Occupational pension: conversion rate reduces pension income

1. What is the conversion rate?

The second pillar (occupational pension) is a capital-funded pension system. This means that individuals accumulate retirement savings in their own occupational pension fund. When they retire, pensioners benefit from the precise sum of money they have personally saved.

They can then choose whether to receive this money as a pension or take a lump-sum payout. If a lump sum is chosen, the occupational pension funds are obliged to pay out at least a quarter of the retirement savings. Many occupational pension regulations include the option of withdrawing a larger proportion or even the entire pension assets as a lump sum.

Any remaining retirement savings are converted to a pension using the conversion rate. At the moment, this rate is 6.8% for the compulsory part of the occupational pension. It is regulated by the Federal Act on Occupational Old Age, Survivors’ and Disability Pension Provision (BVG/LPP) and determines how annual pensions are calculated.

Example: based on a conversion rate of 6.8%, retirement savings of 100,000 francs will yield an annual pension of 6,800 francs.

2. How much is the conversion rate expected to fall?

In current market conditions, an annual pension comprising 6.8% of retirement savings is sufficient for an average life expectancy of 17 years after retirement.

However, the life expectancy of 65-year-old men is currently another 20 years, while 64-year-old women can expect to live for another 23. For this reason, many occupational pension funds are pushing for a reduction in the conversion rate. According to calculations by comparis.ch, a conversion rate of around 5% would be realistic.

A higher conversion rate must be financed

If the government maintains the conversion rate at a level that is higher than mathematically justified, someone will have to cover the cost of the excessive benefits paid out to pensioners. At present, this falls to the higher earners and professionally active:

1. Recently-retired higher earners receive less

The statutory conversion rate only applies to income between 22,050 and 88,200 francs (as of the beginning of 2023). The occupational pension must guarantee that the statutory conversion rate is used for incomes within this range.

Many institutions pay benefits beyond the pillar 2 obligation. For example, they waive the entry threshold or the coordination deduction. Such cases are referred to as non-compulsory provision or pillar 2b.

For this portion of the pension, each occupational pension fund is free to set its own conversion rate. Some pension funds have already lowered the rate to below 5% for the non-compulsory portion in order to continue financing the compulsory part.

2. Active contributors lose out on returns

Workers receive lower returns than their capital actually earns over the course of a year. In 2019, 7.2 billion francs were transferred from active contributors to pension beneficiaries in this way.

This is not in line with the pension system because occupational pension funds are organized according to the capital-funded system and not the pay-as-you-go system used for pillar 1 (OASI or the state pension). In pillar 1, the young people of today fund the older people of today.

3. How can I make up my pension shortfall?

Will my pension be sufficient for life after retirement? This is the question you need to ask yourself.

The pension income you receive from your first pillar (OASI) and second pillar (occupational) pensions usually only amounts to around 60% of your most recent income. Experience shows that pensioners need roughly 80% of their last salary to live.

However, the reduction of conversion rates means that pensions can no longer provide 60% of your income. The gap between pension benefits and actual financial requirements – often called the pension gap or shortfall – is therefore likely to widen.

You can help to close this gap by contributing regularly to the tax-efficient third pillar or paying extra into the second pillar.

Learn more about making up pension shortfalls.