BVG Guide: Meaning – Contributions – Benefits

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All about occupational benefits in Switzerland’s 3-pillar system

People who live and work in Switzerland pay part of their income into the financial instruments of the first and second pillars. In addition, the Swiss pension system allows people to make voluntary retirement contributions with partial tax incentives.

As the second pillar, the occupational pension plan (BVG) is an important pillar of the Swiss 3-pillar system. It complements the mandatory AHV insurance. But how far do the benefits go and to what extent do they cover actual needs in old age?

In this guide, you will find answers to questions about the BVG contribution obligation, the possible amount of the old-age pension and the additional safeguards. This will enable you to classify the options in concrete terms and pursue your personal pension strategy in a targeted manner.

The most important facts in brief

• BVG stands for «Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans».
• It represents the second pillar within Switzerland’s 3-pillar system.
• The BVG pension supplements the retirement pensions of the first pillar and provides additional coverage in case of disability and death.
• Every employer maintains a pension fund or is affiliated with one.
• Employees are compulsorily insured from a minimum income.
• Employers contribute at least 50 percent of the monthly contributions.
• The expected retirement pensions from the first and second pillars are not sufficient to secure the standard of living in old age.

What is BVG? The legal basis

In colloquial language, the abbreviation BVG is often used in Switzerland to refer to occupational pension plans, i.e. pension funds. BVG stands for «Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans». This law sets out the framework for occupational pension provision. The federal law has been in force since January 1, 1985.

Pension funds existed in Switzerland many decades earlier. As early as 1925, about 262’000 members were insured in 1’200 pension funds. However, membership was reserved for only a few citizens, such as civil servants or bank employees.

BVG: 2nd pillar of the 3-pillar system

The Swiss pension system is based on three pillars, which explains the classification of the BVG:

• First pillar: state pension (AHV)
• Second pillar: occupational pension plan (BVG)
• Third pillar: private pension provision (see tips on pillars 3a and 3b)

The second pillar (BVG) helps insured persons and their dependents with benefits in retirement, disability and death.

Pillar 2a and Pillar 2b

The second pillar of the Swiss pension system is divided into a compulsory and a non-compulsory part. The insurable income in the BVG is limited in its amount – the obligatory part. For the part of the income above this, the extra-mandatory part, private provision can be made with the pension instruments of pillar 2b.

The importance of the BVG in the context of pension planning

The mandatory pension covers various risks.

These include:

• Protection in old age (BVG pension)
• Accidents
• Disability
• Death
• Daily sickness benefit insurance to ensure continued payment of wages in the event of illness

Vested benefits institutions are also components of the BVG.

With regard to coverage in old age, the goal of the BVG is that the pension income together with the AHV pension should cover about 60 percent of the last income.

Employers take over organization and share in contributions

As with AHV contributions, employers contribute at least 50 percent to occupational pension plans (BVG). Employers are also responsible for organizing and paying the contributions. As an employee, you therefore receive coverage through a pension fund and do not have to worry about the details.

BVG mandatory ensures minimum benefits

The federal law (BVG) contains regulations that pension funds must comply with. This means that as an insured person, you are guaranteed minimum benefits by law.

Every employer has a pension fund

To ensure that every employee has the option of occupational benefits, all employers must maintain appropriate pension funds or join a joint scheme. Even if the employer fails to do so, employees are guaranteed to be insured with the Stiftung Auffangeinrichtung BVG. This acts as a safety net for the second pillar on behalf of the Confederation. Vested benefits that cannot be transferred to any other institution are also paid there.

Safeguards for the vicissitudes of life guaranteed by law

Since the BVG stipulates the safeguards for survivors in the event of disability or death, insured persons enjoy uniformly prescribed minimum benefits. For example, insured persons with a degree of disability of 70 percent or more receive the full pension and those between 40 and 69 percent receive a partial pension.

Old-age pension only covers part of income

If you take a look at the exact regulations for the old-age pension, you will quickly recognize the gaps within the coverage provided by the BVG.

For this purpose, it is important to be informed about the following restrictions:

• Compulsory insurance only from BVG minimum annual salary: employees are subject to compulsory insurance from an annual salary of at least 22’050 francs (as of 2023). This means that there is no insurance for lower incomes and therefore no pension entitlement is built up.
• Insurance limited to maximum amount: Up to an annual salary of 88,200 francs is provided for retirement. For incomes above these income limits, private pension provision is therefore existential.
• Self-employed persons are not compulsorily insured.
• Employees with fixed-term employment contracts are not insured: This applies to employment contracts of up to three months.
• Family members on one’s own farm are not insured.
• People with reduced earning capacity (at least 70 percent) are not insured.

The limitations on coverage make it clear that in the course of a person’s working life, almost everyone is not insured for more or less large amounts of income. This means that there will be even more gaps in coverage in old age if no private provision is made for this.

The BVG obligation: From when and who is obliged to pay contributions?

According to the BVG, employees are required to pay insurance if they are already insured in the first pillar (AHV) and earn at least CHF 22’050 (as of 2023).

Compulsory insurance begins as soon as an employment relationship is entered into. The minimum age is 17 years of age. Until the age of 24, the contributions only cover the risks of disability and death. Only then are the contributions used to save for the old-age pension.

Important: As mentioned in the previous section, some groups of people are not compulsorily insured (self-employed persons, temporary employment contracts, family members in the agricultural business, disabled persons).

Voluntary insurance via the second pillar (BVG)

Those who are not compulsorily insured under the BVG may be able to take out voluntary insurance.

• Part-time work: If you earn below the BVG minimum wage of 22’050 Swiss francs (as of 2023), it is possible to be insured as a voluntarily insured person with the Stiftung Auffangeinrichtung BVG.
• Self-employed persons: As a self-employed person, you have the option of taking out voluntary insurance with your professional association, with the pension scheme of your employees or via the Stiftung Auffangeinrichtung BVG.

Calculation and payment of contributions

The employer, who also pays the BVG contributions, takes care of the connection to the pension fund. According to the BVG, at least half of the contributions must be paid by the employer. Employees have their share deducted directly from their monthly salary.

The BVG minimum contribution is regulated in ascending order according to age groups in the BVG.

Age	BVG contribution
25 – 34	7 percent of insured salary
35 – 44	10 percent of insured salary
45 – 54	15 percent of insured salary
55 – 65	18 percent of insured salary

Employers may make higher contributions than required by law to retain their employees.

Coordination deduction and insured salary

According to the framework law BVG, the benefits that insured persons receive from the first and second pillar are coordinated. Therefore, a so-called coordination deduction is made in the income to arrive at the insured salary. This currently amounts to 25’725 francs (as of 2023) and corresponds in principle to 87.50 percent of the highest AHV full pension.

For example, if an employee has a gross annual salary of 79,000 francs, this results in an insured salary of 53’275 francs (79’000 – 25’725). The contributions are again calculated from the insured salary. It is therefore important for your pension planning to note that not the entire salary is insured.

Minimum insured salary

The coordination payment would lead to a situation where low incomes would no longer be insured. To avoid this, the legislator has defined a minimum insured salary, which in principle corresponds to 150 percent of the maximum AHV full pension (CHF 2’450, as of 2023). The minimum insured annual salary is therefore CHF 3’675 (as of 2023).

Upper BVG limit and maximum insured salary

The upper limit of the gross salary to be insured under the BVG is three times the maximum AHV full pension (29’400 francs, as of 2023). This results in a BVG limit of 88’200 francsin 2023. In this context, pay attention to the benefits of your pension fund, as some pension funds provide higher benefits than the BVG stipulates.

The maximum insured salary is calculated from the upper BVG limit and the coordination deduction. This is an essential limit for the personal pension plan. For 2023, this means that a maximum of CHF 62’475 of the salary is insured.

Save taxes as a self-employed person with a voluntary pension plan

If you belong to a pension fund as a self-employed person, you can deduct BVG contributions of up to 25 percent of your annual income subject to AHV from your taxable income, depending on your pension plan.

Vested benefits in the event of an interruption of the employment relationship

By nature, insured persons do not remain members of the same pension fund throughout their working lives. In the event of a change of employer, the retirement assets are taken over by the new pension fund. However, even if a new employment relationship does not follow seamlessly, the pension fund assets paid in may not be withdrawn from the pension circuit. This is the case, for example, in the event of maternity or unemployment. The previous pension fund then transfers the termination benefit to a catch-up institution after 24 months at the latest (after six months at the earliest). Providers include various banks, wealth management companies or insurance companies.

The vested benefits institution holds the capital in a low-risk vested benefits account. Since it hardly generates any return there, you should, if necessary, examine alternative securities solutions, such as those offered by digital asset management offered by digital asset management companies.

The BVG pension: ordinary withdrawal

The ordinary withdrawal of the BVG pension is scheduled as soon as the retirement age is reached.

You have the following options for drawing the retirement assets:

• monthly pension upon reaching retirement age
• Withdrawal of the balance as a lump sum
• Withdrawal of a quarter of the balance as a lump sum and the rest as a pension

Please note that the options for lump-sum withdrawals are regulated differently in the pension funds. It is therefore advisable to look into this issue about ten years before you retire.

BVG pension and AHV pension together should cover about 60 percent of the last net income. However, this frequently found generalization is not accurate in many cases. Note that due to the limits described in the previous sections, it can be assumed that the complete income is rarely insured during the working life.

Early Retirement Option

With many pension funds, it is possible to withdraw assets as early as the age of 58. Early retirees must expect deductions of between three and five percent per year of early withdrawal.

Personal circumstances answer the question of pension or lump sum

Since the decision cannot be reversed, it must be made very carefully and, in the case of married couples, jointly.

To help, the following table shows a comparison of the main differences.

	Pension	Capital
Income	Regular income is secured for life.	The income from the assets develops depending on the capital market and the investment strategy.
Flexibility	The withdrawal of the fixed pension is unchangeable.	Free decision on investment and use of the capital. The strategy can be adjusted if life circumstances change.
Survivors’ pension	Widow’s or widower’s pension normally 60 percent of the retirement pension drawn. Cohabiting partners and adult children are not included in the statutory provision.	Existing assets can be disposed of by will within the framework of the statutory provisions.
Taxation	The pension is fully taxable.	One-time capital benefit tax at a reduced tax rate. The existing capital is taxed as assets, the income from it as income.

With regard to individual circumstances, for example, the state of health is a criterion for deciding between pension and capital. Those who expect an above-average life expectancy will opt for annuities.

Spouses also often prefer to opt for a pension in order to provide for their spouse. People without a life partner are more likely to opt to bequeath part of the pension fund capital to descendants.

Risk tolerance and experience with investments also influence the decision for or against a lump-sum withdrawal. If you have sufficient other sources of income , you can invest the capital profitably, for example if you have experience with securities investments.

When making a lump-sum withdrawal, pay particular attention to the following points:

• Pension funds have deadlines by which the lump-sum withdrawal must be declared.
• Married couples and registered partnerships: written consent of the partner is required.
• In the case of purchases into the pension fund, the resulting benefits cannot be made before three years after the last purchase.
• Use the professional support of an asset management company.

Pension or lump sum: combination often the best choice

A combination of annuity and lump-sum withdrawal can often be a suitable option. If the accumulated retirement assets are high, it may make sense to split them into an annuity portion and a lump-sum payment. The pension portion can then be used to cover current expenses, while the lump-sum payment can be used for additional needs such as travel or major purchases. In this way, you can benefit from the advantages of both options and have both regular income and greater financial flexibility.

The BVG pension: early withdrawal

Under clearly defined conditions, the BVG also permits an advance withdrawal of the saved capital before retirement age.

• Construction or purchase of residential property: Provided the home is owner-occupied, the pension fund assets can be withdrawn early for the construction or purchase of residential property. Mortgage loans can also be repaid with the capital.
• Self-employment as main occupation: In the year in which you start working as a self-employed person, you can withdraw your pension fund assets early. However, this is always in full, i.e. not as a partial withdrawal.
• Leaving Switzerland for good: Emigrants can make advance withdrawals from the mandatory occupational pension plan if they emigrate to a non-EU/EFTA country . In the case of EU/EFTA countries , the advance withdrawal does not work, as here the mandatory insurance for old age, disability and survivors’ benefits takes effect and this, according to the law, prevents the advance withdrawal.

Valuable safeguards of the BVG

The main insurance benefits of the BVG include disability and survivors’ benefits.

Disability benefits

A disability pension is paid from a degree of disability of 40 percent. The amount is graduated according to the degree of disability and starts at 25 percent of the full pension at 40 percent disability. The full disability pension amounting to 6.8 percent of the projected retirement assets is paid for a degree of disability of 70 percent or more.

Survivors’ pension

The BVG provides for a survivor’s pension if the deceased leaves dependent children. Likewise, the surviving spouse receives a widow’s or widower’s pension if the deceased is 45 or older and the couple were married for at least five years. In the event of remarriage, there is no further entitlement to a survivor’s pension. If the requirements are not met, the surviving spouse is entitled to a lump-sum settlement of three annual pensions.

Since January 1, 2007, surviving registered partners have the same entitlements under the BVG as spouses. The prerequisite is that the partnership existed for at least five years before the death and that joint children are to be maintained. However, it is important to check whether the respective pension fund has already included these benefits in its catalog.

The amount of the survivor’s pension is 60 percent of the retirement pension drawn (or the full disability pension, if applicable).

Divorced spouses may also be entitled to a survivor’s pension. Prerequisites: The marriage lasted at least ten years and a pension or lump-sum settlement was awarded in the divorce decree.

In addition to the surviving spouse, also Children of the deceased are also entitled to a BVG pension. This is paid to the children until they reach the age of 18 and amounts to 20 percent of the old-age pension. Provided the child is still in education or is at least 70 percent disabled, the orphan’s pension can be drawn until the age of 25.

The BVG pension in practice: examples

The amount of the BVG pension depends on the retirement assets you have built up with your pension fund at retirement. To determine the pension, the retirement assets are multiplied by a fixed conversion rate. For example, if you have retirement assets of 250’000 Swiss francs, this results in an annual BVG pension of 17’000 Swiss francs or 1’416 a month at a conversion rate of 6.8 percent (as of 2023).

The retirement assets are calculated from the following items:

• Retirement credits (contributions from employee and employer)
• Vested benefits
• Deposits (purchase sums)
• Surpluses and interest

Pension funds must pay interest on the credits and benefits paid in at a minimum interest rate. This has steadily declined in recent years due to the persistent low interest rates and has been as low as 1 percent since 2017 (as of 2023). Until 2002, it had been 4 percent since 1985. This development makes it clear that a reliable projection of the old-age pension is not possible. Added to this are the changed mandatory insurance sums as well as the conversion rate, the reduction of which from 6.8 percent to 6 percent is already being discussed by Parliament .

In order to provide an initial orientation despite the uncertain parameters in the future, the following are therefore some rough calculation examples, which are primarily intended to illustrate the differences in the various case situations. As part of your personal pension planning, make sure to update your individual projections on an ongoing basis and adjust them to reflect changes in the underlying conditions.

Please note in the examples that the calculations are based on assumptions from the past as well as in the future, which may not apply in your personal case.

Example 1:

• 30-year-old
• Career entry at age 25
• Annual salary: CHF 80’000 (average salary until age 65)
• insured salary: CHF 54’275
• Contribution (as a 30-year-old today 7 percent): CHF 316
• of which share as employee: CHF 158
• Pension after retirement at 65: CHF 1’440

Example 2:

• 45-year-old
• Career entry 25
• Annual salary: CHF 110’000 (average salary until age 65)
• insured salary: CHF 62’475
• Contribution (as a 49-year-old today 15 percent): CHF 780
• of which share as employee: CHF 390
• Pension after retirement: CHF 1’690

In addition to the BVG pension, a pensioner’s child’s pension may be payable if the insured person dies (including early retirees). It is paid in the amount of 20 percent of the retirement pension, but not more than for children up to the age of 18. If the child is still in education, a maximum age of 25 applies.

Even though the examples cannot be used to derive a personal projection due to the constantly changing parameters, the differences in the income brackets become clear. In the examples, a gross salary that is 30’000 francs higher only accrues a further pension entitlement of around 3’000 francs or 250 per month.

The importance of the BVG within personal retirement planning

The occupational pension plan (BVG) is an important component of personal retirement planning in Switzerland. It forms the second pillar of the Swiss 3-pillar system and supplements the benefits of the first pillar (AHV). Disability and survivors’ p ensions are an essential financial aid in the relevant life situations.

However, you should not rely solely on the BVG to provide financial security in old age. After all, even if you have paid into it throughout your entire working life, in the best case scenario it will only provide you with around 60 percent of your former salary. As the sample calculations show, the coverage gap is particularly high for higher incomes.

It is therefore important to make use of the entire 3-pillar system and, in particular, to take advantage of allowances. In this way you benefit from Tax advantages and ensure that you are financially secure in old age and can maintain your accustomed standard of living.

Conclusion BVG: Valuable coverage for special life situations – not sufficient financial retirement provision

The occupational pension plan according to the BVG is an essential pillar of the Swiss social security system. The second pillar offers employees in Switzerland good financial security in old age and in the event of disability or death.

Pension funds are reputable institutions and they are financially sound. Employees have the option of increasing their pension benefits by making additional contributions and thus increasing their pension entitlements.

However, the pensions resulting from occupational pension plans, together with the state AHV pension, generally only secure basic needs in old age. However, the standard of living in Switzerland remains high by international standards. In this context, it is striking that despite the positive framework conditions in Switzerland, the Old-age poverty is above average in a European comparison. It is therefore important to take additional private pension measures in order to be able to maintain the accustomed standard of living in old age.