Co-ordination deduction, BVG/LPP interest, conversion rate – for people not dealing with pension benefits on a daily basis, these terms are more confusing than intelligible.
The following Q&A between a client and his consultant sheds some light on the matter and explains a few important terms:
Peter K. has just received his annual insurance certificate from his pension fund. But he is baffled by the amounts and unfamiliar words on the certificate. What should he do with the certificate? His pension consultant, Max M., offers the following guidance:
Every employee with basic BVG/LPP coverage (i.e. anybody earning at least CHF 21,060 p.a.) receives an insurance certificate from their pension fund once a year. You should peruse the certificate closely, not set it aside like a closed book. The certificate contains important information for you.
What is the “declared AHV/AVS salary”?
This is your gross salary; it is the basis for calculating your BVG/LPP benefits. This is also the amount on the annual pay certificate from your employer.
What does “pensionable salary” mean?
The AHV/AVS salary is subject to mandatory second pillar insurance up to an upper limit of CHF 84,240 minus a base amount (known as the co-ordination deduction) of CHF 24,570. The limit is set by parliament to ensure that both the very low and the very high salaries are not subject to mandatory coverage. Employers are free to insure amounts below the lower limit and over the upper limit (known as extra-mandatory coverage).
What does “accrued retirement savings capital” mean?
This is the amount of your retirement savings capital plus interest. The interest rate on the mandatory BVG/LPP portion (the statutory minimum benefits) is currently 1.5% p.a. This interest rate is not fixed; it is set by the Federal Council at least once every two years. The extra-mandatory retirement savings capital, i.e. the portion of your retirement savings capital above the upper BVG/LPP limit, may accrue interest at a lower rate than the mandatory portion of your retirement savings capital. The rate is determined by the individual pension fund regulations.
What information is provided under the heading “Benefits”?
This section contains a projection of your future pension based on your available retirement savings capital. The pension fund first extrapolates your retirement savings capital to see how much capital you will have at retirement assuming that you continue to earn the same salary and that your retirement savings bear interest at a realistic rate. Then the pension fund calculates your pension at the current conversion rate. The conversion rate tells you what percentage of your accrued retirement savings capital is paid out as a pension each year. It also applies to survivors’ pensions in case of death and to disability pensions in case of illness. The corresponding information is also on your insurance certificate. The information provided in this section is purely indicative and subject to change every year. The basis is always the pension fund regulations which you can obtain from your pension fund if you have not already received them. Alternatively, you may ask your human resources department.
What does “financing” mean?
This section shows the employee and the employer’s respective share of the contributions and the portion of the contributions which goes to your retirement savings. The administrative costs must also be indicated.
What does “maximum purchase allowance” mean?
If you earned less in the past and have a gap in pension coverage, you can increase your second pillar pension assets by making a voluntary contribution which is deductible from your taxable income. The amounts paid in are frozen and cannot be withdrawn in the form of lump-sum capital until a three-year time limit has elapsed.
What does “maximum withdrawal under the encouragement of home ownership scheme” mean?
The amount indicated here can be withdrawn from your pension fund for the purchase of your own home.
A withdrawal can only be made once every five years; the minimum withdrawal amount is CHF 20,000. The amounts withdrawn are taxed immediately (as a rule, at a reduced rate and separately from other income). The pension-holder pays the tax directly to the tax office.
From the age of 50, the full amount may no longer be available for withdrawal. If you use your pension assets to purchase a home, your pension benefits will be reduced. Accordingly, you should make sure you are fully informed about the possible consequences of a withdrawal.
What does “funded status” mean?
Unless your employer is affiliated with one of the insurance companies at full guarantee cover, you should take a close look at the funded status of your pension fund. If its funded status is below 90%, your pension fund will sooner or later have to adopt a recovery plan which may involve higher premiums or restrictions on withdrawals.
If the indications provided are not clear, the pension fund is obligated to furnish detailed explanations. Send your questions to your pension fund in writing.
Alternatively, you can ask Liberty’s experts for guidance, a second opinion or additional information without obligation.