Pillar 3a equity allocation: How to build your private retirement savings over the long term

Those wishing to save capital for retirement reliably and sustainably will fare best with targeted investment in diversified equities.

Until not that long ago, saving capital for private pension provision through savings accounts or conventional life insurance was enough to ensure adequate retirement provision in addition to Pillars 1 and 2. However, persistently low interest rates and demographic trends in Switzerland changed the environment for planning retirement provision. Those wishing to save sustainably for retirement while also continuing their accustomed lifestyle in their old age should invest part of their paid-in capital on a return-oriented basis, such as in equities in Pillar 3.

What should your Pillar 3a equity allocation comprise?

The appropriate equity allocation in Pillar 3a depends on your investment horizon and ranges from 0% for less than five years to 80% to 100% for more than 20 years until withdrawal. The only widely accepted rule here is: Equity investments should be held for at least ten years. With shorter time horizons, the risk is too high that a decline in stock prices will not be recouped by the time of withdrawal. Conversely, after about ten years, interest-only investments generally result in a real loss when inflation is taken into account. Those who rely on interest-bearing accounts over the long term therefore lose purchasing power.

Investors determine the specific percentage of their Pillar 3a portfolio allocated to equities based on their risk tolerance. The following are commonly used guidelines:

• More than 20 years: 80% to 100% in equities. The focus is not on avoiding short-term fluctuations, but on maximizing nominal growth.
• 10 to 20 years: 60% to 80% in equities. There is enough time to ride out market downturns, but it still makes sense to have a small risk reserve.
• 5 to 10 years: 30% to 50% in equities. A gradual reduction is advisable, as there is less time for the market to recover.
• Less than 5 years: A small or no allocation to equities; a 3a account or a money market fund is preferable.

Your personal risk tolerance always determines the appropriate allocation to equities in Pillar 3a. However, with a long investment horizon, equities are not the “riskier” choice, but rather the rational one. With a flexible retirement plan like AXA’s SmartFlex pension plan, the equity allocation can also be continuously adjusted to the remaining investment period.

What does the long-term performance of equities look like?

The long-term perspective clearly shows that despite crises, equities have performed significantly better over the long term than bonds and savings accounts. 

What are the four rules for saving with equities?

Broad diversification

Those who invest smartly spread their capital between different individual equities and regions to avoid cluster risk. Those who invest in AXA’s SmartFlex pension plan, for example, will be cleverly building up their retirement provision and avoiding a pension gap. The investment funds are strongly diversified and investors can choose from four different investment themes.

Long-term investment horizon 

All good things are worth waiting for. Surprisingly, this maxim also applies to saving with equities. Keeping calm and thinking for the long-term is usually the best policy. This is because the long-term perspective on market trends of the Swiss Performance Index, for example, over the last 25 years shows that despite crises, equity investments fare much better than savings accounts or bonds in terms of appreciation.

Note the low investment costs

Those who also wish to invest in equities to achieve their savings goals should take a close look at the costs involved. Excessively high costs lead to a substantially lower return.  The total cost of an investment consists of the cost of fund management, fund administration and fees for buying and selling fund units. AXA's SmartFlex pension plan which involves investing part of savings capital in equity investments is characterized by comparatively low investment costs.

Regular payments

The general principle for long-term saving is that regular payments and consistent savings discipline are the nuts and bolts for sustainable and continuous capital accumulation. But regular contributions into a return-oriented pension plan also make sense with a view to investing on the stock market. Because those who contribute regularly benefit from being able to buy when prices are low when share prices fall. Here the experts also talk about the average price method in this regard.