Pillar 3a funds: how they work and what to look at

Pillar 3a funds combine tax-privileged pension savings with the opportunities and risks of the capital markets. Instead of holding the balance in an interest account, it is invested in a fund. Over long periods this brings the chance of higher growth, but it comes with value fluctuations. This article shows how 3a funds work, which fees shape the net return and how to choose the right fund.

The range of pension funds looks confusing at first sight. The following overview helps you understand the differences and find the solution that suits you.

What is a pillar 3a fund?

A pillar 3a fund is a securities solution within the restricted pension (pillar 3a). The pension capital is not held in an interest-bearing account but invested in a fund that, depending on the strategy, spreads across shares, bonds, real estate and other asset classes. The value fluctuates with the markets; in return, over long periods there is the chance of higher growth than with a pure interest account.

The key points at a glance

• 3a funds invest the pension capital in the capital markets instead of paying interest on it.
• Over long investment horizons there is the chance of more growth than with an interest account, together with value fluctuations and no guarantee.
• Compared with insurance products, pension funds usually offer more flexibility and a more transparent cost structure.
• The choice of fund should fit your personal situation: investment horizon, risk capacity and total assets.
• Fees significantly affect the net return and should be compared carefully.

What advantages do 3a funds offer over an interest account?

Interest rates on 3a interest accounts have been low for years and differ little between providers. In real terms, after inflation, they barely build up pension capital. Anyone with a long investment horizon therefore considers a securities solution.

3a funds offer several starting points:

• Participation in the development of the capital markets as part of your pension.
• Solutions for different risk profiles, from a low to a high equity share.
• Diversification across different asset classes.
• The option to take sustainability criteria into account.
• A choice between actively and passively managed funds.

One thing remains important: past price gains are not a reliable indicator of future performance, and value fluctuations are part of a securities investment.

What should you look at when comparing 3a funds?

A comparison of 3a funds is only meaningful if you compare like with like. The amount of tax-deductible contributions depends on the statutory maximum amount and on whether you are affiliated with a pension fund. As this is a long-term investment, a careful approach pays off. Look at the following points:

• Same equity share: returns can only be compared meaningfully at a comparable equity share, because higher return opportunities always come with higher risk.
• Same periods: equity markets move constantly. Comparisons are only meaningful with an identical reference date and the same period.
• Long periods: whether an actively managed fund justifies its extra effort only becomes clear over long periods, such as ten years.
• No extrapolation of the past: each fund has its own risk-return profile, and market conditions change. Past performance cannot be projected into the future. What matters is which investment fits your goals and your risk capacity.
• Include the fees: costs differ considerably between funds and reduce the net return. Digital providers often rely on low-cost index and exchange-traded funds (ETFs).
• Same composition: learn about the asset classes. Shares usually offer more return potential than bonds or real estate, but fluctuate more. Bonds tend to be more stable at lower returns, real estate is less volatile but often needs a longer horizon.
• Investment focus: is the fund invested internationally or only in Switzerland? Both have their own opportunity and risk profiles.

How do you find the fund that fits your situation?

A fund spreads the capital across various securities and markets and thus distributes the investment risk. When comparing, many investors look first at performance. But because a pension is a long-term investment, the decisive question is whether the fund fits your personal situation.

Investment horizon

Anyone with a horizon of at least ten years can consider a higher equity share: over long periods, the probability rises that interim losses are recovered. With a shorter horizon, bonds and real estate provide more stability.

Risk capacity and risk tolerance

3a funds exist with a very low to a high equity share. Which share makes sense depends on the fluctuations you can bear financially (risk capacity) and cope with emotionally (risk tolerance). Some funds also allow thematic focuses, such as health or clean energy.

Relationship to your total assets

A pension is part of your total assets. Anyone with further assets, such as residential property or claims from a pension fund, can cope with a higher equity share in the pillar 3a investment more easily than someone without such reserves.

Sustainability

Not every fund described as sustainable is fully so. A fund that meets ESG criteria should invest its entire assets accordingly. Ask the provider which criteria the portfolios are built on. ESG stands for environmental, social and governance factors; a uniform definition has still not been conclusively established.

How do you choose the provider?

A suitable provider stands out through transparency and a reachable personal contact. Digital offerings make investing easier, but you should still be able to reach someone with open questions. Also check whether the provider is independent and can draw on several solutions in the market, or is tied to a single product. A later change of 3a provider should also be straightforward.

Which fees affect the return on 3a funds?

With 3a funds, it is worth looking at the costs, because over long periods even small fee differences noticeably reduce the net return. Actively managed funds are generally more expensive than passive index and ETF solutions. Higher fees, however, are not an automatic sign of better quality. When comparing, watch the following cost types.

Total expense ratio (TER)

The TER covers the ongoing costs of fund management, charged directly to the fund’s assets. It appears in the fund factsheet and is also referred to as ongoing charges or the management fee.

Issue and redemption commission

This commission arises when buying or selling fund units. If both sides are charged, the burden adds up accordingly.

Custody and foundation fees

Custody fees may apply for managing the account. Some providers also charge a foundation fee, because pension products are held through a foundation.

Spreads and transaction costs

Buying and selling involve spreads (the difference between the buy and sell price) as well as any brokerage and stock-exchange fees. Stock-exchange purchases and sales of securities through a Swiss securities dealer are also subject to the federal stamp duty (transfer stamp tax): 0.075 per cent for domestic and 0.15 per cent for foreign securities per contracting party. The issue and redemption of units in domestic funds are exempt.

Withholding taxes on foreign holdings

Dividends and interest from foreign securities may be subject to a withholding tax. Funds that can reclaim part of these withholding taxes are an advantage.

Fund or insurance: what is the difference?

3a insurance products are often “mixed policies”: they combine the pension with cover, for example in the event of death. Anyone taking out a 3a policy generally commits to long-term premium payments. If these become difficult, for instance in the event of unemployment or early retirement, an early cancellation quickly becomes a disadvantage. The fee structure of such policies is also often less transparent than a 3a bank solution.

With fund-based saving, you invest your capital in the markets instead. This means higher value fluctuations than with insurance, but in return more flexibility and, over long periods, the chance of higher growth. Whether a fund or insurance fits better depends on your need for cover, your risk capacity and your wish for flexibility.

Frequently asked questions about pillar 3a funds

What is a pillar 3a fund?

A pillar 3a fund is a securities solution within the restricted pension (pillar 3a). Instead of holding the balance in an interest account, it is invested in a fund that, depending on the strategy, spreads across shares, bonds, real estate and other asset classes. The value fluctuates with the markets; in return, over long periods there is the chance of higher growth than with a pure interest account.

How do actively and passively managed 3a funds differ?

Passively managed funds track an index, such as the SMI, and are therefore usually cheaper. Actively managed funds are run by a fund management that tries to beat the market; the management and transaction costs are generally higher. Whether the extra effort pays off can only be judged over long periods.

Which fees apply to 3a funds?

The main cost types are the annual management fee (total expense ratio, TER), any issue and redemption commissions, custody and foundation fees, and spreads and transaction costs. Over long horizons, even small fee differences noticeably reduce the net return, which is why a careful comparison is worthwhile.

Pillar 3a fund or 3a insurance: which is more flexible?

Fund-based 3a saving with a bank is usually more flexible: contributions are voluntary and the fee structure is mostly more transparent. A 3a insurance policy, by contrast, often commits you to long-term premium payments and is disadvantageous if cancelled early. Which solution fits depends on your situation and your need for cover.