The second pillar of Switzerland’s retirement system has an image problem. While the state pension system (AHV) enjoys broad support across the political spectrum, occupational pensions are often viewed by critics as complicated, opaque and nearly impossible to reform. The failed reform attempts of 2010, 2017 and 2024 are frequently cited as evidence. The most recent proposal was rejected by 67% of voters.
Yet the challenges are real. As people live longer, the capital accumulated during their working lives must finance more years of retirement. As a result, the conversion rate used to translate savings into an annual pension should decline. In the mandatory part of the system, however, it remains at 6.8%. Given rising life expectancy, that rate is too high.
A second challenge concerns part-time workers. As more people work part time, many remain inadequately insured. Because of the entry threshold, some are excluded from mandatory occupational pension coverage altogether. In addition, the fixed coordination deduction reduces the amount of salary that is insured. Any reform would therefore need to reduce overly generous pension promises while improving retirement coverage for lower-income workers. That is precisely what makes reform politically difficult.
Pension Funds Have Responded
But it would be wrong to conclude from the failure of these reforms that the second pillar is stagnant. Unlike the AHV, it is not a uniform government promise of benefits. Pension funds have considerable flexibility, particularly in the non-mandatory part of the system, and they have made use of it.
Nine out of ten pension funds have either made the coordination deduction more flexible or abolished it altogether. As a result, part-time workers are now better insured in many cases. Pension funds have also responded by adjusting pension promises. Comprehensive pension funds that cover both mandatory and supplementary benefits apply an average conversion rate of around 5.3%.
Together with strong investment returns, these adjustments have helped reverse the system’s cross-subsidization between active contributors and retirees. Whereas CHF 8 billion was transferred from active workers to pensioners in 2015, the direction had reversed by 2025, with CHF 2.9 billion benefiting active contributors.
This capacity for self-correction is no accident. Institutions that are responsible for their own balance sheets have a strong incentive to correct unrealistic benefit promises. Employers also improve their pension plans because attractive retirement benefits matter in the competition for talent. In many respects, the decentralized system has moved faster than the political process.
Piecemeal Reforms Have Side Effects
Nevertheless, Swiss policymakers are making another attempt. Instead of pursuing a comprehensive reform, they are turning to individual measures. In June, the Council of States approved a motion calling for an examination of reforms that include lowering the coordination deduction or allowing employees to begin saving earlier.
The intentions may be good. Yet such isolated interventions underestimate how closely contributions and benefits are linked within the occupational pension system. Lowering the coordination deduction or requiring contributions at an earlier age does not merely increase retirement savings. It also raises the statutory minimum benefits that pension funds are required to provide.
This raises an obvious question. Most pension funds have already voluntarily reduced or eliminated the coordination deduction. Why, then, would a legal reduction be problematic? Because the two approaches are not the same from an actuarial perspective.
When a pension fund voluntarily lowers the deduction, the additional retirement savings fall into the supplementary, non-mandatory part of the system. There, the fund can apply a more realistic and lower conversion rate. A statutory reduction, by contrast, expands the mandatory part of the system. As a result, an inadequately funded benefit promise grows larger. The gap is ultimately paid for by active contributors through lower interest credited to their retirement savings.
Well-intentioned individual measures can therefore bring back the redistribution from active contributors to retirees that pension funds have worked to eliminate.
The lesson from the failure of major pension reforms is not that reforms should be pursued in smaller pieces. Either policymakers succeed in crafting a balanced proposal that addresses both contributions and benefits at the same time, or they exercise restraint, dare to do nothing, and allow pension funds to retain the flexibility they need to adapt. In the meantime, political attention can be focused on the AHV, where demographic change and financing challenges require direct political decisions.
The second pillar does not need to be rescued from its alleged inability to reform itself. It needs to be protected from policymakers who tinker with individual components while losing sight of the system as a whole.
This article was first published as a guest commentary in the “Handelszeitung” business newspaper.
