Like much of the developed world, Switzerland is now facing difficulties in the funding of pensions. A large gap is being driven by several factors including: an increase in life expectancy, a rise in the number of people retiring early, as well as the total number of pensioners, and finally – the way the system is currently funded.
Switzerland’s parliament has now asked the Federal Council to submit a pension reform plan by the end of 2026. This is aimed at solving the state pension funding gap forecast from 2030 to 2040. In this post, we take a look into how Swiss pension system is constructed, funded – what the main issues currently are. And what some alternative solutions to the problem could be.
Swiss pensions are made up of three pillars:
- The first pillar is a standard government payment (AHV/ALV) based on the number of years a worker pays social security taxes.
- The second pillar is based on a personal pension or pot, built up from compulsory salary deductions.
- The third pillar is a pot derived from optional tax-deductible savings.
Together all three pillars are supposed to provide enough income for retirement, but the problem is that an ever-growing number of retirees in Switzerland are now finding that they simply don’t have enough to live on. When this happens, the government has to make supplementary payments. And the number of people receiving these supplementary payments is growing and has now risen to 315’000 equating to 12.5% of total pension recipients. This creates additional costs of CHF4.8 billion, which means an even bigger hole in the pension fund.
Currently the state pension system needs to find a way to fill a funding deficit of CHF 8.3 billion between now and 2030. An existing plan by the name of “Old age pensions 2020” includes an increase in the retirement age of women to 65 (just voted in by the Swiss electorate) and an annuity rate reduction on second pillar savings.
There are a number of reasons why the three pillar system in Switzerland is in trouble and with the basic state pension no longer enabling anyone in Switzerland to live properly, the situation is becoming critical.
In addition, the second pillar is being hampered by low interest rates – meaning there are more funding gaps. Some of the main areas for concern:
A large generation of baby-boomers are now reaching pensionable age. This combined with many Swiss opting for early retirement, as well as a high life expectancy, mean that the Swiss pension system will be unable to finance the pensions of future retirees. (This according to pension and social studies experts such as Thomas Gaechter professor of social insurance law at the University of Zurich).
On the back of the recent Covid pandemic and the resultant economic fall out, which hit a wide range of assets held by pension funds – shares fell by 21.9%, bonds were down 12.5% and real estate assets by 11.4%. Exchange rates also moved, thereby affecting the value of holdings in foreign currencies.
In 2021 Swiss employment-based pensions funded in aggregate, held assets worth 18.5% more than what they owed. One year later, they owed 0.5% more than they held in assets. This according to government data just published.
However, despite the bad news, not all second pillar pension funds are in negative territory and at the time of the survey – 44.3% had coverage of more than 100%. And only 3.6% had coverage below 90%.
In order to reverse the trends and fill the gap in pension funding, a number of initiatives to reform Swiss Pensions are being tabled prior to the Pension Reform Plan being published in 2026.
- Retirement at 67? In future people in Switzerland may need to retire at 67, according to a parliamentary commission. Retirement age is being raised across OECD countries because of longer life expectancy. For instance it will reach 74 in Denmark by 2030.
- Reducing conversion rate of future pensions. The term conversion rate means the rate at which invested capital is calculated as an annual pension. This will probably be reduced in future or the pension funds in recent years have being paying out at an unsustainable rate – and current pensions cannot be changed.
- Variable pension payout? There are discussions already being tabled regarding offering people more or less money as their pension payment depending on how well pension fund investments are doing.
Generation X (1965 – 1980) will definitely be the loser in these types of future reforms and they are basically now funding the people in retirement. And with the majority of people in Switzerland voting being older than younger, proposed reforms that could be detrimental to existing pension payments, may not even get passed by the electorate.
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