Pension Provision for Part-Time Employees: An Entrepreneurial Responsibility

Pension Provision for Part-Time Employees: An Entrepreneurial Responsibility

More than one in three people in Switzerland work part-time, including more and more men. For employees who work just a few hours and have a low income, the current pension system can mean large coverage shortfalls. It is important to provide information in a timely manner and create suitable framework conditions.

Part-time work is quite common in Switzerland, especially among women. Around 60 percent of women work part-time, while only a solid 15 percent of men do the same. Since the early nineties, however, this trend has also been growing among men and has now reached all age groups. The desire for a better work-life balance or new role distributions within the family, in which both partners slightly reduce their level of employment to care for their children, for instance, are key drivers in this regard. What is also striking is the increase of part-time work among young persons of both sexes. One explanation is increased time spent in education and training. Young people often work on a part-time or temporary basis in addition to their studies.

The Risks of Part-Time Work

From a pension perspective, the growing proliferation of part-time work and other flexible work forms, such as temporary jobs, several part-time jobs with various employers, and freelance activities, is not entirely without its drawbacks. More than three-quarters of pension fund representatives surveyed as part of the Credit Suisse study designated such working models as one of the biggest social challenges for the Swiss retirement provision system. Part-time work reduces income and thus the contributions made to the first and second pillars, as well as the benefits they pay out later. In employee benefits insurance, the minimum income required for enrolment and the coordination deduction in particular have adverse consequences for part-time employees. In the absence of additional private pension provision, such as Pillar 3a savings, those in such an employment relationship thus risk not being able to save enough for retirement.

Low Incomes

Only those who receive an annual salary of more than 21,150 Swiss francs from their employer are subject to mandatory employee benefits insurance in accordance with currently applicable law. The pensionable salary is determined by deducting an additional amount, the coordination deduction, from the annual salary. This coordination deduction is currently set at 24,675 Swiss francs and remains the same for part-time workers. Pension funds may choose, in their regulations, to set a smaller deduction based on the level of employment or to insure the entire salary, but they are not legally obliged to do so. For instance, if a full-time employee earns 100,000 Swiss francs, the pensionable salary will be 75,325 Swiss francs after deduction of the coordination deduction. If this person, in contrast, were to work at a reduced level of employment of 40 percent and thus earn 40,000 Swiss francs, the pensionable salary would only be 15,325 Swiss francs. As this example shows, the coordination deduction means that part-time work has a significant impact on the contributions that can be made to the second pillar and thus on the accrued retirement capital. This negative impact is bigger for smaller salaries. Even those who have several part-time jobs still lose out. For example, if someone works for three different employers earning a total of 40,000 Swiss francs, but does not earn more than 20,000 Swiss francs for any of these jobs, then none of the three employers is obliged to insure this employee. However, if the combined income exceeds the minimum income required for enrolment in an employee benefits plan of 21,150 Swiss francs (in this case, total income is 40,000 Swiss francs), the employee can be voluntarily insured through the Stiftung Auffangeinrichtung BVG (Substitute Occupational Benefit Institution). The issue of the coordination deduction was addressed as part of the recent 2020 Pension Reform package. However, Swiss voters rejected this reform package on September 24. As a result, the negative effect of the coordination deduction will remain for the time being.

Example of Part-Time Employment

Salary for full-time employment

100000 CHF      

 

Level of employment

40%        

Effective salary

40000 CHF       Pensionable salary: 40,000 - 24,675* = 15,235
         

* Applicable coordination deduction for 2017

Example of Employment with Several Employers

Salary 1 20000 CHF       Pensionable salary 1 = 0

Salary 2

10000 CHF      

Pensionable salary 2 = 0

Salary 3

10000 CHF      

Pensionable salary 3 = 0

Total income

40000 CHF      

 

         

None of the three salaries individually exceeds the minimum income required for enrolment in an employee benefits plan of 21,150 (meaning that none of the employers is obligated to insure this employee)

         

However, since the total of the three incomes exceeds the minimum income required for enrolment in an employee benefits plan, the employee can be voluntarily insured through the National Substitute Pension Plan (40,000 > 21,150)