Pillar 2 of the Swiss three-pillar systems consists of mandatory occupational benefits insurance (BVG). The Swiss Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans (BVG) constitutes a legal framework laying out the minimum requirements for private occupational benefits institutions.
Pillar 2 is intended to guarantee maintenance of the standard of living for people in gainful employment and their family members, because the demographic and economic development of Switzerland now means that an AHV pension from Pillar 1 can only cover the minimum cost of living. Mandatory occupational benefits insurance (BVG) therefore serves the purpose of supplementing the AHV/DI benefits in old age, in the event of disability or in a death case.
Mandatory occupational benefits insurance consists of one mandatory portion and another extra-mandatory (voluntary) portion. Annual salaries up to a specified maximum amount are insured in the mandatory portion (see: maximum effective annual salary for BVG). The portion of the salary above this amount is regarded as extra-mandatory.
The concept of mandatory pension provision covers various risks. For instance, it is activated to provide security in old age (BVG pension), in the event of an accident or disability, or in a death case. Other components of occupational benefits insurance include daily sickness benefits insurance, i.e. ensuring continued salary payments in cases where an employee falls sick, as well as the vested benefits institutions. The following graphic gives you more information about the structure of Pillar 2.
Mandatory or extra-mandatory? With or without a contribution obligation? Here, you can learn all the details you need to know about mandatory occupational benefits insurance (BVG).
All employees with an annual salary subject to AHV contributions which exceeds the BVG minimum annual salary are obliged to pay contributions and to be covered by insurance. Responsibility for correct coverage under occupational benefits insurance rests with the employer. As with AHV contributions, the employer must pay at least half of the contributions for occupational benefits insurance. Incidentally, self-employed persons make voluntary payments into occupational benefits insurance.
The BVG obligation starts when the employment relationship begins and ends on attainment of the regular retirement age (65 for men, 64 for women). Occupational benefits insurance capital is managed by public or private pension funds or occupational benefits institutions.
A distinction is made between the mandatory and extra-mandatory portions of the insured annual salary on the basis of the BVG. Annual salaries that are subject to AHV contributions and that exceed the BVG minimum annual salary are subject to mandatory insurance. Insured annual salaries that exceed this maximum amount (maximum effective annual salary for BVG purposes) are allocated to the extra-mandatory portion; in this case, the benefits of the pension fund concerned are voluntary. If you want to build up an additional pension above this amount, you should invest in a suitable 3a private pension product.
Insured persons generally become entitled to a retirement pension from occupational benefits insurance after they reach the regular retirement age. Depending on the regulations of the pension fund or occupational benefits institution, the entitlement can be claimed as from attainment of age 58. The amounts paid out are determined by the available retirement assets and the defined "conversion rate", by which the retirement assets are multiplied. Sample calculation: With a conversion rate of 6.8% and mandatory retirement assets of (for example) CHF 350,000, the annual pension would be CHF 23,800. Important: The conversion rates used here are likely to decrease in the future. For this reason, you should plan your pension provision early, and you should also pay into the voluntary third pillar to give you added security in old age.
If you change jobs, the accrued BVG retirement assets will be transferred from your current pension fund into your new employer’s fund. In various cases, however, cash disbursement or other ways of using the amount are possible. For instance, the entire BVG credit balance can be paid out in cash if you definitively relocate to another country (except for EU and EFTA countries). Other popular options include advance withdrawal or pledging of the BVG retirement assets to purchase or build a home of your own, or to start out in self-employment. An advance withdrawal of the accrued BVG capital usually gives rise to substantial pension gaps, because the capital to pay out the BVG pension in old age is no longer available. Various products and solutions for private retirement provision are available to address this situation: examples include paying into a Pillar 3a product such as life insurance.
Like private retirement provision, mandatory occupational benefits insurance is also fully funded. Each insured person individually accrues capital for pension payments and provision in old age, on the basis of a legally regulated saving process. Pension funds are obliged to ensure the long-term security of all current and future pension payments, so ongoing SIC deductions that are paid in are invested as securely as possible but with the objective of earning returns. The capital market is thus regarded as the "secret" third contributor alongside employers and employees.
All employees with a specified annual salary subject to AHV (above the minimum annual salary for BVG purposes) are insured in Pillar 2, or mandatory occupational benefits insurance (BVG) and, at the same time, they are also obliged to pay contributions. Persons not in gainful employment should build up private pension provision and invest in products such as a Pillar 3a account or life insurance.
The employer is tasked with correct organization and accounting for occupational benefits insurance. For this purpose, he chooses a pension fund or occupational benefits institution and pays 50% of the employee’s BVG deduction.
Accrued BVG retirement assets are generally paid out on attainment of the regular retirement age (65 for men, 64 for women), in the form of a monthly pension. It is also possible to withdraw the accrued capital in advance in case of definitive relocation abroad, starting out in self-employment, or the purchase of residential property.
There is no monthly maximum for the BVG pension that is disbursed. The level of payments is based on the available retirement assets or capital, and on the applicable conversion rate. For instance, with retirement assets of CHF 115,000 and a conversion rate of 6.8%, the retirement income will be CHF 7,820.
Unlike the AHV/DI pensions, which are financed on a pay-as-you-go basis, the funding of occupational benefits insurance is capital-based. Capital for retirement provision is accrued for each individual, within a defined legal framework. To ensure that the BVG pensions are also secured in the long term, the money paid into the BVG is invested on the capital markets with the objective of earning returns, but nevertheless securely.
Unpleasant but avoidable pension gaps mostly arise in connection with the pension fund if the accrued retirement assets are used for the promotion of homeownership scheme (WEF). If you use capital from occupational benefits insurance to purchase or build a home of your own, you should therefore deal with the issue of a private pension solution in good time, so you can secure your retirement by building up new private pension provision after the advance withdrawal.
The coordinated salary is used to calculate the benefits and contributions for the amount of the accrued retirement provision credit balance from the second pillar. Income from AHV/DI is also taken into account when calculating the pension to be disbursed, so a “coordination amount” is deducted for the calculation of the benefits disbursed.
Retirement incomes from the AHV and the pension fund (BVG) will be sufficient to cover your necessary living costs for the period after retirement and – provided that enough capital was paid into the occupational benefits insurance – to continue your lifestyle at a comparable level. Depending on your personal pension situation, it may be necessary to build up a private pension above and beyond the second pillar; payments into Pillar 3 may be necessary so that you can fulfill your individual wishes in old age. Also, if you want to protect your partner, protect against unemployment or simply achieve your savings goals, your should consider paying into a Pillar 3a solution.
Pillar 2 also includes “daily sickness benefits insurance”, organized by your employer, which covers loss of earnings in case of illness. This protection is limited, depending on the insurance coverage. If employees want to cover additional loss of earnings due to illness and to set additional savings aside for old age, they should build up private pension provision.
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