A pension fund is form of retirement fund – an investment fund which provides its shareholders with a regular income (a pension) after they reach a certain age.
In Switzerland, the term pension fund is used more specifically to refer to occupational pension funds. These are legal entities which manage and invest pillar 2 occupational pension savings on behalf of employers and employees.
All employees in Switzerland who earn a salary in excess of a government-dictated threshold are required to participate in a pension fund of their employer’s choice. Contributions are compulsory, and are deducted directly from employee salaries by employers at a government-mandated rate. Employers are required to match employee contributions. Additional contributions can be made on a voluntary basis under some circumstances. Contributions to 2a pension funds are tax-preferred.
Unlike other retirement funds (pillar 3 retirement funds, for example), occupational pension funds do not issue shares which can be purchased in quantities of the investor’s choice. There are clear legal regulations which define how much can be contributed to pillar 2 pension funds and the circumstances under which assets can be withdrawn.
While investments in unregulated retirement funds earn capital gains based on the fund performance, pillar 2 occupational pension funds pay a fixed rate of interest on invested capital. This interest accrues until assets are withdrawn.
Individuals who remain employed until they reach retirement age are entitled to receive an ongoing, annual pension from their last employer’s pension fund for the rest of their life. Some occupational pension funds also give their subscribers the option of withdrawing all or part of their assets as a lump sum upon reaching retirement age.
If individuals who have been participating in a pillar 2 occupational pension fund become self-employed, unemployed, or begin to earn a salary below the threshold required to participate in an occupational pension fund, they must entrust their assets to a vested benefits foundation by having their occupational pension fund transfer the assets to a vested benefits account, a vested benefits retirement fund or a vested benefits life insurance policy.
A large number of pillar 2 occupational pension funds operate in Switzerland and while Swiss law regulates key factors such as the minimum contribution rate, the minimum interest rate and the minimum conversion rate, there are significant differences between individual pension funds. For example, pension funds are free to pay interest at rates above the government-dictated minimum rate. They also have leeway to decide what happens to subscriber’s pension fund assets after they die.
Some occupational pension funds provide survivors insurance, disability insurance and other insurances in addition to the basic pension fund service, and these insurances may command premiums which are added to required contributions.
The financial strength of individual pension funds also differs broadly, with some pension funds having far better financial strength ratings than others. Rules governing voluntary contributions in addition to compulsory contributions and rules governing lump-sum withdrawals and early withdrawals (to purchase a home or relocate outside of Switzerland and European Union member countries) can also vary between pension funds.
Swiss pillar 2a occupational pension funds can be divided into 4 main categories based on the way in which they operate. These are:
- Autonomous pension fund. The pension fund itself is fully responsible to ensure that contributions are made and that pensions and insurance benefits are paid out. Because risks like disability and death are not insured by a third-party life insurance company, this type of pension fund bears a fair amount of risk.
- Semi-autonomous pension fund. A semi-autonomous pension fund manages pension assets and the paying out of pensions, but uses a third-party insurance company to provide its survivors insurance and disability insurance benefits. Because the pension fund does not have to cover unforeseeable hazards, it bears less risk than a fully-autonomous pension fund.
- Fully-insured pension fund. Fully-insured pension funds insure their subscribers’ pensions and insure against the risk of death or disability using insurance or reinsurance coverage provided by an insurance company. Some fully-insured pillar 2 occupational pension funds operate independently of insurance companies and some operate as subsidiaries of insurance companies. This type of pension fund bears little risk because benefits are guaranteed by an insurance company which spreads risk across many different sectors.
Autonomous and semi-autonomous pension funds are sometimes referred to as pools or collectives because benefits are drawn from a pool of collective assets paid in by subscribers. The list of Swiss pension funds published by moneyland.ch specifies whether each pension fund listed is a pool/collective or a fully-insured pension fund, making it easy for you to find the category of the pension fund which you are subscribed to.
In addition to private occupational pension funds, a government-mandated foundation – the Substitute Occupational Benefit Institution – manages assets and pensions on behalf of individuals who fail to transfer their pension fund assets after leaving an employer.
It is worth noting that employees are entitled to recommend a pension fund of their choice to their employers. However, the final decision of which pillar 2 pension fund to work with rests with the employer.