Swiss Pensions: how they work and latest news

The Swiss pension system is designed to ensure workers have sufficient living allowance in retirement. It consists of 3 pillars. Recently pillar one or the state part, came under fire from various groups as being not enough. In response, the Federal Council of Switzerland boosted state pensions by 2.5% from 01 January 2023 which was just under the increase in the consumer price index (CPI) of 2.8% in 2022.

So how does the Swiss pension system work and what are some of the issues and challenges people have? What changes and reforms are planned? In this post we take a closer look.

Currently the legal retirement age in Switzerland is 64 years of age for women and 65 years of age for men. The retirement age for women will rise to parity of 65 years by 2028. It is possible to take pensions earlier or later, and this affects the amount of pension paid out.

Please note the figures provided here are applicable in 2023.

The pension system three pillars in Switzerland:

Pillar 1: The State Pension or AHV/AVS

This pillar is mandatory and designed to cover the worker’s basic needs after retirement. The AHV pension ranges from a minimum of CHF 1’225 to a maximum of CHF 2’450 per month for an individual and CHF 3’675 per month for married couples. In addition:

• The total amount is only paid out if the worker has no AHV contribution gaps and has paid into the system from the age of 20 and for the full 44 years with an average income of CHF 86’040 or more.
• Both the employer, as well as the employee have to pay AHV contributions. Each pay 5.3% – this premium covers old age pension plus disability insurances.
• For contributions of less than the full 44 years and/or for  a lower income than 86’040, a pro rata calculation is used to work out the monthly amount due.
• It is possible to retire 1-2 years earlier or up to 5 years later, and the monthly amount due is adjusted up or down accordingly.
• Those receiving a state pension can also claim for various other items such as hearing aids, glasses, and even wigs!

Since the above rules when applied together are not straightforward, it is possible to obtain an estimate of your particular pension at any time from the state pension office here.

Pillar 2: Occupational or Private Pension (BVG/LPP)

This is also compulsory in Switzerland for all employed individuals and intended to provide a ‘comfortable’ layer of income after retirement when combined with the AHV state pension. Occupational pensions are funded by employer and employee contributions for employed individuals, and can be voluntarily self-funded by self-employed individuals. Some of the challenges with private pensions:

• Pension plans are transferred to the employer when the worker changes company for a new job role. Some employers only offer low grade pension plans, which can mean the employee does not pay enough into their private pension coverage to enjoy the comfortable layer pillar two is designed for. There is however a legal minimum to cover the salary up to CHF 86’040: the minimum contributions vary from 7-18%, increasing with age. This minimum cover also guarantees a minimum annuity conversion rate at retirement.
• With the divorce rate currently standing at 40% in Switzerland, this means that nearly half of the total number of workers will have to split their pension pots before retirement.
• Private pension plans typically represent that of an institutional investor, are strictly governed and guaranteed by the state up to a limit of 1.5 times the maximum AHV salary covered. The pension funds above the guaranteed limit are less tightly governed and can be risky depending on the health of financial markets, which can then obviously affect returns.
• In the same way as Pillar 1, Pillar 2 premiums are deductible against income tax. The funds can be paid out early (or pledged) for financing owner occupied property, self-employment, and one or two other reasons. Any capital paid out is subject to a relatively low withholding tax.

Pillar 3 – Optional Pensions

This part is sub-divided into Pillar 3a & Pillar 3b. These are voluntary payments and designed to boost Pillar 1 and 2. This level is aimed at maintaining the worker’s lifestyle post-retirement:

• Swiss Pillar 3a are tied pension plans. Annual contributions into this pillar are restricted, and the yearly maxima differ depending on whether you have a Pillar 2 occupational benefits plan or not.
• Swiss Pillar 3b: Are flexible pension plans. No statutorily prescribed term. The invested capital is available at any time. No financing restrictions.
• Pillar 3 is also subject to splitting upon divorce and can be pledged as security against mortgage for owner occupied property.

Latest News

With regard to Pillar 1 – State Pensions:

One key factor behind ongoing problems financing the State Pension or Pillar 1 is the demographic trend of higher life expectancy in Switzerland. Specifically:

• The average life expectancy for women has risen in the last 40 year’s from  79.2 to 84.9 years of age.
• The increase in life expectancy for men during the same period rose from  72.4 to 80.7 years.
• In addition, the number of children per family decreased.
• This means that there are more and more retired people, while the number of gainfully employed persons who actually finance the pensions is steadily decreasing.

As a result an initiative called the “AHV 21 reform” was approved by the Swiss electorate by 50.57% in September, 2022. This safeguarded the financing of the first pillar until 2030 and the following measures are set to be implemented from 01. January 2024:

• A gradual rise in the retirement age of women to reach 65 years of age.
• Flexible annuity on retirement for employed workers aged 63-70.
• Additional incentives for employment after 65 years of age.
• Additional financing for AHV will be raised by increasing value added tax from January 2024 from 7.7% to 8.1%.