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The second pillar
The primary objective of the Swiss pension system is to offer its beneficiaries financial security throughout their adult life.
Many people believe that the pension system is only there to guarantee income at retirement. This is indeed one of its central objectives, but by no means its only one.
Within the Swiss pension system each pillar contributes cumulatively to our financial security.
How does the second pillar contribute to our financial security?
The second pillar contributes to our financial security in six ways:
How does it work ?
The second pillar is the pillar controlled by the employer, so it is known as the “occupational pension scheme”, its French acronym is LPP. It provides a pension benefit, death and loss of income benefits and complete accident insurance (LAA). The LPP and LAA are compulsory for all employees aged over 17 who receive an annual salary from the same employer between CHF 21’330.- (minimum obligatory LPP plan income) and 85’320.- (maximum obligatory LPP plan income).
Unlike the first pillar, the benefits of the second pillar are calculated on an individual capitalization or funded pension plan model, and not on a “pay-as-you-go” model. This means that a person with a high income will contribute more, and therefore benefit from a larger pension than a person with a lower income. The contribution period for the savings module of the second pillar lasts a maximum of 40 years, from 25 to 65 (64 for women).
The total contribution over this period represents an average of 12.5% of the individuals gross earnings, less the coordination deduction, referred to as the “déduction de coordination” in French. An annual minimum State controlled compound interest rate is applied to the funds on the pension plan. This interest rate can be increased by the institution that manages the pension fund company employees are affiliated to.
The coordination deduction
It is important to note that the compulsory LPP contribution is not calculated on the basis of the gross salary, but on the basis of an amount which takes into consideration the amount that has already been contributed to for the first pillar. Why?
Because we already contribute to our pension plan via our first pillar. To avoid contributing twice on the same revenue the system deducts a simplified amount of CHF 24’885.- (7/8 of the maximum annual AVS pension of 28’440.-) from our gross salary to define what is known as our “coordinated salary” or “salaire coordonné” in French.
Let's take an example :
How is the coordinated salary calculated for people who have a salary between 21’330.- (minimum obligatory LPP plan income) and 24’885.-?
The question is relevant because the person who earns 24’885.- must contribute to a pillar 2 pension fund, but the coordination deduction reduces their coordinated salary to CHF 0.- (salary 24’885.- less the coordination deduction of 24’885.-). How does one contribute on the amount 0?
Pension funds apply a principle which rules that the minimum coordinated salary is CHF 3’555.- (the coordination deduction of 24’885 less the minimum obligatory LPP plan income of 21’330).
So for those that earn between CHF 21’330.- and 28’440 (24’885 + 3’555) their coordinated salary is CHF 3’555.-
Depending on age, this translates into an annual pillar 2 pension contribution of :
How is the second pillar pension contribution calculated?
The factors that determine the amount of our pillar 2 contribution include:
It is important to note that the second pillar contributions are divided into two distinct modules: risk factor contributions and savings contributions.
Second pillar risk factor contributions are due by those that are employed from January 1 following their 17th birthday. They can vary between 2.5 and 4% of the coordinated salary depending on the rules of the pension fund and the claims history of the company. They cover death and loss of income benefits.
Second pillar savings contributions are due by those that are employed from January 1 following their 24th birthday. They vary between 7 and 18% of the coordinated salary depending on the age of the beneficiary. They are used to fund the pension plan. The LPP law obliges the employer to finance at least 50% of the savings contribution. The contribution increases every 10 years:
These regular increases in second pillar savings contributions explain why a person’s net salary can decrease at certain ages.
Take the example of a person who has just turned 25, with a coordinated salary of CHF 55’115.- per year:
In this example the employee’s net salary will decrease by CHF 161.- (230 – 69) when they turn 25.
During our working life we will accumulate a significant capital in the form of a lump sum thanks to our second pillar. This lump sum is used to calculate our pillar 2 pension annuity.
25 to 34 (7%)
Yearly contribution :
4’231 (60’435*7%)
Contribution over 10 years :
42’305 (10*4’230.50)
Compound interest (min. legal rate of 1%) over 10 years :
2’398
Total contribution for this period :
44’703
35 to 44 (10%)
Yearly contribution :
6’044 (60’435*10%)
Contribution over 10 years :
60’435 (10*6’043.50)
Compound interest (min. legal rate of 1%) over 10 years :
8’596
Total contribution for this period :
69’031
45 to 54 (15%)
Yearly contribution :
9’065 (60’435*15%)
Contribution over 10 years :
90’653 (10*9’065.30)
Compound interest (min. legal rate of 1%) over 10 years :
18’294
Total contribution for this period :
108’947
55 to 65 (18%)
Yearly contribution
10’878 (60’435*18%)
Contribution over 11 years :
119’661 (10*10’878.30)
Compound interest (min. legal rate of 1%) over 11 years :
35’666
Total contribution for this period:
155’327
TOTAL PILLAR 2 CAPITAL:
CHF 378’008.-
The second pillar compound interest rate
It is important to be aware of and keep an eye on the compound interest rate that your pension fund applies to your pillar two contributions. This rate plays a huge role in the amount of your pillar 2 capital or lump sum at the end of your contribution period, therefore on your retirement annuity.
To protect the people the Federal Government sets a minimum interest rate for the obligatory pillar 2 contributions that must be respected by all pension funds. This rate has been 1% since 2017. Despite this, each pension fund can apply a higher rate depending on its performance and the management of the institution’s assets. An interest rate above the minimum rate is a sign of a healthy and well managed pension fund.
To better understand the impact of a higher compound interest rate, let’s use the below example based on a coordinated salary of CHF 60’435.-
Keep an eye on your compound interest rate, an increase in 1% will increase your total pillar 2 capital by more than 20%.
How do we get from our pillar two capital or lump sum at the end of our plan, to our monthly second pillar pension or annuity? Only two elements are required for this calculation:
The conversion rate is set by the Federal government and cannot be changed without the approbation of the people. Since 2014 it is 6.8% for the obligatory LPP plan. To keep the LPP strong and sustainable, the government’s objective, which was approved by the National Council and the Cantons, is to gradually reduce this rate to 6%.
The long-term sustainable rate is considered to be closer to 5% due to longer life expectancy. It boils down to the longer a person lives, the more he or she costs. The people refused this reform in 2019 when they voted no to the “Prévoyance 2020 ” bill.
The formula for the calculation is simple:
Pillar 2 annuity = lump sum x conversion rate
The second pillar annuity for this person will be CHF 25’705.-, which will be paid monthly.
To better understand your rights and second pillar benefits, our specialists remain available to analyze your pension certificate and the terms of your pension plan. We will also analyze your rights and benefits in the event of loss of income and the passing-away of a spouse.
* The assessment is free and gives you an overview of your first, second and third pillar benefits in the event of retirement and loss of income in the event of illness or accident. It also gives you the amounts that are available if you wish to become a homeowner, start your own business or if you are going to leave Switzerland.