The statutory minimum requirements for annual pensions from pension funds are unrealistically high. Parliament wants to lower the minimum requirement and at the same time expand insurance coverage for low earners. The unions have launched a referendum against this. Voters will decide on September 22nd.
The most important things in brief
- Pensions in occupational pension schemes have to be paid out for longer due to increased life expectancy. And pension funds’ expectations of investment returns have fallen. This is why the statutory minimum requirement for annual pensions in the compulsory occupational pension scheme is too high. In practice, this leads to pensioners being heavily subsidized by the working population. Parliament wants to change this and has decided to lower the statutory minimum requirements for annual pensions.
- For every 100,000 francs of retirement capital, the annual pension must currently be at least 6,800 francs. In the future, this minimum is to be reduced to 6,000 francs. Compensation is planned for 15 transitional generations through pension supplements. In addition, the insured salary is to increase so that younger generations can save more retirement capital. Part-time workers and other low earners in particular are also to benefit from the expansion of insurance; this affects an above-average number of women. In return, those affected must pay higher wage contributions. The unions have called for a referendum. They say that the reform will reduce pensions and lead to higher wage contributions.
The template in detail
Pension provision in Switzerland is based on three pillars. The first pillar (AHV) and, to a certain extent, the second pillar (occupational pension via pension funds) are compulsory. In contrast to AHV, in occupational pension provision you essentially save for yourself. The monthly wage contributions from employees and employers go into an individual account. The capital in this account also increases through investment returns. When you retire, the saved retirement capital is converted into an annual pension using a “conversion rate”. In the compulsory occupational pension scheme, the conversion rate must be at least 6.8 percent by law; an annual pension of at least 6,800 francs must therefore be paid for every 100,000 francs of retirement capital.
The conversion rate contains assumptions about the remaining life expectancy after retirement and about investment returns. In mathematical terms, the statutory minimum conversion rate is much too high today because life expectancy has risen sharply and expectations about the pension fund’s investment returns have fallen due to lower interest rates and lower inflation. According to many experts, a conversion rate of around 5 percent would be mathematically correct today. In practice, the excessive statutory minimum requirement led to a hidden and system-contrary subsidy of pensioners by the working population. The pension funds financed the excessive pensions by, among other things, reducing the interest on the working population’s retirement capital and by charging excessive risk premiums for the working population.
The reform passed by Parliament is intended to reduce these hidden cross-subsidies. The statutory minimum conversion rate is to be reduced from 6.8 to 6.0 percent. Even 6 percent is still too high mathematically, but the subsidies for pensioners would be smaller than before with the proposed reduction. For those affected, this means that for a given retirement capital, the annual pension will fall by almost 9 percent. Parliament has approved a pension supplement of up to 2,400 francs per year as compensation for 15 transitional years. The supplement depends on the year of birth and the retirement capital of the person affected.
Parliament also wants to expand the part of the salary that is insured. The mandatory part currently covers salary between an annual salary of 22,050 francs and 88,200 francs. Parliament wants to lower the entry threshold from 22,050 to 19,845 francs and make 80 percent of the annual salary up to 88,200 francs compulsory. The percentage of salary contributions will also change: 25- to 34-year-olds will pay higher percentage salary contributions than before, while older people will pay lower contributions. On balance, these changes mean in many cases that the insured persons affected will have a higher retirement capital when they retire than under the old rules. This applies in particular to lower incomes. In return, however, a higher retirement capital also means higher salary contributions from employees and employers.
The reduction in the statutory minimum conversion rate only affects the mandatory occupational pension scheme. In the non-mandatory scheme, pension funds are free to calculate their pensions. For most pension funds, the proportion of non-mandatory capital is large enough for the funds to be able to apply appropriate conversion rates in a mixed calculation today. In 2023, the effective conversion rate for new pensioners was on average 5.3 percent – and thus well below the minimum requirement in the mandatory scheme. Only a minority of insured persons are therefore directly affected by the reduction in the minimum conversion rate. At the level of pension institutions, around 15 percent are likely to be affected, at the level of individual insured persons, depending on estimates, it is likely to be around 15 percent to a maximum of a third.
The pension supplements planned for the 15 transition years will also benefit insured persons who would not suffer any losses as a result of the reform. Parliament is planning pension supplements for around 50 percent of the transition years, although far fewer insured persons will suffer losses. This new subsidy for pensioners has been criticized, particularly by industry and pension fund experts. According to federal estimates, the pension supplements will cost a total of over 11 billion francs. The reform was actually intended to reduce the hidden redistribution from employed people to pensioners, but according to a study by the BSS consulting firm, the proposal will actually lead to an increase in such cross-subsidies in the first 30 years.
However, the referendum against the proposal came from the left and therefore for the opposite reason: the left had fought for even more extensive pension supplements and thus for a much greater expansion of cross-subsidies. The left rejects any reduction in the minimum conversion rate, unless the compensation via pension supplements brings a massive expansion of the hidden redistribution from young to old and from top to bottom, following the model of the AHV.
The changes will have different consequences overall depending on the situation of each insured person. Trends in pension levels: women will tend to have higher pensions; men will tend to have lower pensions; those with lower incomes will tend to have higher pensions; those with higher incomes within the mandatory pension system will tend to have lower pensions; for the majority of insured persons, not much will change.
The bourgeois majority in parliament, the employers’ association, the trade association and the pension fund association are in favour of the reform. According to the proponents, the reduction of the statutory minimum conversion rate is a necessary step towards a sustainable pension fund system. The proponents see the overcompensation for the transition years as a political necessity in order to ensure that the reform can gain a majority. According to the proponents, the proposal also brings an expansion of insurance cover for low earners, from which many women in particular should benefit. This is why Alliance F, as an association of women’s organisations, is at the forefront of the fight for the reform. According to a study commissioned by Alliance F, around 275,000 women could expect higher pensions as a result of the reform, and 67,000 women would have to expect lower pensions.
According to federal estimates, the planned reduction in the entry threshold will result in around 70,000 additional employees being insured on a compulsory basis, and additional parts of income will be insured for a further 30,000. In addition, the new insurance model of 80 percent of wages up to an annual salary of 88,200 francs will lead to a significant increase for low earners. Previously, there was a fixed deduction of just under 26,000 francs to calculate the insured wage. For an annual salary of 40,000 francs, for example, around 14,000 francs are currently insured in the compulsory occupational pension scheme; with the reform, this will rise to 32,000 francs in the future.
The unions and the left-wing parties in parliament criticize the fact that the reduction in the conversion rate will result in lower annual pensions. They also criticize the fact that the expansion of the insured wage components will lead to an increase in wage contributions at the expense of employees. Moreover, according to the critics, needy pensioners would often not benefit from the higher wage contributions on balance, because the higher pensions would reduce the entitlement to supplementary benefits.
Criticism also comes from parts of the industry – but partly for opposite reasons. These critics are particularly bothered by the high costs of pension supplements for the transition generations and for the additional wage contributions, which can be particularly significant in low-wage sectors. Pension fund experts, meanwhile, criticize the reform proposal for failing to achieve the goal of reducing the hidden redistribution of wealth from employed people to pensioners.
