40 years of occupational pension insurance: what you need to know
31 March 2025 | Comment(s) |
Adrien Jacquérioz
The Swiss Federal Law of 25 June 1982 on Occupational Retirement, Survivors' and Disability Pension Plans LPP/BVG is celebrating its 40th anniversary. But what exactly is the LPP/BVG? What do we need to know about it and what are the main issues? In this blog article, we take a look at the beginnings of the Swiss 2nd pillar insurance and the challenges faced by occupational pension provision.
The date: 1 January 1985. Introduction of the LPP/BVG into the Swiss pension system. Prior to this, retirement provision was optional and relied on the goodwill of the employer. The first pension funds were set up in the machinery industry.
What is the LPP/BVG?
The Swiss Federal Law of 25 June 1982 on Occupational Retirement, Survivors' and Disability Pension Plans LPP/BVG governs occupational pension provision in Switzerland. It was approved in 1982 and introduced on 1 January 1985. This law regulates the 2nd pillar of the Swiss pension system and is intended to complement the 1st pillar (AVS/AHV) by providing financial protection in the event of old age, disability or death.
The 2nd pillar is financed by equal contributions from the employer and the employee, as well as by the accumulated interest - often referred to as the third contributor - resulting from the return on policyholders' savings on the financial markets.
But there are less and less employers who limit themselves to strict minimum cover under the LPP/BVG. Often, there are small improvements to the basic cover, and the cover then becomes "wraparound", or even "non-compulsory" when it fully exceeds the basic cover.
40 years of LPP/BVG is an important milestone. Why? Because the first policyholders who contributed for the first time in 1985, when they turned 25, will reach retirement age in 2025. They will therefore have completed the full LPP/BVG cycle for the first time in history.
What you need to know about the 2nd pillar
When it comes to LPP/BVG and the 2nd pillar in general, there are a few recurring technical aspects to take into consideration. They are listed below.
- Coverage ratio
A pension fund's coverage ratio indicates the ratio between its available assets (on the assets side of the balance sheet) and its liabilities (policyholders' savings accounts and pensions paid out, also known as pension capital, on the liabilities side of the balance sheet). The average coverage ratio of Swiss pension funds has fluctuated but has stabilised at around 110% in 2023.
- Conversion rate
It determines the amount of an insured person’s retirement pension in relation to their total pension assets. The LPP/BVG conversion rate has been adjusted several times. Initially set at 7.2%, it currently stands at 6.8%, but has been the subject of many reforms.
- Coordination deduction
This is used to determine the portion of an employee's salary that is insured in the pension fund, taking into account the portion of salary already insured under the 1st pillar (AVS/AHV). The coordination deduction, which corresponds to 7/8 of the maximum AVS/AHV pension, is CHF 26,460 in 2025. This amount is therefore deducted from the gross annual salary under the 2nd pillar.
- Entry threshold
Defines the minimum annual salary for contributions to the 2nd pillar. Also subject to reform, the threshold for access to the compulsory occupational pension provision is CHF 22,680 in 2025.
- Assets under management
These are the funds, i.e. the capital saved by policyholders, as well as the various provisions and reserves intended to pay current pensions, managed by the pension institutions. They have grown considerably, from a few tens of billions of francs in the 1980s to more than 1,000 billion today.
- Minimum interest rate
The minimum interest rate on retirement savings sets the amount that policyholders will receive in addition to the returns on their savings on the financial markets. The minimum interest rate has also varied over time: it was 4% from 1985 to 2002, but gradually fell to 1% between 2017 and 2023. It has been 1.25% since 2024.
- Non-compulsory benefits
Pension benefits that go beyond the legal minimum (high remuneration, favourable conversion rate) and offered by pension funds for the highest salaries.
- Pension institutions
Companies responsible for managing the occupational pension provision of the entities affiliated to them. In Switzerland, the number of pension institutions has fallen as a result of mergers and restructuring, from over 3,000 in the 1980s to around 1,400 today.
- Active insured and pensioners
Ratio of policyholders subject to the LPP/BVG to those receiving benefits from the 2nd pillar. The ratio of pensioners to working people is increasing significantly. In 2004, 473,570 people received an old-age pension from the 2nd pillar while in 2022, there were 893,888, almost double and an increase of 88%.
Challenges and issues for the LPP/BVG
During the last 40 years, the economic environment, life expectancy and interest rates have changed. These challenges call for reforms that push the LPP/BVG to develop and adapt to the times, thereby ensuring the long-term future of the Swiss pension system.
The first policyholders in 1985 are now reaching retirement age with full (theoretical) pension provision, but the original data - average life expectancy and capital returns in particular - have changed significantly.
- An increasingly older population
This is one of the main challenges facing the LPP/BVG. In Switzerland, as elsewhere, life expectancy is improving. Changes in the age pyramid are contributing to a significant increase in the ratio of retired people to working people. According to the Federal Statistical Office, life expectancy in 1985 for men aged 65 was 14.9 years and 19 years for women. In 2023, it was 20.3 years for men and 22.8 for women.
- The importance of the "third contributor”
Pension funds invest their policyholders’ contributions in the financial markets in order to grow their capital. Low interest rates and market volatility require greater diversification of investments in order to obtain alternative sources of return to bonds. Pension funds must therefore regularly adapt their investment strategy to generate returns for their members.
- Missed reforms and successful steps
Since the creation of the 2nd pillar, policyholders have benefited from a number of interesting changes. In 1993, for example, the concept of "libre passage" (vested benefits) increased the employment mobility of policyholders, guaranteeing the transfer of their accumulated assets from one institution to another whenever their professional situation changed.
In 1995, 2nd pillar funds were introduced to encourage home ownership. In 2000, the revision of the Civil Code, which provided for the division of 2nd pillar retirement savings in the event of divorce, came into force. However, recent reform proposals to reduce the conversion rate in particular (2010, 2017 and 2024) were rejected by the Swiss people.
As it celebrates its 40th anniversary, the LPP/BVG faces a number of challenges if it is to remain viable and adapt to demographic and economic change. What will it be like in 40 years' time?
Occupational pensions at Groupe Mutuel
Groupe Mutuel has been active in occupational pensions for 40 years, initially through Mutuelle Valaisanne de Prévoyance and Groupe Mutuel Prévoyance, which merged in 2019 to form Groupe Mutuel Prévoyance-GMP.
A level of cover that is always among the highest on the market, sometimes 120%, and high interest rates on policyholders' accounts make Groupe Mutuel Prévoyance-GMP one of the best pension funds in Switzerland in terms of security and returns for policyholders.
Flexible solutions for a pension plan with peace of mind
In 2024, Groupe Mutuel Prévoyance-GMP was transformed into an open collective foundation, under the name Fondation Collective Groupe Mutuel, and became a joint fund forming part of the latter. This ecosystem makes it possible to offer a range of personalised pension solutions that are independent of each other.
Fondation Collective Groupe Mutuel can therefore look to the future with confidence and offer unrivalled possibilities to companies wishing to take control of their pension provision, and in search of innovative and participative 2nd pillar solutions. In addition, the collective foundation is committed to a sustainable investment and capital management strategy
