Occupational pensions: the conversion rate and your pension
How much is your second pillar pension? This depends on the pension fund’s conversion rate. We explain what this means.
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1. What is the conversion rate?
The conversion rate determines how much pension you’ll receive annually from the second pillar. The conversion rate in the mandatory part of the pension fund is regulated by the Occupational Pensions Act (OPA). It is currently 6.8%.
The example illustrates the effect of the conversion rate on the annual pension paid:
Important: the figure shows the pension payment for the mandatory part of your occupational pension.
2. Mandatory or optional?
In the second pillar, a distinction is made between the mandatory and optional component. Insurance is mandatory for annual salaries between 25,725 francs and 88,200 francs (coordinated salary, link not available in English). If you earn more than 88,200 francs per year, this amount is insured on an optional basis.
For example: you have an annual salary of 100,000 francs. 62,475 francs are mandatorily insured (88,200 francs minus 25,725 francs). 11,800 francs make up the optional part of your occupational pension (100,000 francs minus 88,200 francs).
The conversion rate for the optional part is determined by the pension fund itself. It may therefore differ depending on the pension fund. If you earn more than 88,200 francs, there are two variants of the conversion rate for pension payments:
Inclusive conversion rate
With the inclusive conversion rate, the same conversion rate is applied to the mandatory and optional component of the occupational pension. This inclusive conversion rate may be lower than the minimum conversion rate of 6.8%. This is only allowed if the annual retirement pension of the mandatory component is not below the statutory minimum pension. For example: you have saved 300,000 francs in the mandatory insurance component and 150,000 francs in the optional component. In that case, the minimum pension is 20,400 francs (300,000 × 6.8%). This means that an inclusive conversion rate of 5%, for example, would be permissible (450,000 × 5% = 22,500).
Split conversion rate
With a split conversion rate, different conversion rates apply to the mandatory and the optional part of the occupational pension. For the mandatory component, a conversion rate of 6.8% applies. For the optional part, the rate is determined by the respective pension fund.
3. Why is the conversion rate falling?
In recent decades, the conversion rate in Switzerland has been reduced several times. Since 2004, the statutory minimum conversion rate for the mandatory part of occupational pensions has been gradually reduced from 7.2% to 6.8%.
There are a number of reasons for lowering the conversion rate. These include:
Rising life expectancy: People are living longer and longer these days. This means that pension funds must pay out pensions over a longer period of time.
Demographic change: The proportion of older people in society is increasing. More and more pensioners are therefore dependent on pension funds to pay out their pensions.
Low interest rates: Low interest rates have resulted in pension funds earning less returns on their investments in recent years.
Pension funds want to secure their financial stability and pension commitments in the long term by cutting the conversion rate.
4. How can I make up my pension shortfall?
Will your pension be sufficient for life after retirement? Generally speaking, you’ll need 80% of your pre-retirement income to maintain your standard of living. If your first and second pillar pensions are not enough, you have what is called a pension shortfall.
If the conversion rate falls, the shortfall is likely to increase. You can help to close this gap by making regular deposits into the tax-privileged third pillar or by paying extra into the pension fund (“buy-in”).
This article was first published on 25.11.2019
