Occupational benefits insurance is compulsory for the employees of Swiss companies. When choosing a pension fund, various statistics and aspects can help provide a better picture of the offer. Among other things, it is worth taking a closer look at the mandatory and voluntary parts of retirement assets.
Swiss employees earning at least CHF 22,050 (=entry threshold 2022) per calendar year are required to be insured under the Federal Act on Occupational Old Age, Survivors’ and Invalidity Pension Provision (OPA), or Pillar 2 . To this end, they pay monthly contributions, which are saved in the pension fund as retirement assets. Interest is paid on these assets by the pension institutions and when an employee retires, these assets are converted into a life annuity using a conversion rate.
When it comes to retirement capital, a distinction is made between mandatory and voluntary assets for which differing conditions and benefits apply accordingly.
The conditions for the mandatory portion are set out in law, as there is a minimum benefits level. These are the legal requirements for mandatory OPA benefits:
If you join a pension fund (having reached the statutory entry threshold), a coordination deduction will normally be applied to your annual salary to determine the annual salary insured under Pillar 2. This is because your salary is already partially insured through Old-Age and Survivors' Insurance (OASI). If OPA and OASI benefits were not coordinated, very low salary levels would be overinsured.
Salary components insured in Pillar 2 that exceed the mandatory benefits are classified as voluntary benefits. A variety of circumstances may result in the accumulation of retirement assets in the voluntary portion:
Unlike mandatory benefits, there are no statutory requirements on conditions and benefits for voluntary saving. This means that pension funds are free to set the interest rate and conversion rate applicable to voluntary salary portions. For business owners, this means that they must compare the different terms and conditions of pension institutions to find the right OPA solution for their employees.
The most important figure for voluntary benefits is the conversion rate.
The conversion rate is set for mandatory OPA benefits, whereas for voluntary benefits, there are two methods of converting retirement assets into an annual pension: a comprehensive and a split option.
With a split conversion rate, the statutory conversion rate of 6.8% is applied to mandatory benefits and a different one that can be freely chosen (e.g. 5%) is applied to the salary components in the voluntary part.
By contrast, with a comprehensive conversion rate, a uniform (combined) conversion rate (e.g. 5.7%) is applied to both the mandatory and voluntary portions.
Even if a pension fund applies a comprehensive conversion rate, the retirement pension paid out must never be below the statutory minimum (i.e. the mandatory retirement assets converted using the statutory conversion rate).
Susanne has total retirement assets of CHF 320,000, of which CHF 300,00 are the mandatory portion and CHF 20,000 the voluntary portion. Her SwissRetire pension fund applies a comprehensive conversion rate of 6%.
The retirement pension according to SwissRetire is calculated as follows: CHF 320,000 x 6% = CHF 19,200. This pension is lower than the statutory guaranteed minimum of CHF 20,400 (statutory conversion rate of 6.8% applied to retirement assets of CHF 300,000 in the mandatory OPA part). The SwissRetire pension fund must therefore pay Susanne a retirement pension of CHF 20,400.
Important: the above example shows that voluntary retirement assets have no impact at all on the level of retirement pension. Susanne's retirement pension would have been CHF 20,400, even if she hadn't saved any voluntary retirement assets. This means that under the comprehensive method, optional purchases in the voluntary part do not necessarily result in a higher pension. The following example shows why:
as Susanne received a bonus last year, she decides to make a voluntary purchase of CHF 15,000 to increase her retirement savings.
After making the purchase, the calculation according to the SwissRetire pension fund is as follows:
CHF 335,000 x 6% = CHF 20,100
Initially, it looks as if the annual pension is actually higher, but this amount is also below the minimum CHF 20,400 level that Susanne is entitled to by law. Even after making the purchase, Susanne will therefore receive an annual retirement pension of CHF 20,400 from SwissRetire when she retires. In other words, the voluntary purchase had no impact on the level of Susanne's retirement pension.
Basically, with a comprehensive conversion rate, you should always calculate in advance whether additional contributions to the voluntary portion actually translate into a higher retirement pension.
Another figure to consider is the interest rate applied to retirement assets by the pension institution.
Some pension funds apply a higher interest rate to the voluntary portion compared to the mandatory one (particularly pension funds with a split conversion rate). If you look at both figures, the question arises as to which is better - a higher interest rate or a higher conversion rate?
An individual calculation would also be worth it in this case. For instance, if you're starting your career and you receive an attractive interest rate on your retirement capital for 40 years, you will ultimately receive a higher pension, even if the conversion rate is somewhat lower.
When choosing a pension fund, it's also worth looking at the terms and conditions in the voluntary part (e.g. high interest or advantageous conversion rate) as well as the correlations between conversion and interest rates. A brief look at a pension fund's relevant figures supports this decision. Many pension funds offer attractive OPA solutions with helpful administration services and other healthcare services.