Your pension fund is probably your biggest financial asset. It provides you with an annual report in the form of a pension fund statement. Nicole doesn’t really understand her pension fund statement. Do you feel the same way? We shed some light on the subject and clarify the most important terms from the world of pensions with Nicole.
Nicole (34) has been working as a clerk at a medium-sized craft business in Winterthur for several years. Her pension fund is not managed by the company itself, but is organized by a large collective foundation. She took a break for a few years with Noah (4). Since he has been in kindergarten, she has increased her level of employment to 80% again and switched to her current company. At the time, the HR office sent the change in her level of employment to the pension foundation. But the young colleague was unable to tell her exactly how her pension worked. The foundation sends her a pension fund statement once a year, “that’s where it’s all written”. Until now, Nicole was part of the small majority of Swiss people who, according to the 2020 Pension Barometer, only glance at their pension fund statement fleetingly or not at all.
What does my pension fund statement / pension certificate say?
Nicole has already read about how pension funds calculate. Now she wants to find out even more. We start with A for retirement assets and end with Z for interest and go through her pension fund statement step by step with Nicole. Because the pension fund statement answers various questions, such as the following:
- What assets do I have in the pension fund?
- How high is my pension from the pension fund?
- How much does my money in the pension fund grow from year to year?
- How much money can I take out of the PF to buy a property?
- What will my relatives receive from the PF if I die?
How high are my retirement assets and retirement credits?
The current retirement assets (often abbreviated to AGH, also known as retirement assets or vested benefits) corresponds to the sum of the payments made to date and the interest credited to her account. As Nicole has contributed money from her previous pension fund(vested benefits), this is also included in her retirement assets. The retirement assets increase annually by the retirement credits and the interest on her retirement assets. These assets belong to her.
Our tip: Check the development of retirement assets annually
The amount of your retirement assets is crucial for your future pension. Sometimes the pension fund makes mistakes when calculating it. Therefore, check how your retirement assets develop if you contribute additional money to the pension fund. For example, when you make purchases, make voluntary contributions or change jobs.
The retirement credit is the amount that is credited to Nicole’s pension fund account each year. The retirement credit is a percentage of her insured salary. The amount depends on her age. Nicole and her employer pay this together. Her boss must pay at least half. If he pays more, Nicole is left with more money from her salary. As is the case with very few people, her boss also pays 50% of the contributions. Nicole is just on the threshold of the next higher retirement credit. This means that next year she will receive 1.5% less salary in her account because the contribution will increase by 3% points and she will have to pay half of it herself. She will then see the higher retirement credit on her pension fund statement.
| Age of the insured person | 25-34 | 35-44 | 45-54 | 55-64/65 |
| Retirement credit in % | 7 % | 10 % | 15 % | 18 % |
Our tip: Check your pension fund statement annually
The employer owes the pension fund the full contributions. Unfortunately, it has already happened that employees have had their contributions deducted from their salary, but these have not been transferred to the pension fund – leaving a hole in your retirement provision. A glance at Nicole’s pension fund statement shows that her retirement credits were correctly booked to her account in the current year. Take a look at your statement at the end of the year.
Am I insured under a defined benefit or defined contribution plan?
On her pension fund certificate, Nicole sees various lines with retirement assets and pension and the years 64, 63, 62. This makes it clear that she is insured under the defined contribution plan . With this pension plan, the pension fund first determines the contribution amount in the regulations and calculates its benefits on this basis. Her contributions increase with her age and flow into her account with the pension fund. The sum of her contributions, the interest rate and the conversion rate therefore determine how much pension she will receive. The more contributions she pays in, the more she will have in old age.
Nicole used to work for the municipality in her place of residence. She was insured there under the defined benefit plan . Under this pension plan, her pension benefits were easier to determine than under the defined contribution plan: pension benefits = percentage of the insured salary (e.g. 60 % pension on the insured salary). The defined benefit plan is characterized by the fact that the pension fund first defines the type and amount of your pension benefits in the regulations and then determines the necessary contribution amount. For a long time, the defined benefit plan was the standard for public employers, but today only a few pension funds still rely on this pension plan. The system change is taking place more quickly in companies under private law than in public institutions because the state can fall back on taxpayers and bear the financing risk for pension benefits more easily.
What conversion rate is used to calculate my pension?
For Nicole’s pension, the pension fund capital actually saved is multiplied by a conversion rate defined in the regulations. As Nicole is insured under the defined contribution plan, she is much more interested in the minimum conversion rate (MUWS). This is because the BVG stipulates that pension funds must apply the MUWS to the mandatory portion of their pension capital at the time of normal retirement age. This is currently (as at 2024) 6.8 %. Put another way: for every CHF 100,000 in mandatory retirement assets, you will receive an annual, lifelong pension of CHF 6,800 at normal retirement age. The MUWS only applies to your mandatory retirement assets. The fund may apply a different conversion rate for the extra-mandatory scheme.
Nicole’s pension fund is a so-called enveloping pension fund. It also insures benefits over and above the minimum requirements of the BVG. It therefore applies a uniform conversion rate to the entire retirement assets. This enveloping conversion rate means that the conversion rate for Nicole’s retirement assets of 5.8 % is lower than the conversion rate of 6.8 %.
But what is the conversion rate exactly? In the defined contribution plan, your actual, interest-bearing assets are either paid out as a lump sum at retirement or converted into a lifelong annual pension or paid out as a combination of pension and lump sum. Nicole is still a long way from considering “lump-sum payment or pension? After all, she won’t be retiring for over 30 years. Can she withdraw the entire retirement assets as a lump sum? That depends, her pension fund regulations provide information on this. According to the BVG, she can always withdraw at least a quarter of her retirement assets as a lump sum. Because she has a registered partner, David, he must agree to the lump-sum withdrawal in writing. The conversion rate therefore determines how much of Nicole’s capital assets will be paid out as a lifelong retirement pension. The higher the conversion rate, the higher her pension.
How high is my pension from the pension fund?
In the “Expected retirement benefit” section of the pension fund statement, Nicole finds non-binding information on how high her future pension could be. The pension fund has made a projection. It takes into account the existing retirement assets, the remaining number of years until retirement age, the current income and the technical interest rate. The pension fund multiplies the future retirement assets calculated in this way by the conversion rate in accordance with the regulations. Nicole can therefore easily see how high her monthly retirement pension will be if everything happens exactly as assumed. This is still a long way off and Nicole therefore assumes that her income will increase beyond this (i.e. her retirement assets will increase) and the conversion rate will continue to fall. This is because she has already read that the average pension fund pension has continued to fall in recent years.
How high are my vested benefits?
When Nicole stopped working because of Noah, her pension fund paid a vested benefit. vested benefit (also known as a termination benefit). An insured person receives this amount when they leave the pension fund so that they can transfer the money to their new employer’s pension fund or park it temporarily until they return to work. In the case of defined benefit funds, the benefit corresponds to the cash value of the accrued benefit; in the case of defined contribution funds, it corresponds to the existing retirement assets on the day of leaving. Nicole has transferred her vested benefits to the new pension fund as an entry benefit, as prescribed. The amount of this benefit is documented in the pension certificate under the additional information as “Contributed termination benefit as at (date)”.
Our tip: Check your pension fund statement after changing jobs
When you change jobs, the vested benefits are transferred to the new pension fund or to a vested benefits blocked account at a vested benefits foundation. To do this, you must inform your previous pension fund where it should transfer the termination benefit. If you do not do this or forget to do so, it must transfer your retirement assets to the BVG Substitute Occupational Benefit Institution after 2 years at the latest. Over CHF 5 billion is currently parked there. Therefore, after changing jobs, check whether the termination benefit on the statement from your previous pension fund matches the amount shown on the insurance certificate from your new pension fund.
How much will my family receive from the pension fund when I die?
If something happens to Nicole, her pension fund pays the death benefits (also known as survivors’ benefits). Her surviving dependants receive a pension and a one-off lump-sum death benefit. So how much money will her partner David and her son Noah receive? This is also shown on the pension fund certificate. Depending on when Nicole dies, either a percentage of her disability pension (if she dies before retirement) or a percentage of her retirement pension (if she dies after retirement) will be paid out. In the mandatory scheme, the survivor’s benefit is 60 % of the corresponding reference amount for her partner David and 20 % for her son Noah. The pension fund may pay better benefits to the surviving dependants.
How high is my interest rate with the pension fund?
The minimum interest rate is also relevant for Nicole. The BVG stipulates that the Federal Council sets the minimum interest rate at which her pension fund must pay interest on her mandatory retirement assets each year. This is currently (as at 2024) 1.25 %. The minimum interest rate is only binding for Nicole’s mandatory retirement assets. Her fund is free to set the interest rate on the extra-mandatory assets. In addition, her fund may – but does not have to – pay higher interest on the mandatory portion.
The interest (or interest credit) is the amount that is credited to Nicole’s pension fund account at the end of each year. Interest is only paid in the defined contribution plan. As Nicole is insured in an enveloping pension fund, she only receives one interest credit. Her interest on mandatory and extra-mandatory assets is not shown separately. In her case, the interest rate is 1.25 %. This is still slightly above the BVG minimum interest rate.
Our tip: Check the interest credit
Your retirement assets should increase each year by the retirement credits (=contributions from you and your employer) and the interest received. Compare the current pension certificate with the previous year’s pension certificate and check whether the increase in retirement assets is correct.
What salary is insured with the pension fund?
The Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans (BVG) came into force in 1985. It determines whether Nicole must take out compulsory occupational pension insurance and defines the minimum benefits that her pension fund must offer. Pension funds may offer better benefits than the legally defined BVG minimum.
The minimum benefits for old age, death and disability are known as the obligation. For her income from CHF 21,510 (lower entry threshold, as at 2021) to CHF 86,040 (BVG upper limit, as at 2021), Nicole must make contributions to a pension fund that offers “mandatory benefits” in accordance with the BVG. The limits change every two years, as they depend on the AHV pension, which is reviewed every two years. In addition, many pension funds also offer to insure other income components. These contributions flow into the extra-mandatory and lead to improved benefits.
The BVG entry threshold is no longer relevant for Nicole. Because she works 80%, her income easily exceeds the minimum annual salary of CHF 21,510 that she must earn from an employer in order to be insured under the BVG. The situation is different for her sister Claudia. Claudia has two part-time jobs and does not earn enough in either of them to exceed the entry threshold. This is why, unfortunately, no employer has insured her with a pension fund.
What do insured salary and coordination deduction mean?
Nicole looks at her pension fund statement. Insured salary? Is that the same as her income? It may be, but not necessarily. That’s why many pension fund statements also show the “reported salary”. This is the annual salary reported by the employer to the pension fund, including the 13th month’s salary, but excluding profit shares or bonuses. The pension fund deducts the coordination deduction from the reported salary. In simple terms, the reported salary is your income without bonuses, but it is not always the insured salary. First of all, the insured salary (also known as the coordinated annual salary) is the key figure used by your pension fund to determine your pension benefits. The BVG stipulates that at least the gross salary minus the coordination deduction must be insured. However, it may be more; some funds also insure the coordination deduction or income components above the BVG upper limit.
The coordination deduction is intended to avoid double insurance of income in the AHV and 2nd pillar. Pension funds therefore calculate the amount of contributions in the mandatory scheme by deducting the coordination deduction from the reported salary. They then deduct the savings and risk contributions from the insured salary. In Nicole’s case, the coordination deduction is also insured, but the upper limit remains at CHF 86,040. So you can remember: the insured salary in the mandatory scheme is the salary component between the BVG upper limit (2021: currently CHF 86,040) minus the coordination deduction (2021: CHF 25,095). Salary components insured in excess of this are part of the extra-mandatory component. Fortunately, Nicole’s employer’s pension fund is a little more comfortable. It waives the coordination deduction and therefore also insures the first CHF 25,095 (as at 2021) of her salary. This will lead to higher pension benefits for Nicole in the future.
Our tip: Check the insured salary in the pension fund statement
Your pension benefits are based on your insured salary. You should therefore check whether the annual salary shown on your pension fund certificate corresponds to your actual salary. Otherwise your retirement benefits could be too low.
How much money can I withdraw from my pension fund to buy a home?
In the Additional information section, Nicole finds the line “Possible advance withdrawal for home ownership promotion”. The figure corresponds to the maximum amount she can still use to buy a property for her own use or to pay off a mortgage from the pension fund. Home ownership is not currently an issue for Nicole. If she had already withdrawn something, her pension fund would also note this on the statement as “completed withdrawal for home ownership”.
Our tip: Pledge pension fund assets instead of making an early withdrawal
If you are planning to buy something, consider pledging your pension fund assets to the bank instead of withdrawing them. This way, your capital will continue to work for you in the pension fund and – more importantly: if an insured event occurs, your assets will be higher.
Does my pension fund have enough money?
Nicole is lucky with her pension fund. This has a high Coverage ratio of 109 %. The funding ratio is the ratio between the existing pension assets of all insured persons, including surpluses and price fluctuation reserves (i.e. how many assets does the fund have?) and the pension capital required for the fund to meet all future pension obligations for active members and pensioners. With a funding ratio of 105 %, for example, there are 5 % reserves. If it is below 100 %, there is a shortfall.
Nicole was pleased with the high coverage ratio of her pension fund. We explain to Nicole that she always calculates the coverage ratio in conjunction with the technical interest rate rate. It is a return expected by the pension fund on the pension assets: “How much interest can the pension assets set aside for future pension payments earn in the future?” Your fund uses a technical interest rate of 2%, which is relatively conservative compared to private funds.
About the topic underfunding Nicole doesn’t have to worry about underfunding at the moment. As we have seen, her fund has a coverage ratio of 109 %. However, there is a shortfall if the actuarially required pension capital is not covered by the available pension assets on the balance sheet date. Or to put it more simply: the coverage ratio is less than 100 %. Or even simpler: the fund does not currently have enough assets to finance all current and future insurance commitments. It then initiates restructuring measures, i.e. time-defined measures to eliminate the shortfall.
Nicole’s fund still needs to build up further fluctuation reserves. These serve to absorb price fluctuations on the investments in order to avoid a shortfall and any restructuring measures. Once the retirement assets have earned interest, the fund transfers funds from the additional surpluses generated to the fluctuation reserve. This enables it to compensate for low investment results if the financial market develops unfavorably. The amount of the necessary fluctuation reserve varies from fund to fund and depends on the fund’s asset allocation.
And Nicole, any more questions?
Mach den ersten Schritt zur finanziellen Unabhängigkeit
In einer Minute siehst du deine Vermögensentwicklung und dein Einkommen während der Rente.
Last update: 01.12.2024 16:00
