The three pillars
Switzerland's pension system is based on the so-called three-pillar principle, which has been established in the Federal Constitution since 1972. The first pillar stands for state pension provision, the second for occupational pension provision and the third for private pension provision. Each of the three pillars complements the others. Together, they secure financial stability after retirement and cover the following risks: old age, survivorship and disability.
The 1st pillar corresponds to the state pension concept, i.e. the AHV, and is intended to ensure basic financial needs in old age. It also insures against disability and provides for survivors in the event of death. It is financed on a pay-as-you-go basis, in which the contributions paid in are used directly to finance current retirement benefits, so that hardly any investment returns can be earned on them. The AHV contributions are paid in equal parts by the employee and the employer.
Employees and employers are also obliged to contribute to the 2nd pillar. The aim of this occupational provision is to be able to continue the usual way of life after retirement. According to the Federal Law on Occupational Retirement, Survivors' and Disability Pension Plans (BVG) of 1985, it works according to the defined contribution method. This means that all insured persons are required to save capital during their employment in order to secure their pension goals for old age. Employees aged 25 and over with an annual earned income of at least CHF 21ʼ330.- as well as employers must pay at least the same amount into the retirement plan.
These contributions are channeled into retirement assets, which are managed by the pension funds. Currently, Swiss pension funds manage assets totaling around 1ʼ080 billion Swiss francs, which they must invest as profitably as possible on the capital markets in accordance with the investment regulations pursuant to BVV2, which came into force in 2015. These investments, which tend to be of a long-term nature, generate additional income for employees and thus have a positive impact on the pension level. As the chart below shows, the returns on investments contribute a considerable share to the subsequent pension from the 2nd pillar - calculated over the last five years, it was more than 40%. This is why the term "3rd contributor" in the 2nd pillar is often referred to.
Pillar 3 refers to individual pension provision, which is based on voluntariness and is intended to encourage additional pension savings and insurance. While pillar 3a provides incentives to save by means of tax relief, pillar 3b includes savings and insurance measures without special tax privileges.