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The positive developments in pension provision over the past year at a glance: The reform of old-age and survivors’ insurance (AHV, 1st pillar) has already left parliament, while that of occupational retirement planning (BV, 2nd pillar) will continue to provide material for discussion in the coming sessions. The finances of both pillars benefited from the broadly positive stock market performance in 2021, and among the over-50s, long-term unemployment is becoming less of a structural problem. On the other hand, the financing of both old-age and survivors’ insurance and occupational retirement planning remains unsustainable and will weigh too heavily on the younger generation.

AHV reform with supplements for nine transitional years

The increase in women’s retirement age from the current age of 64 to 65, i.e., the same as for men, decided in the AHV 21 revision will contribute to a rise in AHV revenues and help improve the health of the 1st pillar. However, this will only be the case in the longer term, because nine transitional cohorts are to receive socially graduated supplements of between 50 and 160 francs per month. Parliament’s solution went beyond the Federal Council’s proposal. Nevertheless, there will almost certainly be a referendum against the legislative reform – probably in the fall of 2022. If the bill is approved at the ballot box, it could come into force at the beginning of 2023 at the earliest.

As part of the reform, it was also decided to increase value-added tax for old-age and survivors’ insurance. The ordinary rate will be increased by 0.4 percentage points; the Federal Council had envisaged 0.7 percentage points. However, parliament decided against diverting the Swiss National Bank’s negative interest income to the AHV compensation fund.

The financially attractive solution enabling female retirees to benefit from supplements could lead to a larger number of women from the nine transitional cohorts leaving the labor force as early as age 63. This could further exacerbate the shortage of skilled workers from which Switzerland is increasingly suffering.

Pillar 2 redistribution remains a contentious issue

Intergenerational equity continues to be an issue for occupational pensions. The reform model for the Federal Law on Occupational Retirement, Survivors’ and Disability Plans (BVG) originally proposed by the Federal Council would have once again significantly expanded the existing redistribution of pension assets from young to old. This would have promoted a mechanism that was not envisaged in occupational retirement planning, because unlike old-age and survivors’ insurance, pillar 2 functions according to the principle that all insured persons build up their own pension.

As pensions are now having to be paid out for longer and longer due to increasing life expectancy and it has become more difficult to generate secure returns, almost everyone agrees that the first step should be for the statutory conversion rate used to calculate the annual BVG pension to be reduced from the current 6.8 to 6 percent. This means that for every 100,000 francs of compulsory retirement capital saved, an annual pension of 6,000 francs will be paid out instead of the previous 6,800 francs. Despite this reduction, much higher amounts will continue to be paid out in the future due to long life expectancy than the average pensioner will save – at the expense of the younger generation. Due to the political unpopularity of the conversion rate reduction, the Federal Council had proposed compensation and even additional pension increases. These would be financed by permanent additional wage deductions amounting to 0.5 percentage points, primarily from younger workers. As a first step, the National Council is instead envisaging targeted cushions for insured persons whose total pension will be reduced due to the decrease in the minimum conversion rate. Insured persons with a large amount of non-mandatory retirement capital are not affected by the reduction. Parliament’s current solution, which was approved by the National Council and will be discussed further by the Council of States in the spring session, is therefore fairer for all the generations and results in an increase in wage deductions of just 0.15 percentage points.

This will improve the pension situation for employees with low wages. The reduction of the entry threshold from the previous figure of 22,050 francs to the new amount of 12,548 francs in annual salary and a decrease in the coordination deduction are also intended to enable low earners to benefit from a pension fund pension.

Fewer babies, less immigration

Excess mortality during the pandemic overshadowed the increasing aging of the population in the public debate. Yet the demographic trend remains unbroken. This also maintains pressure on the financing of old-age and survivors’ insurance and on the need to discuss a general increase in the retirement age for all genders, as is already a reality in many European countries. An alternative would be an increase in AHV contributions or a further rise in value-added tax. However, both would lead to an even heavier burden on younger generations.

While the old-age dependency ratio, which expresses the ratio of people aged 65 and over to those aged 20–64, continued to rise last year, the youth dependency ratio stagnated at a low level. The number of new births declined again in 2021, and population growth through migration has shown a downward trend for years, with migration severely constrained in both directions by the pandemic.

Prepare for retirement the right way

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

The economy has regained its footing and is looking ahead with optimism

The easing of pandemic-related restrictions in 2021 led to such a strong upturn in the economy that it created global supply chain bottlenecks. Combined with the rise in energy prices, this resulted in a boost in global inflation figures. In Switzerland, we are not witnessing any unusually high wage pressure, and the oil price base effects should also decrease in 2022. We therefore expect a moderate inflation rate of 1 percent in Switzerland in the current year.

Intermediate high for pillars 1 and 2

The finances of the 1st and 2nd pillars benefited from the positive development of the financial markets in 2021. However, due to demographic change, the financing of AHV pensions is still not guaranteed in the long term, and the pillar 2 system can only continue to provide the promised pensions thanks to a redistribution that is alien to the system – at the expense of younger generations.

It may become clear this summer when the Federal Council presents its dispatch on the pension initiative how the financial position of pillars 1 and 2 can be improved. This initiative, submitted in mid-2021 by the Young Liberals of Switzerland party, calls for a gradual increase in the retirement age for everyone to 66 by 2032, and for it to then be automatically linked to the development of statistical life expectancy. The Federal Council rejects the initiative, but is requesting a report that includes a comparison of models from various countries that link retirement age to life expectancy.

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Pillar 3a with potential

Payments into pillar 3a declined at the beginning of the pandemic or were not made at all. However, they rose again in 2021 in parallel with the economic upturn. The Ettlin motion, which intends to allow subsequent payments into restricted pension plans, is of great significance for pillar 3a. The bill is due to be debated in parliament this year and would not take effect until 2023 at the earliest.

There will be legal changes to pension provision in 2022 in a number of other areas: The principle of marriage for all was approved at the ballot box in September 2021 and will come into force on 1 July 2022. Female couples, like all married women, will then be entitled to a widow’s pension if they are over 45 at the time of their partner’s death. And while in the case of a registered partnership, the ordinary matrimonial property regime is the separation of property, for married couples, joint ownership of acquired property applies. For couples with large income differences, this change will place the person with the lower income in a better position in the event of their partner’s death.

Tips for pension planning

  • Take advantage of the maximum pillar 3a amount to save taxes and maintain your standard of living in retirement. The maximum amount for 2024 is 7,056 francs for employees with a pension fund and 20% of net earned income or a maximum of 35,280 francs for employees without a pension fund.
  • Set up a standing order to transfer money to your 3a account to make sure you take advantage of the maximum amount.
  • With UBS Vitainvest Investment Funds, you can participate in the development of financial markets in pillar 3a and boost your private retirement savings. In addition, by choosing sustainable investments, you are doing something for society and the environment.
  • If you have already taken full advantage of pillar 3a and still have funds available, it is advisable to consider a diversified, long-term investment strategy with first-class UBS investment solutions.
  • Existing gaps in pension fund contributions are best closed in the last few years before retirement by making a voluntary purchase. This is generally when your salary is the highest and the payment will have the most favorable effect on tax progression and thus on your tax bill. Before making a purchase, repay any advance withdrawals for home ownership. You should also check the financial status of the pension fund, for example on the basis of the funding ratio, which should be over 100 percent.

Useful facts on the subject