Pension Pensions falling despite "no" to reform

The conversion rate has fallen sharply in the extra-mandatory pension area. What can you do to ensure your money lasts through retirement?

by UBS Insights 06 Jun 2018

The conversion rate is used to convert retirement capital into a pension until the end of life. Many pension funds have now lowered the conversion rate to 5 percent or below; others have announced reductions. Despite the result of the vote last fall in which Swiss voters rejected Rentenreform 2020 (among other things, the reform intended to lower the conversion rate from 6.8 percent to 6 percent), more than a few beneficiaries now find themselves facing a lower conversion rate. This is possible because the law only prescribes the conversion rate for the mandatory portion of occupational benefits. Pension fund institutions are free to adapt the conversion rate they use for credit balances in the voluntary portion of the pension fund.

An unrealistic conversion rate

Because life expectancy has increased, whereas conservative investments still only generate minimal returns, the legally stipulated conversion rate in the mandatory portion is nowhere near realistic. Pension funds compensate for this problem by weighting various elements differently in their calculations. They lower the conversion rate applied to the voluntary portion more than average to compensate for complying with the legally stipulated conversion rate, which is too high. Currently, AHV and pension funds generally only cover about 60 percent to 70 percent of the most recent salary. For this reason, you should inform yourself early about additional pension opportunities.

Your pension opportunities at a glance:

  • Voluntary pension fund purchases: close the gaps in the pension fund. The more you have saved up before retirement, the higher your pension will be. When making a purchase, pay attention to aspects such as risk benefits (e.g. for disability or death) and the pension fund's coverage ratio. This should be at least 100 percent. Your pension fund statement tells you how much extra you are allowed to pay into the second pillar. You're allowed to deduct pension fund payments from taxable income.
  • Generally, before making a pension fund purchase, you should first take advantage of pillar 3a and pay in the maximum annual amount (2019: CHF 6,826).
  • AHV pension deferral: For each year you defer drawing your AHV pension, you receive a supplement to your lifelong pension (this approach only pays off if you live past the age of 85).

What you need to know

Mandatory insurance

Pension funds must maintain statutory benefits for salaries between CHF 21,330 and CHF 85,320 (for 2019). In addition, an annual minimum interest rate, which is established annually by the Federal Council, must be credited to the mandatory pension fund savings (2019: 1%).

Extra-mandatory insurance

Income above CHF 85,320 (for 2019) is only partially subject to statutory regulation, but can nevertheless be insured in many pension funds. The conversion rate in extra-mandatory insurance is not regulated.