Occupational pension schemes in Switzerland

Occupational pension schemes

What are the main types of private pensions and retirement plans that are provided to a broad base of employees?

In the questions raised hereafter, we assume that ‘private pensions and retirement plans’ refer to the occupational pension system (the second pillar).

Two main types of occupational pension plans are available in Switzerland. Defined contributions plans offer benefits in connection with the amount of the contributions: the more the insured contribute, the higher the benefits are. In defined benefit plans, the benefits amount to a percentage of the insured’s last annual salary at retirement age (or a percentage of the average of their last annual salaries). Nowadays, defined benefit plans have become rare in practice and mainly concern public entities.

The second pillar is based on capitalisation. The retirement pensions are financed by retirement credits corresponding to a percentage of the ‘coordinated salary’, the rates of which incrementally increase when employees grow older (7 per cent from ages 25 to 34; 10 per cent from ages 35 to 44; 15 per cent from ages 45 to 54; and 18 per cent from ages 55 to 64/65 (retirement age)), plus the accrued interest. At the time of retirement, the constituted capital is converted into an annual pension on the basis of a conversion rate (unless a lump-sum capital is paid).

Statutory minimum plans require covering the ‘coordinated salary’ that corresponds to the part of the salary between 24,885 Swiss francs and 85,320 Swiss francs. In 2019, the minimum annual interest is 1 per cent and the minimum conversion rate is 6.8 per cent.

In addition to statutory minimum plans, we may find supplementary plans covering an additional part of the salary, beyond the ‘coordinated salary’, and enveloping plans combining statutory plans with supplementary plans. In supplementary plans, the pension funds are not bound by the minimum retirement credits and conversion rates. In enveloping plans, pensions funds may apply different retirement credits and conversion rates to the full salary (including the ‘coordinated salary’), as long as the total benefits provided to the insured are not less than what is provided under the statutory minimum plans.

Pension plans are mainly provided by foundations, which are legally separate from the employers. There are individual pension funds that run the plans for one employer’s employees; ‘shared’ pension funds that run the plans of multiple employees, usually from the same group; and ‘collective’ pension funds set up by insurers, and joined by multiple independent employers (segregated funds are put in place for each employer within the ‘collective’ pension funds).

What restrictions or prohibitions limit an employer’s ability to exclude certain employees from participation in broad-based retirement plans?

Employees meeting the minimum statutory criteria (see question 1) are subject to compulsory occupational pension payment. They are entitled at least to the coverage offered by statutory minimum plans and employers cannot exclude them from participating in such plans. However, participation in supplementary plans can be limited to certain categories of employees, provided that the limitation is based on transparent, objective and non-discriminatory criteria (seniority, level of salary, position, etc).

Can plans require employees to work for a specified period to participate in the plan or become vested in benefits they have accrued?

As a general rule, employees hired for more than three months, or who have actually worked for more than three months, are entitled to participate in statutory minimum plans (in case of successive contracts, employees are also entitled to participate in statutory minimum plans if the total duration of the contracts exceeds three months and the gaps between two contracts do not last more than three months). Supplementary plans can require employees to work for a certain period of time, even though this is not common in practice.

Statutory minimum and supplementary plans cannot require employees to work for a specified period of time before becoming vested in benefits they have accrued.

What are the considerations regarding employees working permanently and temporarily overseas? Are they eligible to join or remain in a plan regulated in your jurisdiction?

In principle, employees working permanently outside Switzerland, in a single country, cannot be affiliated to a Swiss occupational benefits institution.

Employees working permanently outside Switzerland, in two or more countries, may be affiliated to a Swiss occupational benefits institution pursuant to EU/EFTA agreements or bilateral social security agreements, depending on all the circumstances of the case. The nationality and domicile of the employees, their place of work and number of employers may have a significant impact on the state of affiliation.

EU/EFTA and Swiss employees temporarily seconded to EU/EFTA member states by companies based in Switzerland may remain affiliated to a Swiss occupational benefits institution for at least 24 months (a longer period of time, which cannot exceed six years, can be granted upon request), provided that they have been affiliated to the Swiss social security system for at least one month before the secondment.

Depending on all the circumstances of the case and the terms of the social security agreements entered into between Switzerland and the destination country (if any), employees seconded by companies based in Switzerland to non-EU/EFTA member states may, in principle, remain affiliated to a Swiss occupational benefits institution for a limited period of time, under specific conditions.

Do employer and employees share in the financing of the benefits and are the benefits funded in a trust or other secure vehicle?

Employers and employees share in the financing of the second pillar. The aggregate employer contributions must be at least equal to the aggregate contributions levied from employees (for both statutory and supplementary pension plans). The employers deduct the contributions of the employees from their salary and transfer both employer’s and employees’ contributions to the occupational benefits institutions.

Occupational benefits institutions are legal entities separate from the employers. Their board defines the investment strategy in a specific regulation. The investment strategy depends on the financial and structural risk capacity of the occupational benefits institutions and on applicable laws and regulation. Statutory requirements limit the type of investments available (eg, cash amounts, stocks, bonds, property, alternative investments, etc) and the respective part of each of those investments.

What rules apply to the level at which benefits are funded and what is the process for an employer to determine how much to fund a defined benefit pension plan annually?

Occupational benefits institutions have to ensure that their assets cover their liabilities (current and forecasted benefits - ie, pensions and vested retirement benefits). This is the case if the coverage ratio is at a level of at least 100 per cent. When the assets exceed the liabilities (coverage ratio of more than 100 per cent), occupational benefits institutions must create a reserve in accordance with their regulations. In the event of under-coverage (coverage ratio of less than 100 per cent), the occupational benefits institutions need to take consolidation measures.

The second pillar is mainly financed by the employees’ and employers’ contributions. In defined contributions plans, each occupational benefits institution sets the amount of the contributions in its regulations. Those contributions may therefore vary from one occupational benefits institution to another. In principle, they incrementally increase when employees grow older (see question 8).

With regard to defined benefit plans, occupational benefits institutions set a benefits target for the level of employees’ retirement pensions based on a certain percentage (often around 60 per cent) of employees’ last annual salary at the retirement age (or of the average of their last annual salaries). In this context, occupational benefits institutions must estimate in particular current and future investment returns as well as the future evolution of the affiliated employees’ payroll in order to determine the retirement credits needed to reach the benefits target.

Occupational benefits institutions have to rely on Swiss generally accepted accounting principles (GAAP) RPC 26/Swiss GAAP FER 26 accounting standards (version date 1 January 2014), and not International Financial Reporting Standards or US GAAP, to establish financial statements.

What are customary levels of benefits provided to employees participating in private plans?

In practice, the level of retirement pensions varies depending on employees’ situation throughout their working lives. In particular, the type of employer (public or private), branch of activity, position within the company and percentage of work have an impact on the level of benefits. Indeed, benefits notably depend on the accrued retirement savings capital, the accrued interests, the purchases of additional contribution years (if any) and the conversion rate (unless the insured person chooses a lump-sum capital).

Employees with high incomes that are not (fully) covered by supplementary plans cannot usually maintain their standard of living without a third pillar coverage.

Are there statutory provisions for the increase of pensions in payment and the revaluation of deferred pensions?

There are no statutory provisions providing for an automatic increase of pensions in the payment or revaluation of deferred pensions. However, occupational benefits institutions may allow in their regulations to defer the pension’s payment for up to five years, as long as the insured continues their activity. Depending on the pension regulations, deferred pensions include an automatic increase or offer the possibility for the occupational benefits institution’s board to decide on one-off increases.

What pre-retirement death benefits are customarily provided to employees’ beneficiaries and are there any mandatory rules with respect to death benefits?

In the event of pre-retirement death, widows or widowers of the insured persons who have reached the age of 45 and were married to the deceased for at least five years or who have one or several children, are entitled to at least 60 per cent of the full invalidity pension that the deceased would have received. If they meet none of these conditions, they are entitled to a lump-sum benefit equal to three annual pensions. Under specific conditions, divorced spouses may be treated as widows or widowers.

Children of the deceased (aged up to 18, or 25 if they are disabled or in training) are entitled to at least 20 per cent of their parent’s potential full invalidity pension. Supplementary plans may increase those minimums.

The occupational benefits institutions’ regulations may appoint other beneficiaries of survivors’ benefits (eg, partners, parents, siblings, etc).

When can employees retire and receive their full plan benefits? How does early retirement affect benefit calculations?

The statutory retirement age for the second pillar is currently 64 for women and 65 for men. A reform is, however, being contemplated (see question 43).

There is no statutory right to early retirement in the second pillar. However, occupational benefits institutions may allow early retirement as of 58 years. Early retirement has an impact on the amount of the pensions, in particular since it reduces the retirement credits paid by the employer and the employees at a time where they are the highest (18 per cent from 55; see question 8) and the conversion rate by a small percentage for each ‘non-worked’ year.

Purchases for early retirement enable the insured to fill in (at least partially) a benefit gap resulting from early retirement. They are, however, not always possible and subject to specific conditions. As the case may be, purchases may be tax deductible, in a proportion set by the competent tax authorities.

Are plans permitted to allow distributions or loans of all or some of the plan benefits to members that are still employed?

Direct cash distributions and loans are not permitted. Nevertheless, in accordance with the applicable regulations, indirect distributions may be possible (eg, increase of the level of pensions, increase of the interest, exemption of the payment of retirement credits for a specified period of time).

An amount of up to the vested termination benefits may be withdrawn before retirement in order to finance ownership of a residential property for the insured’s own use (on certain conditions a pledge is also possible). However, restrictions exist for the insured over 50 years of age and any withdrawal automatically reduces the pension benefits.

Notwithstanding the above, the insured may request a cash payment of their vested termination benefits if they permanently leave Switzerland for a non-EU/EFTA member state, if they become self-employed and are no longer subject to mandatory insurance, or the termination payment is less than their annual contributions. Employees leaving Switzerland for an EU/EFTA member state, who remain subject to mandatory retirement, death and disability insurance under the laws of the member state, can only ask for cash payments of the vested termination benefits of supplementary plans. Their vested termination benefits under statutory minimum plans must be transferred to a blocked vested benefits account.

Is the sufficiency of retirement benefits affected greatly if employees change employer while they are accruing benefits?

In the event of a change of employer, the insured person is entitled to a termination payment (in principle, at least to the buy-in transferred at the time of joining with interest, plus contributions made during the contribution period, increased by 4 per cent per year over 20 years, up to a maximum of 100 per cent), which is transferred to the occupational benefits institution of the new employer. However, retirement benefits may dramatically change from one employer to another if the pension plan to which the new employer is affiliated provides for significantly lower benefits.

In the event of a change of employer in the context of a significant reduction of the number of employees or a restructuring, a partial liquidation could affect the vested termination benefits. If the coverage ratio is lower than 100 per cent, the occupational benefits institution may deduct underfunding proportionally from the vested termination benefits of leaving employees, provided that such a deduction does not reduce the retirement savings capital guaranteed under the statutory minimum regime. In case free assets are available, they could be distributed in addition to the vested termination benefits of the leaving employees.

In what circumstances may members transfer their benefits to another pension scheme?

Employees cannot voluntarily transfer their vested termination benefits to another occupational benefits institution. However, a transfer to another pension plan will be automatic if the employees become eligible for another enveloping plan offered by the employer. When the employees change employer, their vested termination benefits are also automatically transferred to their new employer’s occupational benefits institution (see question 19). If the vested termination benefits cannot be transferred to a new employer’s occupational benefits institution (eg, end of paid employment, unemployment), they need to be transferred to a blocked personal vested benefits account.

Who is responsible for the investment of plan funds and the sufficiency of investment returns?

Occupational benefits institutions’ board members are responsible for the investment strategy and the sufficiency of investment returns.

Statutory requirements limit the types of investments available (see question 12). If the investment returns are not sufficient, the occupational benefits institution’s board needs to take consolidation measures. If necessary, the competent supervisory authority can also take action.

Can plan benefits be enhanced for certain groups of employees in connection with a voluntary or involuntary reduction in workforce programme?

Pension plans usually allow employers to make extra payments to employees in the event of a reduction of the workforce, either by making direct payment to their retirement savings capital or by paying a ‘bridge pension’ until retirement (early retirement age or statutory retirement age).

Are non-broad-based (eg, executive-only) plans permitted and what types of benefits do they typically provide?

Non-broad based plans are permitted, provided that they are based on transparent, objective and non-discriminatory criteria (seniority, level of salary, position, etc). In practice, non-broad based plans are very often supplementary plans that go in particular, beyond the ‘coordinated salary’ and facilitate withdrawal of a lump-sum capital.

How do the legal requirements for non-broad-based plans differ from the requirements that apply to broad-based plans?

As a general rule, there are no fundamental differences between the legal requirements applicable to broad-based plans and those applicable to non-broad based plans. However, non-broad based plans may differ from the legal requirements for statutory minimum plans, in particular in relation to saving contributions and conversion rates (see question 8).

How do retirement benefits provided to employees in a trade union differ from those provided to non-unionised employees?

Retirement benefits for unionised employees do not differ from benefits for non-unionised employees. Such a distinction would usually be considered as discriminatory.

How do the legal requirements for trade-union-sponsored arrangements differ from the requirements that apply to other broad-based arrangements?

Employers are solely responsible for affiliating their employees to occupational benefits institutions. Therefore, it is not the practice of trade unions to create or sponsor occupational benefits institutions. Even if it were the case, such occupational benefits institution would be subject to the same legal requirements as those applicable to ‘standard’ occupational benefits institutions.