The three-pillar principle: the pension system in simple terms

The Swiss pension system consists of three pillars. The aim is to enable people of retirement age to maintain a reasonable standard of living, whilst offering protection against certain risks in life.

The principle of multilevel protection is enshrined in the Swiss Federal Constitution. Article 111 states: “The Confederation shall ensure that the Federal Old-age, Survivors’ and Invalidity Insurance and the occupational pension scheme are able to fulfill their purpose at all times.” The aim is to guarantee financial protection in the event of death, invalidity and old age.

First comes pillar 1 (the state pension), then pillar 2 (occupational retirement planning) and pillar 3 (private retirement savings). The three pillars complement each other and ensure the stability of the pension system. The Swiss model is different from the systems in place in other countries because of the balance between the three pillars and the strict division of responsibilities between the state and private stakeholders. Switzerland also stands out from other countries due to the mandatory affiliation to pillar 2: in other countries, occupational retirement planning is often voluntary rather than mandatory.

In an international comparison, Switzerland’s pension system is considered to be above average in terms of profitability, sustainability and trustworthiness. According to a ranking of these three assessment criteria in the “Mercer CFA Institute Global Pension Index” for 2023, Switzerland was ranked 11th out of 47 countries.

OASI, the state pension, is the most important social protection included in pillar 1. It secures a person’s financial livelihood in old age and pays benefits in the event of death. It pays old-age, widow’s, widower’s and orphan’s pensions. If the pension is not sufficient to cover minimum living costs, supplementary benefits (EL) close the gap.

In the event of invalidity, the affected persons receive invalidity insurance (IV) according to the degree of invalidity. In addition to OASI, IV and EL, loss of earnings compensation (EO) is also among the benefits that can be paid out under pillar 1. These benefits concern persons in military and civilian service and on maternity, paternity, adoption and childcare leave, for instance.

The state pension system is a contribution-based system: the contributions of active insured persons benefit the pensioners. The next generation will then be responsible for the old-age pensions of those paying contributions today.

Since no capital is saved, interest rate trends play a subordinate role in determining OASI benefits. Pillar 1 depends on the development of the economy and the population. The more people who are employed, the higher the total wages and the contribution income. Conversely, contributions will be insufficient if unemployment rises.

Due to demographic factors, the number of people drawing an OASI pension is growing faster than the number of people in employment. There is currently one retired person for approximately every four people in employment. In around 30 years, the ratio will be just two to one. This leads to an imbalance between OASI income and expenditure. Around a quarter of the budget is not covered by contributions but by federal funds, VAT and the casino tax.

Anyone who lives or works in Switzerland pays OASI contributions until they reach the reference age. Contributions and benefits are governed by law. Following the OASI 21 reform, which came into force at the beginning of 2024, the reference age from which women are entitled to draw a pension is to be gradually increased from 64 to the same age as men (65). A pension can be drawn a maximum of two years in advance, which leads to a reduction in the amount, or deferred for a maximum of five years, which results in an increase.

Pillar 2 consists of occupational retirement planning, also referred to as the pension fund or OPA, and accident insurance (UVG). In combination with pillar 1, pillar 2 is designed to replace 60 to 70 percent of a person’s last salary once they have retired and enable them to maintain their accustomed standard of living.

Pension funds invest the contribution capital, for example in shares, bonds or real estate. They use assets and revenue to finance benefits such as retirement, invalidity and survivors’ pensions or lump-sum withdrawals. You can have your saved capital paid out early if you want to emigrate, become self-employed or buy a property.

The amount of the OPA contribution depends on your age, your salary and the employer’s pension plan. The older the employee, the higher their contribution rate. At least half of the contribution is paid by the employer. Salary components in excess of 88,200 francs are not subject to mandatory insurance. Some companies also offer their employees benefits for higher salaries with the pension fund, which leads to extra-mandatory assets. With pension funds of this kind, voluntary purchases are often added to the extra-mandatory assets.

Pillar 3 represents voluntary private retirement savings for old age. You can use pillar 3 to close potential pension gaps or to build up capital for home ownership and self-employment. In 2020, around half of the working population had a pillar 3 retirement solution.

Pillar 3a restricted pension plans are regulated by law and offer tax advantages. Pillar 3b unrestricted products are not quite the same: their savings goal is flexible because it is not linked to retirement. The premium is not tax-deductible, the policy is already taxed as an asset during the term, and lump-sum payments are tax-free, provided the policy is used for retirement.

The three-pillar system has proven its worth because it ensures a balance between a state pension, occupational retirement planning and private retirement savings. You should take action so that you too will be protected in retirement. In order to close a pension gap whilst saving taxes, you need to detect the gap early on. We can help you by providing individual advice.

However, in many cases the statutory provisions are not sufficient to ensure protection and financial security in retirement whilst offering reliable protection against risks. Private savings are therefore often the best option for a pension that suits your personal situation in life.