Pillar 2
Pension fund conversion rate for the BVG pension
How much BVG pension can I expect? The conversion rate is used to calculate the annual BVG pension from the existing retirement assets. You should know the following facts to be able to make a realistic assessment.
Content:
Content:
- The conversion rate determines the percentage at which the accrued retirement assets and interest are converted into an annual retirement pension.
- The amount is set by law for the mandatory portion and is based on life expectancy and a return target.
- Different conversion rates apply to the mandatory and extra-mandatory portions.
- To the conclusion
At some point, every employee will ask themselves how much their own pension will be. Under the Swiss pension system, the pension comprises the state pension (first pillar), occupational pension provision (second pillar) and private pension provision (third pillar). The three pillars together should enable a financially secure retirement for everyone.
When viewed in detail, the aim of the BVG, in combination with the state pension, is to achieve a pension income equivalent to approximately 60 percent of the final salary. The conversion rate is a determining factor for the actual amount of the pension fund pension. That’s why it’s important for you to understand how it’s calculated and applied.
The conversion rate is a set percentage that defines the annual BVG pension from the retirement assets in the pension fund. There is a minimum conversion rate for the mandatory portion of the BVG. This conversion rate, set by the Federal Act on Occupational Retirement, Survivors’ and Disability Pension Plans (BVG), is currently 6.8 percent.
The formula is as follows:
Retirement assets × conversion rate = annual pension
For example, if you have saved CHF 100,000 in retirement capital, you will receive an annual pension of CHF 6,800 when you retire.
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The conversion rate is set by law. Various parameters are used to calculate it. The most important ones are as follows:
- The duration of the pension payment, i.e. the calculated life expectancy of current and future retirees.
- The promised interest rate on the existing actuarial reserves, known as the technical interest rate.
Life expectancy – if you live longer, you will receive a pension for longer.
Statistically speaking, nowadays a 65-year-old man who retires may enjoy a pension for almost 20 years, while a woman of the same age may even live two and a half years longer.
The BVG pension is paid out for life. This is why the total paid out in pension payments rises with the increase in life expectancy. A 65-year-old man who retired in 1985 received a BVG pension for five years less than the current generation of retirees.
To be able to pay out retirement pensions during this longer period, pension funds need to set aside sufficient capital for the future.
Technical interest rate – how the return affects the conversion rate
The conversion rate is also based on the return expectations for the pension fund capital invested in the capital markets. The pension funds promise to pay the insured interest and estimate how much interest they will be able to pay on the assets when the pensions are paid out. Based on current life expectancy, according to the Federal Social Insurance Office (FSIO), the valid minimum conversion rate of 6.8 percent requires pension funds to generate a return of around 5 percent. Pension funds have on average been unable to generate income of this magnitude for a long time now.
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The current conversion rate for the BVG mandatory insurance has remained unchanged for many years. Until 2005, it was 7.2 percent.
In 2023, the Swiss parliament planned to cut the rate again as part of the BVG reform – justified by the further increase in life expectancy and lower interest rates – to 6.0 percent in the future. The failure of this reform in the referendum in September 2024 means that the conversion rate remains at 6.8 percent. Back in 2017, a further attempt to lower the conversion rate to 6.0 percent was also rejected in a referendum.
Conversion rate at a glance
The mandatory portion
Gainfully employed persons in Switzerland who are insured under the state pension and earn between CHF 22,050 and a maximum of CHF 88,200 (as of 2024) per year are by law subject to mandatory insurance under the second pillar. The minimum conversion rate for this BVG mandatory insurance is 6.8 percent: pension funds must guarantee this conversion rate with minimum benefits up to an income of CHF 88,200.
The extra-mandatory portion
Extra-mandatory assets are accrued when people pay contributions into the pension fund beyond the mandatory portion, for example by insuring annual salaries above the CHF 88,200 limit or by making higher savings contributions. Each pension fund sets the rate governing the percentage at which these assets are converted into a pension. The percentage is often much lower than the 6.8 percent for the mandatory portion.
In fact, significantly fewer people than expected benefit from the current conversion rate of 6.8 percent. If the rate shown on your pension fund statement at the age of 65 is lower than this, you are covered by extra-mandatory insurance. However, check with your pension fund again to ensure full clarity.
Split or combined conversion rate: what’s the difference?
If salary components are insured in both mandatory and extra-mandatory pension provision, the pension fund can apply the split conversion rate or the combined conversion rate when calculating a pension.
In the case of a split conversion rate, the conversion rate of 6.8 percent as set by law applies to the mandatory portion, while a different conversion rate set by the pension fund applies to the salary components of the extra-mandatory portion. This option ensures greater transparency.
By contrast, the combined conversion rate applies to the entire retirement assets. However, with this approach, the BVG stipulates that the retirement pension must not be below the statutory minimum benefits. This means that the amount paid out may not be lower than the 6.8 percent of the mandatory portion.
An excessively high conversion rate has a negative impact on the pensions of future retirees – especially those of today’s younger generations. The majority of pension funds are pushing for the minimum conversion rate to be lowered, as life expectancy is constantly rising and return prospects are insufficient for stable financing given the low interest rates.
If financing is not guaranteed, pension funds have to use funds to secure pensions that would otherwise benefit those still in employment in the form of higher interest. This applies in particular to higher earners whose extra-mandatory assets generally significantly exceed the mandatory insurance. The reform of occupational pension provision (BVG reform) was intended to counteract this.
To understand how much pension you will receive from the second pillar and why, you need to know the conversion rate. This is because your accrued assets will not simply be paid out to you in equal parts by the pension fund once you reach the reference age.
However, in the long term the current conversion rate is no longer sufficient to maintain the principle of solidarity and generational equity in occupational pension provision. It remains to be seen what changes will now be made to financing the second pillar following the failure of the BVG reform at the ballot box.
Disclaimer
Disclaimer
