Switzerland: Parliament again approves occupational pension reform

Employer Action Code: Monitor

In March 2023, parliament approved reforms to the Swiss second-pillar BVG/LPP pension system to improve its long-term financial balance while maintaining the general benefit level. Benefits from the Swiss first-pillar social security system (AHV/AVS) are complemented by mandatory minimum employer-provided pensions based on a cash balance account design (BVG/LPP system), payable on termination, retirement, death or long-term disability. Many companies offer plans exceeding the minimum BVG/LPP benefits, a separate top-up arrangement or both. The recently approved reforms to the mandatory BVG/LPP system (BVG/LPP 21) include reducing the pension amounts generated by the cash balance account, changing the earnings threshold for participation and the offset used to determine insured earnings so that coverage is enhanced for workers with lower earnings (e.g., part-time and multiple employment workers), providing an additional pension amount for a certain cohort of future retirees and revising benefit accrual rates. The package of measures is controversial, and a public referendum on them in 2024 is almost certain. WTW Switzerland has prepared an overview of the reforms: BVG 21 reform.

Key details

• The minimum conversion factor would be reduced to 6.0% from 6.8%. This is the factor applied to the member’s account balance at benefit commencement to determine the annual lifetime pension payable to the member. Most pension funds that provide benefits exceeding the mandatory minimum had already significantly reduced their conversion factors (while overall still meeting the mandatory minimum BVG/LPP benefit level).
• For members within 15 years of normal retirement age (64 for women, 65 for men) as of the effective date of the reforms, a lifetime pension supplement would be payable, with the amount depending on birth year and the size of the BVG/LPP account balance. A full supplement would be payable to members with balances up to 220,500 Swiss francs, degressively smaller amounts for balances up to 441,000 Swiss francs, and no supplement to those with higher balances. The supplement would be financed primarily by the pension fund, partially supported by financing contributions from the federal supplemental fund.
• To finance this financial support, the federal supplemental fund will in turn increase the contributions to be paid to it by the occupational benefits institutions. If a pension fund charges contributions to its members to finance the contributions due to the federal supplemental fund, the employer must at least finance the same contributions as the total of the employee contributions.
• The minimum annual pay needed for BVG/LPP participation would be cut by 10% (making it 19,845 Swiss francs instead of the current 22,050 Swiss francs).
• An "AHV/AVS coordination offset” would still be subtracted from the member’s annual earnings to determine covered pay under the BVG/LPP but be equal to 20% of covered earnings up to 88,200 Swiss francs per year under the AHV/AVS (today it’s a fixed offset amount of 25,725 Swiss francs).
• In mandatory minimum plans the annual crediting rate to the cash balance account, as an age-based percentage of BVG/LPP covered earnings, would be 9% for ages 25 to 44 and 14% for ages 45 to. 65. Current crediting rates in mandatory minimum plans are 7% for ages 25 to 34, 10% for ages 35 to 44, 15% for ages 45 to 54 and 18% for ages 55 to 65.

Employer implications

The BVG/LPP 21 reforms are meant to complement AHV/AVS reforms that were approved in a public referendum in September 2022. Left-wing parties in parliament and trade unions have already launched a national signature campaign to call for a referendum on the BVG/LPP 21 reforms (50,000 signatures are required by July 6, 2023). The last reform attempt in 2017 (which combined AHV/AVS and BVG/LPP reforms) was rejected by voters 53% to 47%, and the prospects for BVG/LPP 21 surviving a referendum are uncertain. Employers should monitor the progress of the referendum campaign and review the impact of the BVG/LPP 21 provisions on their mandatory plans as well as any potential impacts on voluntary plans they may have in place.

Contacts

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Angelica Meuli

Senior Legal Consultant

email Email phone +41 21 321 68 10

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Estelle Caveng

Legal Consultant

email Email phone +41 43 488 44 72

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