Demographic Change: Challenges for Pension Funds

Switzerland is facing an unprecedented challenge: the baby boomers are reaching retirement age. At the same time, we are living longer than ever. What sounds good at first glance is putting our pension system under massive pressure. Because while the number of pensioners is exploding, the base of those who finance these pensions is shrinking. Pension funds are particularly affected.

The most important facts at a glance

• The ratio is tipping: in 1948, 6.5 employees financed one pensioner, and by 2050 it will be just 2.2
• Pensions are falling dramatically. BVG pensions today are around 40 percent below the 2002 level
• Conversion rate in decline: from 7.2 percent (1990s) to an average of 5.30 percent (as of 2024)
• Replacement rate collapses: instead of 62% of the last salary, only 51% is paid today
• Rising funding pressure: without reforms, the AHV’s pay-as-you-go deficits alone will grow to several billion francs a year by 2040
• Increasing personal responsibility: the third pillar is becoming an indispensable pillar of old-age provision

Switzerland is getting older, with massive consequences

The demographic trend can no longer be ignored. A 65-year-old man now lives on average another 20.5 years , a woman of the same age even another 23 years (as of 2024). In 1948, when the AHV was introduced, the figures were just 12 and 14 years respectively. By 2050, life expectancy at birth will, according to the FSO reference scenario, rise further to 87.2 years (men) and 89.6 years (women).

But that is only one side of the coin. The other: The birth rate has been below the replacement level of 2.1 children per woman since the 1970s and fell to a record low of 1.29 in 2024. Fewer births mean fewer people in work in the future. Added to this is the baby boomer wave: between 1955 and 1970, Switzerland experienced exceptional population growth. This generation is now reaching retirement age.

The calculation is simple : more and more people are drawing pensions, for longer and longer. Fewer and fewer people are paying in. The Federal Statistical Office predicts that by 2050 there will only be 2.2 working people for every pensioner. In 1948 there were still 6.5.

Pension funds in a pincer grip

This demographic ageing is hitting occupational pension funds with full force. Unlike the AHV, which operates on a pay-as-you-go basis, pension funds are based on a funded system : Everyone saves for their own pension. However, this system is coming under pressure from two directions.

1. Increasing life expectancy means that pension funds have to pay out pensions over a much longer period. What used to last for 12 years must now last for 22 years, with the same capital. This is not mathematically feasible.
2. The phase of low interest rates between 2008 and 2022 has dramatically reduced returns on the capital markets. The so-called “third contributor”, the income from invested pension assets, weakened for years. Although the turnaround in interest rates in 2022 brought higher potential returns again, massive valuation losses were initially incurred on bonds.

This combination of a longer payout period and lower returns is known as a pincer grip. As a result, pension funds have to adjust their benefit promises.

The conversion rate falls and so does your pension

Nowhere is the crisis more evident than in the conversion rate. This determines how much pension you receive from the capital you have saved.

An example: If you saved CHF 750,000 and retired in 2015 with a conversion rate of 6.25 percent, you would receive CHF 47,000 per year. If you retire today with the average rate of 5.30 percent, you will only receive around CHF 40,000, over CHF 7,000 less per year.

The statutory minimum conversion rate in the mandatory BVG part is still 6.8 percent. In practice, however, most pension funds have long applied lower rates. In the case of so-called enveloping funds , which combine the mandatory and extra-mandatory parts, the effective conversion rate is often well below six percent. A shadow calculation ensures that the statutory minimum benefits are maintained.

At the beginning of the 1990s, the conversion rate was still 7.2 percent. With market interest rates of over six percent, this was easily affordable. Today, experts speak of a technically correct conversion rate of around 5.2 percent, based on an imputed investment return of 2.5 percent and current life expectancy.

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What does this mean for your wallet?

The consequences are dramatic. The replacement rate , i.e. the ratio between pension and final salary, has according to recent pension studies fallen from around 62% (2002) to around 51%. It is even lower for higher incomes. The legislator’s goal that AHV and BVG together should reach 60 percent of the last earned income is being missed more and more often.

BVG pensions are, according to calculations by pension experts, on average around 40 percent below the 2002 level today (the decline is smaller when the AHV and pension fund are considered together). There are several reasons for this decline: falling conversion rates, lower interest rates on retirement assets and the systemic redistribution from the working population to pensioners.

This is another problem: many pension funds currently pay out higher pensions than the insured persons have saved during their employment. This difference is cross-financed by the retirement assets of active insured persons. Redistribution from young to old , an issue that is increasingly undermining the acceptance of occupational pensions among younger generations.

Political reforms: Progress and setbacks

Politicians are trying to take countermeasures. With the AHV 21 reform, which came into force in 2024, the reference age for women is being gradually raised to 65. In addition, retirement has been made more flexible: you can now draw your AHV pension between the ages of 63 and 70. A 0.4 percentage point increase in value-added tax, to 8.1 percent, should generate additional income. From December 2026, a 13th AHV pension will also be paid out for the first time, an additional annual supplement designed to support pensioners’ purchasing power.

However, occupational pension provision is faltering. The BVG 21 reform was rejected by the people in 2024. The plan was to reduce the statutory conversion rate from 6.8 to 6.0 percent, combined with a pension supplement for the transitional generation. The no vote means that the pension funds will have to continue to make adjustments in the extra-mandatory area, with all the problems of lack of transparency and redistribution.

International experts have been calling for more far-reaching measures for some time: The OECD recommends a gradual increase in the retirement age to 67 and an automatic adjustment in line with life expectancy. This has long been a reality in many European countries.

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The funding gap continues to widen

Financing old-age provision remains strained. For the AHV, the Federal Social Insurance Office expects pay-as-you-go deficits to grow from the late 2020s onwards, reaching several billion francs a year by 2040, and pension funds are also under structural pressure. This trend shows the scale of the challenge. Without further reforms, a dangerous imbalance looms: either contributions will have to rise or benefits will continue to fall.

This development does not affect everyone equally. Part-time employees, the majority of whom are women, are particularly hard hit. Due to the coordination deduction and the entry threshold, many part-time salaries remain completely or partially uninsured. The BVG 21 reform would have brought improvements here, but after its failure the situation remains unresolved.

Consolidation in the sector is also progressing. Of the more than 15,000 pension institutions that once existed, around 1,300 remain today (1,292 in 2024). This trend is likely to continue, which brings both advantages and disadvantages: more efficiency and professionalism on the one hand, and fewer tailor-made solutions on the other.

What you can do now

In view of this development, personal responsibility is becoming increasingly important. The third pillar is evolving from a nice-to-have to a necessity. Here are some concrete starting points:

• Make consistent use of pillar 3a. The tax advantages are considerable. For 2026, employees with a pension fund can pay in up to CHF 7,258 and deduct it from their taxable income. If you don’t have a pension fund, you can pay in up to 20 percent of your earned income and a maximum of CHF 36,288. Since 2026, it has also become possible to pay missed pillar 3a contributions retroactively, for up to ten years.
• Rely on securities investments instead of pure savings accounts. The differences in returns over the years are considerable. FINMA-regulated providers such as Everon offer various investment strategies, from conservative to dynamic, from sustainable to private markets. A systematic, quantitative approach can help to avoid emotional investment decisions.
• Check purchases in the pension fund. If you have gaps in your contributions, you can close them by making voluntary payments. This not only reduces your taxes, but also increases your later pension. However, you should keep an eye on the development of your fund’s conversion rate.
• Seek professional support. Pension planning has become complex. Holistic financial planning takes into account all three pillars, your circumstances and your goals. Today, transparent, digital pension solutions make it easier to keep track of everything.
• Consider flexible working in old age. AHV 21 provides incentives to work longer. Anyone who continues to work beyond the reference age pays no AHV contributions on an exempt amount of CHF 16,800 per year and per employment relationship; income above this remains subject to contributions. Since AHV 21, you can waive this exemption and use the additional contributions to close gaps, which can increase your later AHV pension. Pension fund contribution options and tax advantages are retained.

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Professional asset management as a building block of your pension provision

The declining benefits from the first and second pillars make private pension provision indispensable. However, a pillar 3a savings account alone is hardly enough to close the resulting gaps. With a policy rate of zero percent, account balances earn almost no interest, while even modest inflation gradually erodes their purchasing power. Securities investments offer better potential returns here, provided they are implemented professionally.

Everon combines Swiss tradition with innovative investment strategies. As a FINMA-regulated asset management company, Everon offers systematic, quantitatively sound investment strategies that avoid wrong emotional decisions. Instead of relying on gut feeling, Everon relies on scientifically proven factors and uses its proprietary “Everon Portfolio Engine” for stock selection.

The various strategies are tailored to different needs: The multifactor strategy combines several valuation criteria for a balanced portfolio structure. The income strategy focuses on regular income through dividends and is particularly interesting for people who are already retired or planning to retire. The Smart Global Markets strategy is an ETF-based solution for those looking to invest in global markets at low cost. And for investors with a focus on sustainability, the Sustainability strategy offers exclusively ESG-compliant investments.

Advanced investors can also investin private markets, an asset class that was previously reserved for institutional investors. Private equity, private debt and private real estate offer attractive diversification opportunities, albeit with higher risk and a longer capital commitment.

In addition topillar 3a, you should not neglect unrestricted pension provision (pillar 3b). While tied pension provision is tax-privileged but can only be withdrawn upon retirement, pillar 3b offers maximum flexibility. Here you can save and invest without restrictions, for example in securities, real estate or other assets. A balanced mix of restricted and unrestricted pension provision gives you both tax advantages and financial freedom.

Outlook: The system remains, but needs to be adapted

The Swiss three-pillar system continues to enjoy a high international reputation. The combination of the pay-as-you-go system (AHV), capital cover (BVG) and private pension provision provides a robust basis. This diversification of pension risks between the state, companies and individuals is a strength.

However, the parameters urgently need to be adjusted. The demographic trend is not a surprise; it has been foreseeable for decades. Other countries such as Sweden, the Netherlands and Denmark have already built in automatic mechanisms: The retirement age there automatically adjusts to life expectancy. Switzerland is lagging behind here.

Intergenerational fairness is becoming a key concept. One generation must not live at the expense of the next. Today’s pensioners still benefit from historically high conversion rates, while young people have to reckon with significantly lower pensions and higher contributions at the same time.

The good news is that awareness of the problem is growing. More and more people are realizing that they need to take action themselves. The turnaround in interest rates has also given pension funds room for maneuver again. And technological developments are now enabling more transparent, more individual pension solutions than ever before.

One thing is certain: demographic change will continue to shape our pension system. Those who inform themselves and make provisions today will be better off tomorrow.