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