desired interest rate yourself. There is also no redistribution.
And in the third pillar?
Primarily through higher contributions to Pillar 3a. It is generally worth making the maximum contribution every year, if you can afford it. What we are seeing, however, is that only slightly more than half of gainfully employed persons are contributing at all to Pillar 3a. Unlike the pension fund, these gaps cannot be closed in later years.
However, there are currently efforts in the Federal Assembly to open up the possibility of additional payments to Pillar 3a. This could especially benefit young employees and persons taking a career break. In addition, a parliamentary initiative is being discussed with the aim of increasing the maximum annual contributions to Pillar 3a. This would further increase the attractiveness of the third pillar.
The second point is investing the Pillar 3a assets. Young people in particular are still too cautious in this regard. However, the long investment time horizon is precisely how they can significantly benefit from upward markets until their retirement.
When is the best time to start planning your own pension provision?
You should deal with the topic as early as possible. In the best case, as soon as you're earning money. It then makes sense to review the planning every five years and when major life changes happen. And, for instance, setting new priorities after a career step or starting a family. It is also important not to lose sight of your own needs after retirement. If you want to be able to afford a more luxurious lifestyle or an early retirement, you have to lay the financial foundations for this early.
And when should you specifically deal with retirement?
You should answer some key questions for yourself by the age of 50 at the latest. How long do I want to keep working? How much capital or how much pension can I expect? And how much money do I need for my desired lifestyle after retirement?
You should start with specific planning five years before actually retiring. The questions here pertain to partial retirement steps or the staggered withdrawal of pension assets. This should then be reviewed annually until retirement.