Switzerland's Pension System Explained: A Guide for Young Adults

Retirement might feel like a distant concern when you’re knee-deep in coursework and exams. But what if I told you that thinking about it now could make a big difference later? In this article, we’ll break down the three pillars of Switzerland’s pension system and discuss what young adults should consider for a secure retirement. Let’s dive in and make pensions less of a mystery and more of a proactive plan for the future.

The Pension System in Switzerland

The pension system in Switzerland, known as the three-pillar system, is a comprehensive structure for securing people’s financial needs in old age, in the event of disability, and in protecting their loved ones in the event of death. The system comprises three primary components: the state, occupational, and private pension provisions.

1st Pillar: The State Pension Provision

The first pillar of the pension system is the state pension provision. The primary objective of Pillar 1, known as the old-age, survivors’, and disability insurance (AHV/AVS), is to secure a person’s livelihood. The 1st pillar is mandatory and financed by a pay-as-you-go system in which the working population supports the pensions of the retired population.

2nd Pillar: Occupational Benefits Insurance

The second pillar is the occupational benefits insurance (BVG/LPP) and is mandatory for most employees above a certain income threshold and designed to maintain one’s accustomed standard of living during retirement. In contrast to the first pillar, the second pillar allows individuals to save for their own retirement, with the pension fund investing the capital. This funded structure allows the beneficiaries to profit from the contribution of capital market returns.

3rd Pillar: Private Pension Provision

Whereas both Pillar 1 and Pillar 2 are obligatory, Pillar 3 is entirely voluntary. This pillar offers individuals the opportunity to establish private pension provisions, enhancing their financial security in old age. The third pillar comprises two distinct types of pension provision: tied (Pillar 3a) and untied (Pillar 3b). Tied pension provision is tax-privileged but comes with withdrawal restrictions, while untied pension provision is not tax-privileged, but more flexible and has no withdrawal requirements.

The 4 Tips for a Good Retirement Provision

Planning for retirement can seem daunting, but with the right strategies, you can pave the way for a secure future. Here are four essential tips for young adults:

1. Watch out for contribution gaps

If you want to get the most out of your AHV/AVS pension later on, it’s important to avoid so-called contribution gaps. This may be the case during your studies or if you move abroad, for example, as you do not automatically pay contributions via your Swiss employer, but would have to pay contributions yourself during this time. To get the maximal AHV/AVS pension, you must pay your contribution every year from the year you turn 21 (the minimum annual contribution is currently at 503 CHF per year). If you have gaps in your contributions, you can still pay them within five years. After that, however, your AHV/AVS pension will be reduced by 2.3% for every missed year of contributions. If you’re not employed, you need to pay this yourself so you can get the most out of your pension later on. Contact your cantonal AHV/AVS office to find out if you have any contribution gaps.

2. Saving is good, investing is better

As a young adult, you have a very long investment horizon. As you won’t need your retirement savings for at least another 40 years, you can afford short-term fluctuations in the value of your assets. It is therefore wise to not only save money in an account but also to invest it in equities and thus to benefit from higher potential returns. The renowned economist and pension expert at UBS, Dr. Veronica Weisser, recommends that young people save 10 to 15% of their salary each month from their first salary and invest in a diversified portfolio of equities. Get yourself an investment account with a reliable bank partner, search for an efficient long-term and diversified equity investment, and start investing.

3. Keep your human capital in good shape

Once they start a family, many parents, especially women, take some time off to care for their kids full-time. However, this valuable time with their children can lead to pension gaps due to the lack of salary payments. Many parents don’t realize that if they’re not working for an extended period, their human capital will suffer and they’ll have a harder time re-entering the labour market when the kids are older. It makes financial sense to keep at least one foot in the labour market and not take a too-long full-time baby break. The present value of your human capital may very well be your biggest asset, so look after it wisely.

4. If you work part-time, save full-time

If you decide to work part-time, it is important to know what this means for your pension. In Switzerland, 6 out of 10 women and 2 out of 10 men work part-time. One downside to part-time work is that our pension system is set up for those who work full-time: To get the full AHV pension in your golden years, you’ll need to earn over CHF 88,200 a year. If you earn less because you work part-time, this can result in gaps in your pension. On top of that, there’s a big gap in the second pillar. If you earn 88,200 francs, about 70% of your salary is insured in the pension fund. But if you make 50,000, only half of it is insured. To avoid this gap, it’s a good idea to save extra money yourself, for example with a 3a account, which will also save you taxes. If you’re employed and have a pension fund, you can contribute up to CHF 7,056 a year and deduct it from your taxable income (as of 2023). So don’t forget: always save full-time, as you will retire sooner or later on a full-time basis.

Or as Dr. Veronica Weisser puts it: If you invest regularly in well-diversified equities from a young age and don’t take a break from work too long, you will be financially well prepared for the longest vacation of your life.