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Glossary

The technical terms in the finance and pension industry are not always easy to understand. Below you will find important terms explained briefly and to the point.

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Actuarial assumptions

A pension institution (pension fund) needs statistical information to calculate how much it owes to insured persons. This can include information on the probability of dying, becoming disabled or being married. The compilation of all probabilities, including cash values resulting from them, is referred to as actuarial assumptions.

Annual salary

Autonomous pension fund

Employers can choose between three insurance models: full insurance, semi-autonomous pension funds with the risk savings fund model or autonomous pension funds.

Autonomous pension funds bear the risks of old age, death and disability of its members themselves. Within the limits of the law, the Board of Trustees decides how high the benefits and contributions are and what the investment strategy of the pension fund will be. The employers and their employees bear the risk themselves with an autonomous pension fund. Larger companies in particular rely on autonomous pension funds.

Buy-in

Legal basis: Article 79b of the Occupational Pensions Act (OPA)
Most insured persons can make voluntary buy-ins into their pension fund, meaning that they make a contribution to their retirement savings so that they will receive a higher pension later. In addition, contributions for voluntary buy-ins can be deducted from taxable income, but voluntary buy-ins are only possible if there is a gap in contributions. However, it is likely that an insured person will have such a gap, because a gap can occur whenever there is an increase in salary or if the insured person spends an extended period in training, stays abroad or takes breaks for child-rearing. 

The amount of this contribution gap indicates how high the voluntary buy-in can be. This information is on the insurance certificate.

Anyone who has drawn money from the pension fund for owner-occupied residential property must first pay it back, only then may they make a buy-in again.

Cash value

Abbreviation: CV
The cash value (pension cash value) is the amount needed for a pension to be paid out in a certain amount, with a certain interest rate (technical interest rate) for a certain amount of time. This means that in order to calculate the pension cash value, it is necessary to know the foreseeable interest rate and the duration of the pension payment. When calculating the pension cash value, it is assumed that the amount of the pension remains the same over the entire payment period (term of the pension payment).

The pension cash value is important for pension institutions because the pension cash value allows pension institutions to calculate the initial capital they have to invest at the beginning of the term in order to be able to pay the pensions later.

Collective institution

A collective institution is a pension institution (pension fund) with which several employers are affiliated. In contrast to a joint institution, the affiliated employers do not form a community based on the principle of mutual solidarity in the collective institution. This means that separate accounts are kept for each employer, with each having its own benefit and financing plan. The collective institutions are managed by insurance companies, banks or other providers.

Contribution exemption

If an insured person is no longer able to work to a degree of at least 40% in the long term due to illness or accident, then the pension fund contributions no longer have to be paid by the employer or the employee after the waiting period defined in the pension plan has expired. In the case of contribution exemption, the pension fund continues to pay the contributions for the insured person. On this basis, the insured person is still protected against the risks of old age, death and disability.

Conversion rate

Abbreviation: CR
Legal basis: Article 40 of the Ordinance on Occupational Old Age, Survivors’ and Invalidity Pension Provision (OPO 2)
The conversion rate is a factor (percentage) with which retirement savings are converted into a pension. When a person retires, they receive a fixed share of their retirement savings as a pension each year.

An example with numbers:
A person’s retirement savings at retirement are CHF 500,000.00, and the pension fund specifies the conversion rate as 6%. The retired person thus receives an annual pension of CHF 30,000.00 (500,000.00 × 6%) from the pension fund.
 
The amount of the conversion rate is derived from the technical interest rate and the average life expectancy of the person.

Coordinated OPA salary

The coordinated Occupational Pensions Act (OPA) salary is the salary that must be insured by law. It is as high as the OPA salary, minus the coordination deduction, which is why the coordinated OPA salary is also called the coordinated salary. With the coordinated OPA salary, there is a minimum and a maximum for the mandatory component.

Coordinated salary

See coordinated OPA salary.

Coordination deduction

To determine the Occupational Pensions Act (OPA) salary, the OPA coordination deduction is deducted from the old-age and survivors’ insurance (OASI) salary.

The amount of the coordination deduction is the same for all insured persons. It is adjusted by the federal government at regular intervals and is based on the maximum OASI annual pension.

Coverage ratio

Abbreviation: CR
In order for the pension fund to assess its risks, it calculates its obligations to the insured persons. The pension fund has obligations to its active insured persons (pension assets) and to its pension beneficiaries (pension promise / pension cash value). The pension fund compares these obligations with its assets. The ratio between the assets and the obligations results in the coverage ratio of a pension fund. The coverage ratio is usually expressed as a percentage.

If the coverage ratio is above the 100% mark, the pension fund has surplus cover and fluctuation reserves. If the coverage ratio is below the 100% mark, the pension fund is in an underfunding situation.

The coverage ratio can only be used to a limited extent to assess the quality of a pension fund. This is because the obligations of a pension fund depend heavily on the level of the technical interest rate and the actuarial assumptions used.

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Death benefits

If an insured person dies, their surviving dependents are entitled to death benefits from the deceased person’s pension institution. 
Surviving dependants are the surviving spouse, the surviving registered partner and orphans. A pension institution may include additional beneficiaries in its regulations, such as persons who were largely dependent on the deceased person.

Defined benefit plan

In Switzerland, there are two different systems for pension institutions (pension funds): the defined benefit plan and the defined contribution plan. The difference is in how pension fund benefits (retirement, disability and death benefits) are calculated. 

Under the defined benefit plan, the pension fund benefit is calculated on the basis of the insured salary, meaning that the amount of the pension fund benefit is defined in advance, and it depends on the last insured salary. With defined benefit plans, it is therefore not the amount of retirement capital an insured person has saved that is important but the amount of their last insured salary before retirement.

If an employee receives a salary increase, this leads to higher pension fund benefits for the employee. However, these higher benefits must be acquired through a buy-in by the employee and the employer through a one-time deposit of funds (subsequent payment). If the subsequent payment is not made, then the pension fund benefit defined in advance will not be reached in old age.

The defined contribution plan is the standard model for pension funds today. The defined benefit plan system is now used only by a small minority of pension funds.

Defined contribution plan

In Switzerland, there are two different systems for pension institutions (pension funds): the defined benefit plan and the defined contribution plan. The difference is in how pension fund benefits (retirement, disability and death benefits) are calculated. 

Under the defined contribution plan, pension fund benefits are calculated on the basis of the savings contributions actually paid and the interest rate on the capital saved. The higher the contributions, the more capital the insured person can save and the higher their monthly pension will be later on. This is because when the insured person retires, their accumulated capital is converted into a lifetime pension (at the conversion rate). 

The defined contribution plan is the standard model for pension funds today. The defined benefit plan system is now used only by a small minority of pension funds.

Depositing funds

See Buy-in.

Disability benefits

Disability pension

If an insured person is ill for an extended period of time, becomes occupationally disabled and can no longer work, then they are entitled to a disability pension. They receive this pension from the first pillar (disability insurance) and from the second pillar (Occupational Pensions Act (OPA) insurance).

To receive a disability pension, a person must be at least 40% disabled. This degree of disability is determined by the disability insurance.

Discounting

Discounting is a mathematical procedure that can be used to determine a terminal value of a future payment. In other words, discounting is used so that you know today how much money you need to have in order to pay an amount in the future.
In order to obtain today’s value, you need information about the duration and interest rate. You can then calculate backwards and subtract the annual interest until you reach the present day.

Distribution ratio

In accordance with the regulation on the minimum ratio, the insured persons receive at least 90% of the income generated from the Occupational Pensions Act (OPA) business from a full insurance. The percentage actually used for the insured collective in a year is called the distribution ratio.

Early withdrawal

Within the scope of governmental measures to promote home ownership, an insured person may withdraw capital from the pension fund. The insured person has an amount paid out from their pension fund and uses the money to purchase an owner-occupied residential property. This causes the retirement capital of the insured person to be reduced. The money that is withdrawn early can also be paid back.

Employee and employer contributions

Anyone who is compulsorily insured under the second pillar (mandatory insurance) pays contributions to the pension fund every month. At least half of these contributions must be paid by the employer, the rest is paid by the employee. 
The contributions consist of savings contributions, risk contributions and administrative costs. 

The minimum amount of the savings contributions depends on the age of the employee:
25–34 years: 7%
34–44 years: 10%
45–54 years: 15%
55–64 / 65 years: 18%

The risk contributions for insurance in case of death and disability as well as the administrative costs are determined by the pension fund.

Entry threshold

The entry threshold refers to the minimum salary that an insured person needs to earn with an employer in order to be subject to mandatory insurance in the second pillar. The level of this entry threshold is regularly adjusted by the federal government.

Persons who earn less than this minimum salary are not subject to mandatory insurance in the second pillar. Also, persons who work for more than one employer and earn less than the entry threshold with each employer are not automatically insured in the second pillar. However, such persons have the option of obtaining insurance on a voluntary basis, usually with the Substitute Occupational Benefit Institution.

Enveloping occupational pension benefits

If a pension institution (pension fund) offers the statutory minimum benefits while also offering benefits that go beyond the mandatory Occupational Pension Act (OPA) scheme, this is referred to as enveloping occupational pension benefits

With enveloping occupational pension benefits, a pension fund can insure the minimum benefits and the non-mandatory scheme benefits separately at different conditions (conversion rate, interest rate, savings process). This is referred to as OPA splitting.

Fluctuation reserves

See Reserves.

Full insurance

Employers can choose between three insurance models: full insurance, semi-autonomous pension funds with the risk savings fund model or autonomous pension funds.

A full insurance solution is available from a life insurer. Full insurance is considered very safe; on this basis, companies can avoid all risk. With full insurance, it is a legal requirement that the insurance companies pay interest on the Occupational Pensions Act (OPA) retirement savings of their insured persons at least at the statutory minimum interest rate each year, regardless of whether the insurance company itself has achieved a corresponding return on the retirement savings they invested on the capital market. Underfunding is not possible; the insurance company must always guarantee 100% of pension benefits, and in return, it receives some of the profits. See Legal ratio.

Fully autonomous fund

Funding in advance

Insurance companies and pension institutions can be financed according to funding in advance. The contributions of insured persons earn interest as savings. In order to be able to pay this interest, the capital is invested in the market. With funding in advance, each insured person saves for themselves, as with a savings bank.

The alternative to funding in advance is the pay-as-you-go system.

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Insurance certificate

Once a year, each person insured with a pension institution receives a personal insurance certificate that contains all the important information about their occupational pension benefits. On the insurance certificate, the insured person can see which benefits they and their dependants can expect to receive from the pension institution in old age (old-age benefits), in the event of disability and in the event of death (risk benefits). The insurance certificate also contains information on financing, that is, how high the insured person’s coordinated salary and contribution rate are. In addition, the insurance certificate tells an insured person whether they can make a buy-in and whether they can withdraw money to finance an owner-occupied residential property (promotion of home ownership). Most insurance certificates also contain information on the pension institution.

Insured salary

Legal basis: Article 7 and Article 8 of the Occupational Pensions Act (OPA)
The insured salary is the credited annual salary, minus the coordination deduction. The annual salary, insured salary, entry threshold and coordination deduction are specified in the pension plan. The pension plan is determined by the employer.

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Joint institution

A joint institution is a pension institution (pension fund) with which several employers are affiliated. In contrast to a collective institution, the affiliated employers form a community based on the principle of mutual solidarity. The insured persons have a uniform pension solution, and the organisation and accounting are also uniformly regulated. Joint institutions are particularly common in trade and professional associations.

Legal ratio

Life expectancy

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Mandatory credit balance

Legal basis: Articles 6 et seqq. of the Occupational Pensions Act (OPA)
The mandatory credit balance corresponds to the credit balance saved under the mandatory OPA. See also Splitting.

Mandatory OPA

The Occupational Pensions Act (OPA) stipulates by law which employees must be insured with a pension institution (pension fund) and what minimum benefits the pension institutions must provide.

All employees aged 18 and over who are already insured under the first pillar and earn a salary above the entry threshold must be insured.

Mandatory scheme / mandatory insurance

Minimum interest rate

Minimum ratio

The minimum ratio (also known as the legal ratio) is regulated in the Insurance Oversight Act (IOA) and applies to Occupational Pensions Act (OPA) pension institutions. The regulation on the minimum ratio states that at least 90% of the income from the OPA business must be allocated to the insured persons (distribution ratio). Shareholders receive a maximum of 10% of the generated income, which compensates them for putting up the risk capital. The minimum ratio is based on the OPA operating statement and is monitored by the competent supervisory authority, the Federal Office of Private Insurance (FOPI).

Mortality table

See Table.

Non-committed funds

Non-committed funds are funds that a pension fund does not need to cover its obligations and fluctuation reserves. Non-committed funds are also referred to as surpluses. A pension institution can add these funds to its reserves or distribute them to its insured persons (e.g. with an increase in benefits or a reduction in contributions).

Non-mandatory

Non-mandatory scheme

With the insured annual salary, a distinction is made between the mandatory portion (having to do with the mandatory scheme / mandatory insurance) and the non-mandatory portion (having to do with the non-mandatory scheme / non-mandatory insurance) in the Occupational Pensions Act (OPA).

Insured annual salaries that are higher than the maximum eligible OPA annual salary (OPA maximum salary) count towards the non-mandatory scheme portion. The benefits are provided by the pension fund on a voluntary basis. A non-mandatory scheme leads to higher pension fund benefits. See also Splitting.

OASI salary

The old-age and survivors’ insurance (OASI) salary is used to calculate the insured salary in the second pillar. The OASI salary is composed of hourly, daily, weekly and monthly wages. It also includes bonuses and compensation for overtime and night work, local and cost-of-living allowances, gratuities, length-of-service gifts and regular remuneration for meals and accommodation, as well as for private use of company cars and company flats.

Obligations of a pension institution

The obligations of a pension institution correspond to the actuarially required pension capital.

Experts on occupational pension benefits calculate the obligations of pension institutions according to recognised principles.

Old-age benefits

Old-age child’s pension

If an insured person has minor children at the time of retirement, then they will receive an old-age child’s pension from the pension fund. The old-age child’s pension amounts to 20% of the insured person’s old-age pension. If the insured person dies, the old-age child’s pension will continue to be paid. If a child comes of age and has not yet completed their initial education, the pension fund will continue to pay the old-age child’s pension. This will continue until the child reaches the age of 25 at the most. 

One-time deposit of funds

See Buy-in.

OPA Guarantee Fund

The Occupational Pensions Act (OPA) Guarantee Fund Foundation is a national occupational pension scheme financed by all pension institutions that provide mandatory benefits. The OPA Guarantee Fund Foundation exists to safeguard pension assets in the event of bankruptcy. If an employer or pension institution becomes insolvent, the OPA Guarantee Fund Foundation pays out the benefits. 

OPA minimum benefits

The Occupational Pensions Act (OPA) stipulates by law the minimum benefits that a pension institution (pension fund) must provide. The minimum interest rate on pension assets, the minimum pension conversion rate and the retirement age, which corresponds to the regular old-age and survivors’ insurance (OASI) retirement age, are defined.

The minimum benefits are prescribed by law with the intention that the insured persons can maintain an adequate standard of living after retirement with the benefits from the pension fund and the benefits from the old-age and survivors’ insurance / disability insurance.

OPA minimum interest rate

Legal basis: Article 15(2) of the Occupational Pensions Act (OPA)
The Occupational Pensions Act (OPA) minimum interest rate is the interest rate at which the OPA retirement savings of insured persons must earn interest at a minimum. The Federal Council determines how high this interest rate is. When deciding on the level of the OPA minimum interest rate, the Federal Council considers trends in the return on various investments (e.g. government bonds, other bonds, shares or real estate). The Federal Council reviews this interest rate at least every two years.

The pension institution (pension fund) decides how much interest is paid on credit balances that are above the mandatory range.

See also Splitting.

OPA salary

The Occupational Pensions Act (OPA) salary (also referred to as the upper limit) is the maximum amount of salary that may be insured under the mandatory occupational pension scheme. The OPA maximum salary is three times as high as the maximum old-age and survivors’ insurance (OASI) annual pension.

Salary components that are higher than the OPA salary are not insured under the mandatory occupational pension but can be insured as a non-mandatory scheme.

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Parity

Pension institutions (pension funds) operating in the mandatory range of the Occupational Pension Act (OPA) are managed on a parity basis. This means that the Board of Trustees is a body composed according to the principle of parity, meaning that an equal number of employers and employees have equal say. The representatives are elected directly by the insured persons or by delegates.

Pay-as-you-go system

A pay-as-you-go system is used in the old-age and survivors’ insurance (OASI) system to ensure that pension beneficiaries’ OASI pensions can be paid. This means that the economically active generation, that is, all active employees, finance the pension beneficiaries with their contributions to the OASI. These contributions are used directly to pay the pensions, meaning they are redistributed or apportioned. Compared to a pension fund, employees do not save any money personally. 

The alternative to the pay-as-you-go system is funding in advance.

Pension assets

Pension capital

A pension institution has obligations to its insured persons. The pension capital designates these actuarial obligations. A distinction is made between the pension capital for active insured persons (usually savings capital, but vested benefits at a minimum) and the pension capital for retired insured persons.

Pension cash value

See Cash value.

Pension commitments

In the insurance certificate, the pension institution (pension fund) indicates to the insured persons how high their future pension will be.

Pension fund

Pension fund benefits

The pension institution (pension fund) provides various benefits: old-age benefits, survivors’ benefits (death benefits) and disability benefits (risk benefits). Insured persons can find an overview of these pension fund benefits on the insurance certificate.

Pension institution

Employers are legally obliged to run their own pension institution (pension fund) or to join a pension institution (pension fund). This can be a collective institution or a joint institution. Employers can also choose between three insurance models: full insurance, semi-autonomous pension funds with the risk savings fund model or autonomous pension funds.

Pension plan

Each person insured with a pension institution has a pension plan in which their specific pension solution is defined, meaning that it shows the amount of the contributions and the extent of the insured benefits. In addition, limits for the insured salary are defined in the pension plan. 
A pension institution may offer its insured companies a choice of several pension plans.

Pledge of assets

Within the scope of governmental measures to promote home ownership, an insured person may pledge capital from the pension fund. The insured person uses a portion of their savings in the pension fund as collateral for financing. This means that the institution (e.g. the bank) that provides the financing (e.g. in the form of a mortgage) includes the pledged savings balance in the pension fund as part of the insured person’s equity capital, allowing the insured person to receive better financing conditions.

Probability of dying

To calculate the amount of the pension benefits, the pension institutions need to make assumptions about the insured persons’ probability of dying, that is, estimates of how many years a person will live after they retire.

The statistical values for calculating this probability of dying are provided by a table (also referred to as a mortality table). 

Projection rate

The projection rate is an interest rate used to calculate the expected retirement savings.

Promotion of home ownership

If you want to buy an owner-occupied residential property, you can use money from your second pillar to finance it. There are two options for taking advantage of the opportunity presented by this programme for the promotion of home ownership: the insured person may withdraw capital early (early withdrawal) or pledge assets (pledge of assets).

Provisions

Provisions are financial reserves that pension institutions are obliged to set aside for promised benefits which are not or only partially covered by contributions or which are subject to fluctuations. 

The most important provisions of a pension institution: 
– Provisions for increasing life expectancy
– Provisions for fluctuations in risk experience (disability or death) 
– Provisions for retirement losses
– Provisions for current or continuing benefit claims 
– Provisions for a reduction in the technical interest rate
– Provisions for pension increases

The supreme body / Board of Trustees of the pension institution (pension fund) makes decisions regarding what provisions are set aside.

Reserves

Every pension institution (pension fund) needs to build up (fluctuation) reserves in the amount of 10 to 20% of its capital assets. The amount of the reserves depends on the investment strategy and the age profile of the pension fund.
Reserves are defined as assets that are above the coverage ratio of 100%. The reserves serve to compensate for any price fluctuations on the markets, that is, to cushion possible losses. The larger the reserves of a pension fund, the more risks it can take (e.g. with its investment strategy).

Reserves of employer’s contributions

Employers can voluntarily make early payments of contributions to their pension institution for the coming years. The employer can recognise these employer reserves as an expense, thereby reducing its profit and benefiting from lower taxes. In addition to the tax savings, the voluntary reserves of employer’s contributions give the employer a way to guarantee its obligations in difficult times (the employer creates reserves in good years).

However, the reserves of employer’s contributions are only possible in limited amounts: they may not exceed five times the employer’s annual contribution to the pension fund. The amount of these annual contributions is calculated in accordance with the regulations of the pension institution.

Restructuring

If a pension institution gets into an underfunding situation, then it needs to take restructuring measures to restore financial equilibrium. If the coverage ratio is below 90%, this is referred to as significant underfunding.

The supreme body / Board of Trustees makes decisions regarding what restructuring measures will be implemented. It is important that the measures are not born unilaterally by either the employers or the employees. The measures also need to comply with the regulations as well as be proportionate and balanced.

A variety of restructuring measures are possible:
– Employer and employee contributions 
– Pension beneficiary contributions 
– Reduction / cancellation of the interest rate on non-mandatory retirement savings
– Reduction of the interest rate on mandatory retirement savings
– Suspension of early withdrawals for the financing of residential property
– Reduction of the conversion rate for non-mandatory retirement savings

Restructuring in case of significant underfunding should be completed within five to seven years.

Retirement losses

According to the Occupational Pension Act (OPA), retirement losses occur if the existing retirement savings of an insured person at the beginning of retirement are not sufficient to finance the future pension payments. This means that the benefits are higher than the actuarial assumptions allow for based on the Probability of dying.

Retirement savings

After retirement, the insured person receives a lifetime retirement pension (old-age benefits) from the pension fund. The amount of this retirement pension is calculated from the retirement savings (pension assets) as follows: The retirement savings are multiplied by the current conversion rate. This results in an annual pension that is paid out until death.

Depending on how the insured person is insured with the pension fund, they will also receive benefits from the non-mandatory scheme savings component after retirement. This can be associated with different interest rates and be converted in different ways. The sum of the pension from the mandatory scheme and the non-mandatory scheme is the total pension. See also Splitting.

If the insured person has minor children at the time of retirement, then they will receive an old-age child’s pension from the pension fund for every child.

Risk benefits

Pension funds pay various pension fund benefits. Risk benefits include disability benefits and survivors’ benefits (death benefits).

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Savings process

Legal basis: Article 16 of the Occupational Pensions Act (OPA)
In the second pillar, insured persons save for their retirement capital according to an individual savings process, that is, each insured person has their personal “savings account” at the pension fund. If the conditions for a mandatory Occupational Pensions Act (OPA) pension are met, then the savings process begins at the age of 25 and ends when the insured person reaches retirement age. The retirement capital saved is used to finance the pension. The existing capital is multiplied by the conversion factor, allowing the annual pension to be calculated.

Semi-autonomous pension funds

Employers can choose between three insurance models: full insurance, semi-autonomous pension funds with the risk savings fund model or autonomous pension funds.

With semi-autonomous pension funds, the pension fund transfers the risk of death and disability to an insurance company. As a rule, semi-autonomous pension funds manage the retirement savings themselves but insure the risks (death, disability) with an insurance company. This gives semi-autonomous pension funds the opportunity to generate good returns and set aside fluctuation reserves for investment risks. The insured persons also benefit from good investment performance by receiving a better interest rate on their retirement capital. However, semi-autonomous pension funds do not receive an investment guarantee and bear the risk themselves. If the return is very low in bad financial years, the pension fund must nevertheless pay interest on the retirement capital of the insured persons in the mandatory Occupational Pensions Act (OPA) scheme at the specified minimum interest rate. In this case, the interest the pension fund pays may be higher than the return, and there is a risk that a pension fund will get into an underfunding situation.

Shadow account

All pension institutions are required by law to keep a shadow account, meaning that they need to manage the individual retirement accounts of the insured persons in accordance with Occupational Pensions Act (OPA) standards. The shadow account should show how high the statutory minimum benefits are according to the OPA, which the pension institution must guarantee at a minimum.

Splitting

Splitting is used both in the Occupational Pensions Act (OPA) system and in the old-age and survivors’ insurance / disability insurance (OASI / DI) system. However, “splitting” does not mean the same thing in these two areas. 

OPA splitting:
With enveloping occupational pension benefits, the pension institution offers both Occupational Pensions Act (OPA) minimum benefits and non-mandatory benefits (from a non-mandatory scheme). If these two benefits are insured separately under different conditions, this is referred to as OPA splitting. This means that two conversion rates, two interest rates, two savings processes and so on are applied for the OPA minimum benefits and for the non-mandatory benefits. 

OASI / DI splitting:
Old-age and survivors’ insurance / disability insurance (OASI / DI) splitting is when the income earned by married couples during the marriage is added together, with half of the total credited to each of them equally. The child-raising and care credits are also split. For splitting to be possible, both spouses need to have been insured in the same calendar years. Splitting is carried out as soon as one spouse is entitled to a pension, if the marriage ends in divorce or if a widowed person is entitled to a retirement pension. 

Substitute Occupational Benefit Institution

The Substitute Occupational Benefit Institution is a national pension institution. 

Commissioned by the federal government, it is a safety net for the second pillar. Every employer, without exception, is insured with the Substitute Occupational Benefit Institution if the legal requirements for this are met.

Employers are obliged to join a pension institution (pension fund). If they do not do so, they will be forced to join the Substitute Occupational Benefit Institution.

In addition, the Substitute Occupational Benefit Institution insures employees and self-employed persons who are not legally obligated to take out second pillar insurance but who wish to do so voluntarily. The vested benefits of people who leave their previous pension institution (e.g. in the event of a job change) and do not specify a new pension institution or account details are also transferred to the Substitute Occupational Benefit Institution.

Supreme body / Board of Trustees

Within the legal provisions, the pension institutions (pension funds) are free to determine the structure of their benefits and their financing. The supreme body (usually the Board of Trustees) is responsible for this. The supreme body determines the strategy and investment strategy of a pension institution and also supervises the Executive Board. 

The supreme body is composed according to the principle of parity, that is, it consists of an equal number of representatives of employees and employers.

Survivors’ benefits

Table

The tables provide the statistical basis for calculating the probability of dying, with a distinction being made between period and generation tables. Period tables do not take into account a further increase in life expectancy in future. Pension funds set aside a provision for this risk. Generation tables calculate with a model that takes into account future increases in life expectancy, meaning that each cohort has a different life expectancy.

Technical interest rate

Abbreviation: TIR
The technical interest rate is a component in the calculation of pension cash values. To determine the technical interest rate, an assumption is made about the average interest rate at which the capital with which the pensions are paid will earn interest in future.

A pension fund needs the technical interest rate as a discounting rate that allows it to calculate the capital it needs to pay future pensions.

Pension funds are free to set the technical interest rate within certain limits. The higher the technical interest rate, the smaller the amount of capital set aside, but there is also a higher risk that the pension fund will get into an underfunding situation if the return is lower than the technical interest rate. The higher the technical interest rate, the higher the technical conversion rate.

The technical interest rate for pension cash values is always linked to the statistical values for mortality, and all of this is summarised in the actuarial assumptions. The technical interest rate should not be confused with the Occupational Pensions Act (OPA) minimum interest rate or the projection interest rate.

Term of pension payment

The term of pension payment refers to the period of time during which a pension is paid to a person. The duration of the pension is not determined for each person individually but is instead arrived at on the basis of statistical surveys. These statistical surveys are consolidated in actuarial assumptions (e.g. in the Occupational Pension Act (OPA) 2015 or the population census 2020). 

The term of the pension payments is needed to calculate the pension cash value. All pension institutions that apply the same actuarial assumptions therefore also calculate the same pension amount for a person.

Underfunding

Every pension institution in Switzerland is required to report a coverage ratio. The coverage ratio is the ratio of the assets to the obligations of the pension institution. The coverage ratio thus shows what percentage of the obligations of a pension institution are covered by assets. For example, if a pension institution has a coverage ratio of 100%, then its obligations and its pension assets are exactly the same. This means the pension institution has sufficient capital to meet all obligations. If the coverage ratio is more than 100%, then the pension institution has assets that exceed its liabilities. If the coverage ratio is below 100%, the obligations exceed the assets, and a pension institution is said to be underfunded.

A pension institution in an underfunding situation would no longer be able to pay all current and future obligations (payouts) at the same time. However, it is very unlikely that a pension institution would have to meet all obligations at the same time. The reason for this is that not all insured persons change employers or retire at the same time. 

If a pension institution has significant underfunding over an extended period of time, it is required to initiate restructuring

Upper limit

See OPA salary.

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Vested benefits

If an insured person leaves the pension institution (pension fund), then they are entitled to the vested benefits. 

The vested benefits include at least all employee and employer contributions and any buy-ins or deposits of funds made (one-time deposits of funds). The vested benefits must be transferred either to the insured person’s new pension fund or to a vested benefits institution.

Vested benefits institution

Vested benefits institutions (also referred to as vested benefits foundations) exist to ensure that cover for occupational pension benefits can be maintained. 

When a person changes jobs, they often change pension funds as well. In this case, the capital saved up to that point (vested benefits) must be transferred to the new pension fund. 

If someone becomes unemployed or takes an extended break, then the capital needs to be transferred to a vested benefits institution. The capital is still tied up in a vested benefits institution, thus guaranteeing cover for occupational pension benefits.

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No terms found. More definitions will follow.
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