How do mandatory and non-mandatory pension fund contributions differ?
There are two types of pension fund contributions: mandatory and non-mandatory. How do they differ? And what should you bear in mind?
Occupational pensions are
in Switzerland. Anyone who earns an annual salary of more than CHF 21,150 must pay pension fund contributions. Up to annual earnings of CHF 84,600, salaries fall into the category of so-called mandatory contributions. All pension funds must offer identical, legally defined conditions for the mandatory contributions. Currently, an annual interest rate of at least 1.0 per cent must be applied to old-age benefits, and retirement savings must be converted at a conversion rate of 6.8 per cent.
However, many employers and collective employment agreements allow for pension fund contributions on salaries that exceed the income limit of CHF 84,600 – so-called non-mandatory contributions. They are not required by law and in some cases offer the policyholders better benefits, such as in the event of death or disability. The conditions for non-mandatory contributions, however, vary considerably as they depend on the respective pension fund and the selected pension plan.
Two different methods are used for the non-mandatory component: the universal and the split method. Under the universal method, the pension fund does not differentiate between the mandatory and the non-mandatory components; retirement savings and benefits are viewed as a whole. Under the split method, on the other hand, the mandatory and the non-mandatory components are treated differently. A different interest rate and different conversion rates apply for non-mandatory contributions. This can lead to significant variations in the benefits, which is why it is worth taking a closer look.
Different conversion rates
Tellco pkPRO offers its policyholders a universal conversion rate of 6.0 per cent.* This means that the mandatory and non-mandatory contributions are added together and converted at a conversion rate of 6.0 per cent. In other words, the regulations treat the mandatory and non-mandatory component of the retirement savings capital equally. To ensure that statutory benefits are provided, a shadow account is maintained in order to assess whether OPA requirements for benefits are being met. Other pension funds use the split method: they might convert the mandatory component at 6.8 per cent, as required by law, but the non-mandatory component at just 4.5 per cent, for example. Both approaches have their advantages: the universal conversion rate is particularly interesting for higher voluntary contributions, while the split method is of greater interest for lower ones.
* Tellco pkPRO checks compliance with the minimum OPA requirements in relation to the conversion rate of 6.8 per cent every time a policyholder retires.
Different risk benefits and interest rates
All converted benefits received by policyholders must be higher than the statutory minimum requirements, regardless of whether the split or the universal method is employed. The situation with interest rates is different, however: if the pension fund is in danger of becoming underfunded, i.e. of no longer being able to cover the retirement savings, the interest on the non-mandatory component will be lower than on the mandatory component. The principle, however, is that reduced or zero interest rates on all retirement savings are only permitted if the pension fund has a gap in coverage.
Different security strategies
Pension funds currently have various challenges to contend with: demographic trends, persistently low interest rates and the legal framework, which is in urgent need of reform, have led to a situation in which more and more money is being redistributed from active members to pension beneficiaries in order to provide the benefits prescribed by law. The non-mandatory component is the only area in which pension funds can attempt to stop the redistribution process. In the case of both universal solutions and split pension models in the non-mandatory component, pension funds can use the legal leeway available to them to improve security for their policyholders. The Board of Trustees of Tellco pkPRO made use of this leeway and – for the sake of security, sustainability and fairness – cut both the technical interest rate and conversion rate, thereby reducing the imbalance.
Did you know?
You don’t have to earn a high salary to pay non-mandatory contributions
The mandatory OPA component will affect persons with an annual salary between CHF 21,150 and CHF 84,600.
The insured salary is the OASI salary, taking into account the coordination deduction of CHF 24,675, and ranges from a minimum of CHF 3,525 to a maximum of CHF 59,925. Age-dependent contributions are levied on this insured salary. No savings contributions are paid up to the age of 24, and only the risks of death and disability are insured. From the age of 25 onwards, policyholders also save for their retirement. The amount of the savings contributions varies according to the age of the policyholders:
25–34 years: 7% of the insured salary are savings contributions
35–44 years: 10% of the insured salary are savings contributions
45–54 years: 15% of the insured salary are savings contributions
55–64/65 years: 18% of the insured salary are savings contributions
All savings contributions paid in excess of these mandatory contributions are non-mandatory.
Figures in the article: as of June 2018.