How to understand your pillar 2

Most of us are familiar with the basics of pillar 2. But how many of us have thought about its implications? Is your company cutting you a good deal when it comes to pension contribution? How should you understand pillar 2 as part of your broader investment portfolio? Let’s find out.

What is pillar 2

Let’s start with the basics. There’s plenty of info out there explaining what pillar 2 (2. Säule) is [1, 2, 3], so we’ll limit this section to a few short bullets:

• Pillar 2 is a pension fund. It aims to help Swiss residents maintain their standard of living upon retirement
• You must contribute to pillar 2 if you’re gainfully employed
• One can contribute beyond the mandatory threshold. These are extra-mandatory contributions
• Typically, both employers and employees contribute to pillar 2
• Pillar 2 funds are locked in a “private box” that belongs to you and only to you. This contrasts with defined benefit pension schemas of other EU countries
• Your employer manages your pillar 2 funds. Changing employers typically results in moving your money to a different pension fund provider

If the points above are clear, you understand the basics of pillar 2.

Mandatory pillar 2 contributions

There’s a minimum threshold for mandatory pillar 2 contributions if you’re employed. This threshold is age-dependent, as comes as a percentage of your coordinated salary. Copying directly from admin.ch:

Age, men	Age, women	% coordinated salary
25-34	25-34	7%
35-44	35-44	10%
45-54	45-54	15%
55-65	55-64	18%

What is the coordinated salary?

Your coordinated salary is a function of your total comp. Your total comp is your base salary plus any bonus, stock compensation etc. The following rules apply [4]:

• The first CHF 25,095 are exempt
• Compensation above CHF 86,040 is exempt

Let’s look at a couple of examples:

• CHF 75k total comp: coordinated salary is CHF 49,905
• CHF 120k total comp: coordinated salary is CHF 60,945

It follows that the coordinated salary maxes out at CHF 60,945. This and other interesting figures are neatly captured here.

How do employers contribute?

By law, employer contributions must be at least equal to employee contributions [1]. It’s common for employers to go beyond that.

Extra-mandatory pillar 2 contributions

Contributions to pillar 2 beyond the legal requirement are extra-mandatory contributions. Also known as voluntary contributions.

A big chunk of such contributions typically comes from employers. In such cases, the more the better. Employees can also voluntarily contribute. This time, though, a case can be made both for and against such contributions.

Reasons to make voluntary contributions:

• Income tax deduction: pillar 2 contributions are deducted from your yearly gross salary
• Scalability: most employees can voluntarily contribute much more to pillar 2 than to pillar 3a [5]

Reasons not to make voluntary contributions:

• Low return on investment: very conservative portfolio with low long-term returns. Currently the guaranteed interest rate is 1% [5]
• Locked up funds: your money gets locked up until retirement. The same exceptions that apply to pillar 3a are valid here. This factsheet provides additional details

All things considered, my personal view is that voluntary pillar 2 self-contributions aren’t desirable. The tax benefit simply doesn’t make up for the suboptimal portfolio allocation and subsequent low returns. Chances are you’re better off investing in diversified equity funds. Specially if you’re young.

There’s only two scenarios under which voluntary pillar 2 contributions would make sense:

• You’re a high earner late in your career (say 50+), and investing conservatively is a priority
• Your company matches additional voluntary contributions

There’s one final point worth mentioning. In the event of permanently leaving Switzerland, you can cash out your pillar 2 funds. However, if moving to an EU / EFTA country with social security obligations, you can only withdraw the extra-mandatory portion of your pillar 2 [5].

Pillar 2 funding benchmark

Enough with the theory. Now is when things get interesting. To better understand pillar 2, we’ll look into several realistic examples. This will give you a benchmark to compare how good a deal your company is cutting you with regards to pension. I won’t disclose company names, but most examples are based on real pension schemas offered by different companies (from start-ups to big corp) in Switzerland:

	Example #1	Example #2	Example #3	Example #4	Example #5
Age bracket	25-34	25-34	25-34	25-34	35-44
Base salary (CHF)	105k	100k	130k	120k	110k
Bonus (CHF)	10k	18k	15k	20k	30k
Total comp (CHF)	115k	118k	145k	140k	140k
Coordinated salary (CHF)	61k	61k	61k	61k	61k
Mandatory contribution (% coord. salary)	7%	7%	7%	7%	10%
Total mandatory contribution (CHF)	4.3k	4.3k	4.3k	4.3k	6.1k
Employee contribution (% total comp)	3%	3%	0%	1.5%	4%
Employer contribution (% total comp)	12%	7%	18%	1.5%	5%
Employee contribution (CHF)	3.5k	3.5k	0k	2.15k	5.6k
Employer contribution (CHF)	13.8k	8.3k	26.1k	2.15k	7k
Employer mandatory contribution (CHF)	2.1k	2.1k	2.1k	2.1k	2.8k
Employer extra-mandatory contribution (CHF)	11.7k	6.2k	24k	0	4.2k
Total extra-mandatory contribution (CHF)	13k	7.5k	21.8k	0	6.5k

The most important rows in the table above are:

• Employee contribution (CHF): generally speaking, money in your pocket is better than money locked-up. Hence, the lower this figure, the better. This assumes that you’re disciplined enough to invest money through other means
• Employer contribution (% total comp): many employers don’t anchor their contributions on a % of the coordinated salary. Instead, they define their contribution based on total comp. The higher, the better
• Employer extra-mandatory contribution (CHF): how much employers contribute above their legal requirement. The higher, the better. This figure is very important. Why? Because this is the chunk of pillar 2 that would convert into cash in the event of leaving Switzerland and moving to an EU / EFTA country. It’s a good idea to consider this as almost additional salary. And surely to weigh it in when evaluating your compensation

Example #1

This is a good deal. The employee puts 3.5k yearly cut from her salary. In return, the employer provides extra-mandatory contributions of almost 12k.

Example #2

Very similar to #1, but with a lower employer contribution. Notice the impact of this. Total comps of #1 is slightly below #2 (115k vs 118k). However, when we factor in employer contributions to pillar 2, the tides turn (127k vs 124k).

It’s not only take-home pay that matters when assessing your compensation

Example #3

The employer contributes generously. So much that the employee doesn’t have to put a dime in their pillar 2. Employer extra-mandatory contributions effectively increase total comp by ~15% (22k on top of 125k).

Example #4

The company has a schema with extra-mandatory pillar 2 contributions. However, the employee takes on a big chunk of it.

Example #5

Fictitious example where the minimum possible contribution is offered by the employer. Again, the perceived total comp gap from #1 and #2 is large. However, it shrinks when factoring in employer contributions to pillar 2.

The role of pillar 2 in your investment portfolio

We’ve explored how the pillar 2 nest builds up. It remains to discuss how to account for pillar 2 as part of our broader investment portfolio. Two points are important here.

Include pillar 2 when you track your net worth

It’s a common mistake to neglect pillar 2 investments when tracking your assets. If you fall in this category, count again. You’ll be happy with the outcome.

The reason why it makes sense to count pillar 2 in is twofold. First, pillar 2 consists of non-transferrable, government protected assets. As safe as it gets. Second, pillar 2 can be converted into a lump sum upon leaving Switzerland. This is particularly important for the expat-heavy community of this website.

That said, if you’re an expat be careful with the accounting. Remember that you’d only get access to the extra-mandatory part.

Account for pillar 2 when you look into your asset allocation

This is somewhat related to the point above, but from a different angle. Chances are pillar 2 is a sizable part of your overall investment portfolio. Because of the low risk, low return profile of pillar 2 funds, they’re best understood as bonds. Next time you assess your asset allocation, make sure you factor that in. The relatively share of equities in your portfolio might be lower than you had thought.

Wrapping up

In this entry we’ve looked into the basics of pillar 2. More interestingly, we’ve benchmarked different employer contribution schemas. And also looked into how to understand pillar 2 as part of your broader investment portfolio. Hopefully this will help you understand your pillar 2 better.

Last updated on June 8, 2021