Outlook 2021 Reforms for all three Swiss pension pillars

After the challenges of recent months, the focus in 2021 is on the urgently needed reforms to pillars 1 and 2.

byVeronica Weisser 28 Jan 2021

The economic slump in spring 2020 caused the UBS Pension Index Switzerland to reach its worst level since 2005. But economic development was not the only negative driver; the other three components of the index – demographics, pension fund finances and political reforms – also deteriorated, increasing the need for reform. Read more about the related developments that can be expected this year, the new maximum amounts that apply to pillars 2 and 3, and how you can achieve your savings goals with pillar 3.

Reforms: safeguard financing in the short term

The AHV 21 reform is a legislative revision of pillar 1. The bill was reduced to a few modifications in order to get it through parliament as effectively as possible and to safeguard AHV financing – at least in the short term. The key issue is the increase in the retirement age for women to 65, combined with compensation for the first affected cohorts. Furthermore, value-added tax is to be increased and the percentages for early withdrawal or deferral of pensions are to be adjusted. Whether the revision can enter into force as planned in 2021 is currently in great doubt. This means that important time is being lost, because year after year more baby boomers are retiring, who could contribute to the restructuring of AHV, for example by raising the retirement age. The longer the delay, the more far-reaching subsequent reforms will have to be.

Pillar 2 is also dependent on a more stable financial foundation. Here, employees save their own retirement capital during their working life and receive it after retirement, usually as a monthly pension. The conversion rate determines how high the pension will be. This rate should be calculated mathematically based on the expected pension duration and returns, but has not been adjusted for years. Since it is not changed for current pensions, but life expectancy is rising steadily and interest rates will remain low, the working generation will have to contribute more and more to current pension financing. This was never the intention for pillar 2, reduces the prosperity of younger people and puts the pension model in a dangerously unbalanced position.

Vital questioning of pillar 2

In its dispatch to parliament of 25 November 2020, the Federal Council requested the adoption of a reform model that lowers the conversion rate. But this would merely increase the redistribution from young to old and ultimately lead to a situation in which the principle of pillar 2 would become more and more similar to that of pillar 1 – and be confronted with the same problem, i.e. much too few younger workers. This question that calls the whole system into question is likely to dominate deliberations on the current reform.

Another weighty issue in the political process is the improvement of pensions for low-wage earners. The coordination deduction (CHF 25,095) puts many part-time workers and those with multiple sources of income at a disadvantage and at a higher risk of poverty in old age.However, a reduction in the coordination deduction would meet with greater resistance than that of the conversion rate, as this would result in significantly higher personnel costs, especially for small companies. 

The situation regarding pillar 3, on the other hand, is less tense. In 2020, Parliament adopted a motion to allow retrospective payments into pillar 3a. The corresponding draft legislation is expected to be brought before parliament in 2022. Politicians are thereby emphasizing the fact that greater personal responsibility will become more important in the future.

New minimum and maximum amounts for pillars 2 and 3

Pillar 2

Pillar 2

Since 1.1.2021, in CHF

Since 1.1.2021, in CHF

Pillar 2

Minimum annual wage (entry threshold)

Since 1.1.2021, in CHF

21,510

Pillar 2

Coordination deduction

Since 1.1.2021, in CHF

25,095

Pillar 2

Upper limit for annual salary

Since 1.1.2021, in CHF

86,040

Pillar 2

Maximum coordinated wage

Since 1.1.2021, in CHF

60,945

Pillar 3 (3a)

Pillar 3 (3a)

Since 1.1.2021, in CHF

Since 1.1.2021, in CHF

Pillar 3 (3a)

Insured persons with a pension fund

Since 1.1.2021, in CHF

6,883

Pillar 3 (3a)

Insured persons without a pension fund

Since 1.1.2021, in CHF

34,416

Demographics: more pensioners, fewer people in work

The number of pensioners will continue to rise sharply in 2021 and in the following years – this is one of the major challenges facing the pension system. Half of all cantons are already dominated by the older generation in terms of population, even after the coronavirus crisis. The currently higher mortality rate, especially among older generations, is unlikely to be noticeable in pension fund finances. In addition, declining immigration and a low birth rate for the foreseeable future will lead to fewer and fewer people in work in relation to pensioners.

Careful retirement planning

You should think about your retirement planning early on so that you don’t have to make sacrifices later in life. Here you will find all UBS products and information on pension planning, clearly adapted to your age and situation in life.

Economy: restrained investments for the time being

The coronavirus crisis put a severe damper on economic development in the first half of 2020. In the first months of 2021, it can be assumed that impending restrictions will continue to cause uncertainty and slow down investments. If, however, the situation eases as hoped from the second quarter onwards, a major surge in investment could set in. In general, the course of the Swiss economy is influenced to a large extent by the exchange rate. In this respect, there are positive signs of stable development due to the successful policy of the Swiss National Bank so far and the relative strength of the euro against the dollar. If the investment surge dominates the second half of the year, correspondingly responsive stock market trends and a gradual improvement on the labor market could result in a positive environment for the pension system.

Finances: uncertain prospects for AHV

Rising unemployment and declining workloads, for example due to the discontinuation of short-time work, are leading to a decline in contributions for pillars 1 and 2. These shortfalls are most rapidly noticeable in AHV.

Declining VAT revenue would also affect the finances of AHV, since it is partly financed via VAT percentages. And federal spending on coronavirus measures ultimately ties up funds that could otherwise have been used to restructure AHV. Consequently, there are primarily more risks than opportunities for the financial situation of AHV in 2021.

The trend toward increased working from home could affect the investments made by pension funds, as they invest a significant portion of their assets in real estate. General speaking, pension funds with many commercial properties in their portfolio will not perform as well.

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Tips for pillar 3a

Anyone who wants to secure their standard of living in old age would be well advised to increase their 3rd pillar as much as possible. We have some tips on the easiest way to achieve this goal.

  1. Frustrating coronavirus restrictions are often compensated for with online shopping. Anyone who feels tempted should transfer the equivalent amount to pillar 3a before buying a product. This will “offer” you part of your online shopping in the form of a tax break.
  2. It’s even better to make regular payments into pillar 3a: monthly and automatically. This way you will feel the expense less and it will become as natural as paying your rent. And anyone who regularly invests in their UBS Vitainvest investment funds usually benefits from lower average prices.
  3. After all, with an investment horizon of ten years or more, investments are a worthwhile alternative to a traditional retirement account. People over the age of 60 also generally have a long enough investment horizon because a large part of the capital invested in pillar 3 is not needed until they are older, when they start to require additional care. The Vitainvest investment funds in the UBS retirement custody account 3a can simply be transferred to a normal custody account on reaching retirement age, so that investments continue without interruption and the risks of having a bad investment year are lower.