What is a pension fund?

Introduction

Occupational pension planning, also known as the 2nd pillar, plays a crucial role in shaping your retirement strategy in Switzerland. Often underestimated, it constitutes one of the primary sources of personal savings and deserves your full attention. Here’s why:

• A Significant Asset: For the majority of insured individuals, the 2nd pillar represents the most substantial portion of their financial wealth.
• Consistent Returns: Your capital is invested and generates annual returns, bolstering your financial security.
• A Retirement Income: This capital will determine your standard of living in retirement, enabling you to fully enjoy this stage of life.
• A Lever for Life Projects: Whether it’s buying real estate or funding a personal project, your pension fund can be a powerful tool to help realize your dreams.

It is, therefore, essential to have a deep understanding of how your 2nd pillar functions. With this in mind, FBKConseils publishes detailed articles about occupational pensions. Today, we’re starting with the basics: What is a pension fund?

Definition of a pension fund

To fully understand what a pension fund is, it’s helpful to distinguish between two key principles that structure the Swiss retirement system: the pay-as-you-go system and the capitalization system. These concepts will help you better grasp the workings of the 1st and 2nd pillars.

Pay-as-you-go system vs. capitalization system

The 1st Pillar (AVS) – A Pay-as-you-go System

The 1st pillar, also known as AVS (Old-Age and Survivors Insurance), operates on a pay-as-you-go system. This means that active workers contribute directly to fund the pensions of current retirees.

• No personal savings are accumulated.
• Your future pension depends solely on two key factors:
  • Your average salary over your professional life.
  • The number of contribution years made until retirement age.

This system ensures intergenerational solidarity, but it doesn’t build personal retirement wealth.

The 2nd Pillar (LPP) – A capitalization system

In contrast, the 2nd pillar, or LPP (Occupational Benefits Plan), relies on a capitalization system. Your savings are personal and are built up throughout your professional career.

Every month, part of your salary is deducted and deposited into a pension account managed by your pension fund. These funds are invested to generate returns, which grow your retirement capital. Upon retirement, this amount will be paid out either as a pension or a lump sum, depending on your choice.

• You can only rely on yourself: Your retirement depends directly on the total contributions made and the returns generated.
• Therefore, it’s essential to understand and monitor your pension fund’s evolution throughout your career.

These two systems together form the foundation of the Swiss retirement system. In the next sections, we will delve deeper into how pension funds work and their impact on your financial future.

How does this capitalization system work?

Think of your pension fund as a personal backpack that you aim to fill throughout your career. This backpack could be large, sturdy, and well-designed, or it might be small, poorly suited, or even slightly leaky. Your pension fund is this backpack, selected by your employer to help you build your retirement capital.

Swiss companies offer pension funds with vastly different characteristics:

• Some pension funds provide generous benefits, with high contributions and attractive returns, allowing your backpack to fill quickly.
• Others are more modest, with limited contributions and reduced benefits, making it harder to fill your backpack.

When you change employers, you automatically switch to a new pension fund—a new backpack. But don’t worry: your old backpack’s contents are not lost! You can transfer its contents into the new pension fund chosen by your new employer. However, you cannot keep the old backpack, as each job in Switzerland is tied to a specific pension fund.

In summary: Your pension fund is a crucial tool for preparing for retirement. The better it performs, the fuller your backpack will be when you reach retirement age. This is why it’s important to understand its mechanisms and pay attention to the conditions offered by your employer.

How can I tell if I’m in a good pension fund?

Assessing the quality of your pension fund may seem complicated, as the 2nd pillar is a broad and technical subject. However, some key indicators can help you determine whether your pension fund is performing well. Here are three essential criteria to examine:

The coverage ratio

The coverage ratio measures the ability of the pension fund to meet its obligations to all insured members. In other words, if all insured members retired at the same time, would the fund be able to pay out their pensions?

• A ratio above 100% indicates that the pension fund has sufficient funds to cover its commitments.
• A ratio below 100% signals a potential shortfall. However, there’s no need to panic: members never retire all at once, and Switzerland has robust protective mechanisms to safeguard contributors’ assets.

Note: While a temporarily low coverage ratio isn’t necessarily alarming, it could, in some cases, negatively impact your future benefits.

Returns paid to members

Each year, your capital is invested by your pension fund, which is required to generate annual returns. These returns are crucial for growing your savings over the long term.

• High returns mean your capital grows quickly, increasing your future pension.
• Low returns can slow your savings growth, especially if inflation is high.

The performance of a pension fund can vary significantly, so it’s wise to compare the historical results of different institutions.

The contribution plans offered

Each pension fund offers employers different contribution plans, which determine:

• The annual contributions made by you and your employer to the fund.
• The benefits provided in cases of retirement, disability, or death.

This aspect is crucial: A fund that offers generous contributions and extensive benefits ensures better financial security for both your present and future.

In Summary: To determine if you’re in a good pension fund, pay attention to these three key criteria. A healthy coverage ratio, competitive returns, and suitable contribution plans are the best guarantees for protecting your financial future. Don’t hesitate to request detailed information from your employer or review your pension fund’s annual report.

What is the purpose of a pension fund?

A pension fund plays a central role in professional retirement planning in Switzerland. Its primary mission is to receive contributions from your employer and yourself and then consolidate these funds into capital for your retirement.

Collecting workers’ contributions and consolidating them into capital

Each month, a portion of your gross salary, as indicated on your payslip, is automatically deducted to fund your 2nd pillar. This contribution is shared between you and your employer.

Here’s how it works:

• You contribute a certain percentage of your gross salary, as defined by legislation and your pension fund’s regulations.
• Your employer also contributes, often at an equal or higher rate, to bolster your savings.

These contributions are then received by your pension fund and credited to your individual professional retirement savings account. Over time, they form an accumulated capital, which grows through regular deposits and the returns generated by the pension fund’s investments.

Why is this important?

The higher your salary and contributions, the greater your retirement capital will be, directly determining your pension level upon retirement. Your savings are essentially an investment in your future.

Tip: Regularly review your pension certificate to track the growth of your capital and anticipate your financial situation at retirement.

Investing the capital according to wealth management rules

Once your and your employer’s contributions are deposited, your pension fund pools them with other members’ funds to create a significant capital base. This capital is then invested in financial markets according to strict wealth management rules, as defined by Swiss law and the fund’s internal guidelines.

How does it work?

Your pension fund allocates these funds across various types of investments, including:

• Stocks (Swiss and international companies)
• Bonds (loans to governments or companies)
• Real estate (residential or commercial properties)
• Alternative investments (private funds, infrastructure, etc.)

The objective is to generate returns while minimizing risks, ensuring the capital grows over time.

The “Third Contributor”: generated returns

In Switzerland, the “third contributor” refers to the returns generated annually through the pension fund’s investments.

• The 1st contributor: You — through your monthly salary deductions.
• The 2nd contributor: Your employer — who adds to your retirement savings.
• The 3rd contributor: Financial returns — achieved through the pension fund’s wealth management.

These returns are reinvested or credited to your personal account, further increasing your retirement capital. The better the fund’s investment performance, the more comfortable your retirement will be. That’s why it’s crucial for your pension fund to adopt a diversified and cautious investment strategy.

In Summary: A good pension fund doesn’t just receive your contributions; it must also grow your savings to ensure you have a financially stable retirement.

Transforming capital into pensions

When you reach retirement age, you have two main options for using the capital accumulated in your pension fund:

1. Withdraw the entire capital for personal use.
2. Receive a lifetime monthly pension, guaranteed by your pension fund.

Why choose a lifetime pension?

Opting for a lifetime pension is advisable if you want to secure a regular income for the rest of your life. Managing a large amount of capital on your own and ensuring a steady income over several decades can be a complex challenge that many people prefer to avoid.

When you choose a pension, the pension fund takes on this responsibility. It guarantees your payments regardless of how long you live, whether it’s until 70, 90, or even 105 years old. This financial commitment is supported by the accumulated funds and the returns generated.

Providing income in case of disability or death

While the primary goal of a pension fund is to prepare for retirement, life can sometimes take unexpected turns. Events like disability or death can occur before or after retirement. In such challenging situations, pension funds play a crucial role in ensuring income for those affected or their loved ones.

Key benefits provided by the pension fund

• Disability Pension:
  If you become disabled during your career and can no longer work, your pension fund must provide a disability pension.
• Child’s Disability Pension:
  If you’re receiving a disability pension and have dependent children, they may also qualify for a child’s disability pension, under specific conditions.
• Widow’s or Widower’s Pension:
  In the event of your death, your spouse or registered partner may be entitled to a widow’s or widower’s pension.

Pension funds in Switzerland

In Switzerland, pension funds can be public, private, or semi-private, which explains their high number, though it has significantly decreased over the years. While there were around 15,000 in 1985, when the LPP (Loi sur la Prévoyance Professionnelle) came into effect, there are now fewer than 1,500.

Major pension funds in Switzerland

Some of the main pension funds in Switzerland include:

• Publica (the federal government’s pension fund)
• BVK (pension fund for the Canton of Zurich)
• CFF Pension Fund (Swiss Federal Railways)
• Pension funds for La Poste, the Canton of Geneva, and the State of Vaud
• UBS, Nestlé, and other private companies’ funds

How to identify your pension fund?

The answer is simple: it’s the one your current employer has chosen.

As mentioned earlier, when you change jobs, you also change pension funds. However, this does not mean starting over:

• Your accumulated pension assets with previous funds are transferred to your new pension fund, provided you request it.

Uncertain about the transfer of your funds?

We recommend consulting our dedicated article on vested benefits accounts, where we explain in detail the options available when changing employers and how to avoid leaving your pension assets “forgotten” in a previous fund.

How FBKConseils can help you with your pension fund?

Let’s be realistic: your employer decides which pension fund you’re enrolled in, meaning FBKConseils cannot directly influence this choice. However, where we step in is with knowledge—and knowledge is power.

Here’s how FBKConseils can help you optimize your 2nd pillar and maximize your financial benefits:

A free initial consultation

Despite our many in-depth articles on the 2nd pillar, you may still have lingering questions. FBKConseils offers a 15- to 30-minute consultation, free of charge, to answer your questions and clarify any complex points.

Personalized simulations, analyses, and explanations

The 2nd pillar is a powerful financial tool for:

• Optimizing taxes through optional buy-backs
• Enhancing your retirement by anticipating future financial needs
• Preparing life projects like purchasing property or starting a business

FBKConseils provides tailored analyses and simulations, empowering you to better plan the use of your 2nd pillar and make informed decisions about your financial future.