Challenges lie ahead for pension system

Just how solid are the three pillars of the Swiss pension system? imagepoint

Once upheld as a model, the Swiss pension system has suffered from the ups and downs of the stock market – but managed to survive.

The so-called three-pillar system remains vulnerable though, with structural issues still to be resolved.

The Swiss love their insurance. When it comes to life coverage, they are ranked just behind the Japanese and the British.

This high degree of cover is included in a complex social insurance scheme that takes into account retirement, disability and death. This system is based on the three pillars.

The first pillar is represented by state pensions, either retirement or disability. It is compulsory for all Swiss.

The second is made up of occupational benefit plans, which complete state pensions and cover the same ground. It is work-related, made up of employee and employer contributions but only if the salary in question is above a certain level.

The third pillar is non-compulsory and can take the form of life insurance or funds set aside in special, non-taxable savings accounts.

Egalitarian

The first pillar is egalitarian. Compulsory for each Swiss resident over the age of 20, it is managed by the state.

Deductions are proportional to one’s salary, but benefits are the same for all and set at fairly low levels – SFr2,150 for a single person, SFr3,225 for a couple. By setting a ceiling on benefits, the state scheme can redistribute funds to lower income residents. It functions on the basis that workers finance the system.

The second pillar is designed to compensate the shortfall of the first. Beneficiaries should be able to claim a maximum of 60 per cent of their last annual salary, or a maximum of SFr77,400.

But unlike the state pension scheme, workers contribute to the capital of their own retirement fund, so in theory, the more you earn, the more benefits you will get.

Optional private schemes dominate the third pillar. They are spread among savings plans, as well as investment funds and insurance policies. In some cases, there are important associated tax privileges.

“The Swiss three-pillar system strikes a good balance between sharing the pension burden and encouraging personal saving,” said Meinrad Pittet, an actuary and pension scheme specialist.

Balance

The Swiss pension system is different to France’s social security system for example, which like many others only offers the same pension for all. It counters the negative effects of an ageing population, when there are fewer workers to pay for a larger number of retirees.

However, huge losses on the stock market between 2000 and 2002 meant less money flowing back into the schemes and forced a re-evaluation of the system.

Its high standing among international bodies such as the Organisation for Economic Cooperation and Development was, if not in tatters, definitely shaken. Switzerland’s ageing population also means that payouts from occupational benefit plans have to go further as people live longer.

Fears the pension scheme would collapse have since been allayed, but structural deficiencies remain. Various alternatives to remedy this are being considered, including a reduction of benefits paid out.

For Meinrad Pittet, this is not the best option, because it could encourage people to take out a lump sum at retirement from their occupational benefit scheme rather than monthly payments for the rest of their life.

“The risk is that people will use up these funds quickly and they could end up relying on social services [when the money runs out,]” he told swissinfo. “We should reconsider how to keep annuities attractive enough for retired people.”

swissinfo, Pierre Novello

In brief

Future homeowners in Switzerland can dip into their occupational benefit capital (second pillar) to top up their deposit (at least 20 per cent of the value of a property).

This has become a popular option, especially since the value of a home usually increases faster than the yield of a pension fund.

There is however always the risk that the property may be sold at a loss.

Key facts

There are 1,885,300 beneficiaries of the state pension scheme in Switzerland and abroad.
Annual payments are worth more SFr2.5 billion.
More than 300,000 people over the age of 80 were receiving benefits in 2005.
Government figures show that the state scheme’s capital will be eaten up by 2017 if no reforms are undertaken.
In 2004, 3.19 million workers were registered with one of the country’s 3,000 occupational benefit plans.