How does your LPP occupational pension scheme work, and what is the purpose of a pension fund?
Secure your future with the 2nd pillar.
The 2nd pillar is an important way of providing for your retirement. With rising incomes, more than the maximum Old Age and Survivors' Insurance (OASI) pension is needed to guarantee your current standard of living after retirement. It applies to all insured persons who receive an annual salary of over CHF 22,050 (as of 2023) from an employer.
However, demographic trends mean that pensions must be paid for longer and longer as life expectancy increases. Consequently, the amount of the future pension indicated on the LPP/BVG certificate is not guaranteed: considering the legal provisions currently in force and assumptions about future returns on capital, retirement assets are extrapolated and constantly adjusted to new market conditions. When you receive this pension, it will be considered an acquired right.
How does it work in practice?
The second pillar is a personal savings system, unlike the AVS. The contributions you and your employer paid are allocated to you as if you had an account at the bank. These contributions will depend on your insured salary, determined by your gross salary (AVS salary) less a coordination deduction. This deduction is applied by reference to the AVS pension, which is supposed to cover this first amount so that you are not insured for the same amount twice, and it amounts to CHF 25,725 (some employers may decide to reduce it). Once the insured salary has been defined, contribution rates are applied according to age categories. At least 50% of the contributions are borne by the employer (sometimes more), and the remaining percentage is deducted from your gross salary.
Your assets are then managed by a pension fund, also known as a provident foundation, which manages policyholders' assets in the best possible way. These funds aim to generate a return by complying with strict investment standards (OPP2). The minimum return to be distributed is defined by the Confederation (currently 1%), but the funds can pay out more if the markets and strategy allow.
The conversion rate is the key element.
The conversion rate is the percentage applied to your capital to determine your annual pension. This rate will tend to fall in the future, resulting in smaller pensions. The minimum rate is set by the Confederation (currently 6.8%). This guaranteed rate applies only to LPP/BVG minimum assets. In other words, pension funds can apply any rate to assets over the minimum LPP guaranteed by the state.
Pension funds as a source of income
The rate of return on your pension fund assets depends on your economic situation and expected capital income. For 2023, a minimum interest rate of 1.0% will apply. The minimum interest rate is expected to remain unchanged in the coming years. The lower the rate, the less the BVG assets of insured persons increase, which implies a reduction in the level of benefits on retirement.
A pension fund is an important means of guaranteeing retirement income. However, as life expectancy rises, it is important to keep abreast of current legal provisions and assumptions about future returns on capital.