Pension Pillar 3a could become more flexible

What making retroactive payments would mean

by UBS Insights 02 Dec 2019

Illustration: Eva Revolver

A representative survey was carried out for the UBS Pension Monitor. Read the interview about it with Emmanuel Ullmann, pensions expert at UBS.

In the Pension Monitor, UBS conducted a survey to gauge the popularity of Pillar 3a in Switzerland. What were the key findings?

The use of Pillar 3a has gone up from 51% to 57% within the space of a year. We think this reflects the greater importance now attached to pensions in public debate. More and more people are realizing how crucial Pillar 3a is for securing their retirement provision. I expect this trend to continue.

Only one third of respondents were in favor of a higher retirement age. What does that mean for pension provision?

If the majority of people are against increasing the retirement age, that takes away one possible option for restructuring the first and second pillars of our retirement provision.

Doesn’t that also indirectly increase the importance of Pillar 3a?

It does. If there is a fall in pension income from the first and second pillars, Pillar 3a and the accumulation of free available assets have a greater role to play in compensating for it. Pillar 3a in particular is the ideal vehicle in this situation, although I wouldn’t want to play off the three pillars against one another.

UBS Pension Monitor 2019

(available in German, French or Italian)

Last fall, a motion to allow Pillar 3a buy-ins was passed by the Council of States. What does the motion entail, and what happens next?

The motion, proposed by Erich Ettlin, a member of the Council of States, would allow individuals who have never paid or not consistently paid the maximum contribution into Pillar 3a to close the gap. It includes certain restrictions: for instance, it would only be possible to make buy-in payments once every five years, and payments would be limited to the maximum amount permitted for self-employed persons – currently CHF 34,128. The motion is expected to be put to the vote in the National Council in the spring of 2020.

The criticism made by the Federal Council is that only the wealthy would benefit. What’s your view on that?

Pillar 3a was developed as an additional instrument alongside the first and second pillars. It makes most sense for those in the middle and upper-middle income tiers. For those with lower incomes, there is not too much of a gap between the pension they receive from the first and second pillars and their previous income. In addition, they often do not have the means to make regular payments into Pillar 3a. The Ettlin motion is aimed precisely at giving those in the middle-income tier a flexible way of taking responsibility for addressing large gaps in their pension. For the very wealthy, the possibility of making Pillar 3a buy-ins is not really relevant given what is possible with Pillar 2.

The intention is not only to fill the gaps that result from not paying in the maximum contribution, but also those arising from interruptions to regular employment. What does this mean for pension provision?

It would bring Pillar 3a into line with the pension fund, where you can make up for gaps that have arisen for any number of reasons. And it would fundamentally strengthen pension provision, as working life these days is very dynamic – with people spending a year abroad or going on sabbatical, for instance, or taking time off to raise children. Pillar 3 has remained essentially unchanged since 1985 – the Ettlin motion would now give it a necessary element of flexibility and make it better adapted to today’s society.

Which gaps should be filled first? Those in Pillar 2 or Pillar 3?

That depends on the individual situation. Those who belong to a pension fund on sound footing and who are unlikely to change jobs again might buy into their pension fund to fill any major gaps and enjoy a much higher pension as a result. If the conversion rate is poor, interest rates are low and the funding ratio is meager, it would be less advisable to buy into the pension fund. Other important factors are whether you want to optimize your pension or your retirement capital, how you view your own health and whether you want to invest your retirement capital yourself. I would recommend discussing those issues with a client advisor.

Personal profile

Emmanuel Ullmann is Managing Director of the Fisca Pension Fund Foundation of UBS AG and Company Secretary of the Verein Vorsorge Schweiz (Swiss Pension Association). The Verein Vorsorge Schweiz represents the interests of vested benefits foundations and Pillar 3a institutions and their clients. UBS is a founding member. The association played a key role in drafting the basis for the motion to allow buy-ins into Pillar 3a.