Part 1: A key pillar of Swiss pension provision
In 1985, the motorway tax sticker became compulsory and cost CHF 30 to drive on Swiss motorways. In a report, the Federal Council also concluded that it was necessary to undertake a comprehensive revision of the Federal Constitution and the Swiss people rejected the popular initiative "Extending paid leave".
Noteworthy developments since these historical milestones occured include the cost of the motorway tax sticker remaining unchanged since 1995, when it was increased to CHF 40, and the introduction of the electronic format last year. The year 2024 also marked the introduction of the 13th AVS pension in the Federal Constitution. As for the legal framework for paid leave, there have been no major changes since 1985, despite several initiatives attempting to improve it, all of which were rejected.
Above all, 1985 was marked by the entry into force of the Law on Occupational Retirement, Survivors' and Disability Pension Plans - better known as the BVG. This minimum framework law is the foundation of the second pillar and a major milestone in the Swiss social system. It should be remembered, however, that many employers had already set up pension schemes for their employees before this date. In 2025, we are delighted to celebrate this essential social insurance scheme’s 40th anniversary and the beginning of its fifth decade!
Let's also wish a happy birthday to all those turning 65 this year: they will be the first to have been able to contribute a full 40 years (from age 25 to 65) to the BVG – and will have invested up to c. CHF 1,500 in motorway tax stickers in the process!
Let us recall some key dates of the Swiss pension system:
Over the years, the BVG has evolved, giving rise to debate and adaptations. In the following paragraphs, we look at some of the key elements of this system, namely:
01
With the introduction of the BVG in 1985, occupational pension provision became compulsory for all employees whose income exceeds a certain threshold. This is a minimum annual amount that an employee must earn in order to be automatically affiliated to a pension fund, covering both retirement savings and the risks of death and disability.
Currently, this threshold is set at CHF 22,680 a year. As soon as an employee earns more than this amount, their employer is obliged to insure them under the BVG. On the other hand, this mechanism penalises certain categories of workers, in particular part-time workers or those with several jobs, none of which individually exceeds this threshold. They sometimes find themselves excluded from occupational pension provision, despite having a sufficient overall income.
This threshold has therefore been at the heart of many political debates. The draft reform of the BVG, rejected by the electorate on 22 September 2024, proposed lowering the threshold to CHF 20,412, with the aim of extending coverage to a greater number of workers, including part-time workers. It should be noted that from 1985 to 2004, the threshold for entry into the BVG corresponded to 100% of the maximum annual AVS pension. This was lowered to 75% in 2005, a significant improvement at the time... but that was already 20 years ago.
When an employer chooses to insure his employees without taking into account - totally or partially - the entry threshold, this is known as enveloping pension provision, which goes beyond the legal minimum provided for by the BVG. In practice, many employers insure all their employees (or use a threshold that is lower than the regulatory CHF 22,680). This threshold is therefore a key parameter in defining a pension plan.
While the entry threshold is still useful for avoiding excessive administrative complexity and disproportionate costs, the question is: is it now holding back the development of retirement provision?
02
Once you have joined a pension scheme, another key parameter comes into play: the coordination deduction. This fixed amount is subtracted from the annual salary to determine the insured salary, which is the basis for future contributions and benefits. Its purpose is to coordinate 2nd pillar benefits with those of the AVS (1st pillar), to avoid double coverage on the same income bracket.
The maximum coordinated salary is limited to CHF 90,720, or three times the maximum annual AVS/AHV pension. The coordination deduction makes sense for modest to average salaries. On the other hand, its uniform application is less justified for high earners, as the combined benefits from the 1st and 2nd pillars are often not enough to maintain the previous standard of living.
Like the entry threshold, the coordination deduction was adjusted in 2005. From 1985 to 2004, it corresponded to 100% of the maximum annual AVS pension; since then, it has been lowered to 87.5%, which has slightly increased the insured salary. However, as this amount remains fixed, it puts part-time employees at a disadvantage (which the 2024 reform was intended to correct, but failed to do so when it was rejected). In a labour market where part-time employment is becoming increasingly common, a deduction proportional to the rate of activity is becoming a serious consideration. This is a frequent feature of so-called enveloping plans.
While coordination remains necessary for its integration with the AVS, in practice it is often complicated for insured members to understand, generates additional administration and limits pension benefits for insured members: Should it be completely eliminated?
03
Under the BVG, retirement provision is built up between the ages of 25 and 65. There are four age groups of 10 years each, with increasing retirement credits. The table below shows how these age groups have evolved, while noting that the age groups for women have only been unified with those for men since 2005.
| Men since 1985 (age) | Women from 1985 to 2004 (age) | Women from 2005 (age) | Retirement credits (1985 - 1986) | Retirement credits (from 1987) |
|---|---|---|---|---|
| 25 - 34 | 25 - 31 | 25 - 34 | 7% | 7% |
| 35 - 44 | 32 - 41 | 35 - 44 | 10% | 10% |
| 45 - 45 | 42 - 51 | 45 - 45 | 11% | 15% |
| 55 - 65 | 52 - 62 | 55 - 65 | 13% | 18% |
It should be noted that in the Federal Council’s 1975 communication to the Federal Assembly, which accompanied the draft BVG law, an entry age of 20 was already considred. Paying contributions from the age of 20 allows greater flexibility and improves the total potential retirement benefits. The same applies to the possibility of continuing to save for retirement beyond the age of 65 in certain cases.
The issue of pension credits increasing with age remains particularly interesting to analyse. As a reminder, the financing of retirement benefits under the BVG is currently based on the defined contribution system: Firstly the contributions are determined, and benefits are derived consequently. Prior to 1985, however, many pension funds were financed on a defined-benefit basis, a system in which benefits are fixed in advance and financing must then be adjusted accordingly. Against this backdrop, the draft BVG implicitly assumed that there should be an equivalence of outcome between these two systems, provided that demographic and economic trends remained normal. Hence, an increasing age scale was introduced to allow a smoother transition between the two systems.
Today, this system could also be reviewed. The last reform proposal envisaged a simpler approach to old-age credits, with a scale of contributions reduced to two levels instead of four. The aim of this simplification would be to limit the effect of age on the level of contributions, while maintaining a benefit target that guarantees an adequate retirement. While the current system has proved its worth, such a simplification would undoubtedly make it possible to achieve the same objectives, while taking account of an environment where the retirement age is no longer necessarily 65. For so-called enveloping plans, flexibility exists for them to revise these scales, even if the transition may be difficult to execute between the different generations insured in the pension fund.
04
The principle of the portability of retirement savings (vested benefits) guarantees that the accumulated retirement savings follows each employee throughout his or her working life. However, the Federal Law on Vesting, which introduced full vesting, did not come into force until 1 January 1995. Before that, each pension fund set its own rules. When employees changed jobs, only the retirement savings built up through their own contributions were automatically transferred. The part financed by the employer was often paid only partially, or not at all, depending on seniority. It was therefore not uncommon for a change of employer to result in a significant loss of retirement savings.
Since 1995, the situation has changed: legal provisions now guarantee the continuity of employees' rights to their retirement savings, which means that there are no losses when they change employer. But even today, it's up to everyone to actively monitor their retirement savings to preserve their value.
This mechanism is a major advantage over other international pension systems, where insured members can easily "forget" or lose rights acquired over the course of their career. This pillar of stability and transparency must be preserved.
The Swiss pension system, based on the three-pillar principle, is a solid fifty years old. Over the past forty years, the BVG has undergone a number of positive changes, such as the lowering of the entry threshold and the reduction in the coordination deduction, which has improved cover for women and part-time workers in particular. The introduction of full vesting in 1995 was also a major step forward, guaranteeing the continuity of acquired rights.
These improvements are the fruit of often lengthy and complex political debates. That's why we should pay tribute to those companies that had already set up an occupational pension scheme for their employees long before 1985. Thanks to the BVG, any employee born in 1960 or later will be able to contribute to the occupational pension scheme for 40 years - provided they have worked in Switzerland under conditions subject to the law.
Thanks to the BVG, any employee born in 1960 or later will be able to contribute to the occupational pension scheme for 40 years - provided they have worked in Switzerland under conditions subject to the law.
So, happy birthday to the BVG! It doesn't matter if you're "officially" 40, you're still young and the best is yet to come: the most important thing is to remind every employer of the importance of providing good cover for retirement. Let's continue to work together for a fairer pension provision that ensures everyone can maintain their standard of living in retirement.
In our next article on the subject, we will cover the other essential elements of the BVG and lay the foundations for the future of pension provision.
