Glossary

The actuarial reserve is the capital accumulated by pension funds to finance the insured benefits.

The AHV salary is the basis for calculating the legally prescribed benefits of the 2nd pillar (BVG). The AHV salary is the actual salary earned, including any insured allowances.

Asset liability management (ALM) refers to the coordination and control of dependencies between the assets and liabilities sides of the balance sheet, as well as the structure and expected development of the insurance portfolio. The aim of an ALM study is to define an investment strategy that is tailored to the performance targets, risk capacity and risk appetite of the pension fund.

A benchmark (also reference index) is a measure for comparing results or performance. Pension funds use benchmarks in the investment area to check the achievement of targets. When choosing a benchmark, the composition of the corresponding index is decisive.

In a defined benefit pension plan, future benefits are defined in advance as a percentage of the insured salary. The retirement and savings contributions to be paid are derived from this basis.

In the event of early retirement, the insured person is entitled to an AHV bridging pension until they reach the reference age.

Buy-ins are voluntary contributions made by an insured person that lead to higher insured retirement benefits. Depending on the pension plan, buy-ins can also lead to an increase in benefits in the event of disability or death (before retirement). Buy-ins are only possible as long as there is a gap in cover and if the requirements under pension law are met. As a rule, purchases are tax-deductible.

BVG is the abbreviation for the Federal Law on Occupational Retirement, Survivors' and Disability Pension Plans. The BVG has been in force since 1 January 1985. Various aspects of the BVG are regulated in detail at ordinance level (BVV), including how a pension fund must invest its assets and what risks it may take.

Pension funds are obliged to pay interest on the retirement savings of their insured persons. Each year, the Federal Council determines the (minimum) interest rate at which pension schemes must pay interest on the retirement savings of insured persons in the mandatory area (BVG retirement savings). In the non-mandatory area, interest on retirement savings is not subject to any legal requirements.

In Switzerland, the 2nd pillar is financed according to the capital cover method. As a result, the necessary capital (actuarial reserve) is saved for each insured person during their gainful employment to be available for future benefits.

When capital is invested for the long term to generate income, capital gains or to maintain a substance, it is referred to as an investment (capital investment).

Insured persons can decide whether they wish to receive a pension or a cash payment of their accumulated capital on retirement. Partial withdrawals of the capital are also possible in principle. The pension scheme determines the periods to be observed.

Each pension is based on an individual entitlement and is non-transferable. To ensure that pensions do not continue to be paid out after a death, pension funds are authorised to periodically request proof of life from the insured persons.

A pension plan is considered comprehensive if it provides benefits that go beyond the scope of the mandatory BVG coverage. This is particularly the case if a pension fund insures higher salary components, offers higher benefits, pays higher contributions or assumes more advantageous eligibility criteria.

In a defined contribution pension fund system, the benefits (for retirement, disability, death) are generally based on the sum of the retirement credits and savings contributions plus interest (retirement assets).

The conversion rate is an actuarial figure that pension funds need to calculate pensions. The amount of an insured person's future pension is calculated by multiplying the conversion rate by the existing retirement assets at the time of retirement. The conversion rate depends on the age at the time of retirement. The pension funds determine the level of the conversion rate in the regulations. The main factors that determine the conversion rate are the technical interest rate and future life expectancy.

The funding ratio shows the relationship between the available assets of a pension fund and its obligations (liabilities). Overfunding occurs when the obligations are more than 100 per cent covered, whereas in the case of underfunding, the assets are not sufficient to cover all obligations in full. A distinction is made between the technical and the economic coverage ratio. In the former, the liabilities are discounted using a technical interest rate, while the economic view takes the current yield curve into account.

see savings contributions

The relevant annual salary is the basis for calculating the contributions and benefits of the 2nd pillar. The relevant annual salary is the contractually agreed annual salary at 100% plus any profit share.

Under the BVG, recipients of a disability pension receive an annual pension of 20 per cent of their disability pension for each child under the age of 18. For children who are in education, the disabled person's child's pension is paid until they reach the age of 25 at the latest.

In a pension plan based on the dual primacy system, the pension benefits are determined partly according to the defined contribution system and partly according to the defined benefit system. The standard market model is the dual primacy system with a defined contribution system for retirement benefits and a defined benefit system for the risk benefits of disability and death.

An employer is a company that takes out an affiliation contract with a pension fund and insures its employees against the risks of death, disability and old age.

The employer contribution is made up of the savings contribution (for old age) and, if applicable (depending on the pension plan), the risk contribution (for the risks of death and disability). By law, the total of these contributions (incl. risk) across the entire portfolio of insured persons must be at least equal to that of the insured persons.

Pension funds must periodically have a recognised expert in occupational pension provision verify that they have the necessary security to meet their obligations to the insured and pensioners.

The insurable salary corresponds to the applicable annual salary multiplied by the level of employment.

Each year, the foundation counsil determines the interest rate to be applied to the retirement assets of the insured persons based on the investment income and the financial situation of the pension fund.

As a rule, performance is annualised. Performance is defined as the relationship between the profit/loss of an investment and the capital employed. To calculate the capital employed, the respective cash flows in the period under review must also be taken into account.

The investment strategy defines the asset classes (e.g. equities, bonds, government bonds, commodities or real estate) in which a company invests and how the available assets are distributed among the different asset classes in percentage terms. Pension funds are bound by the provisions of the BVG and the corresponding subsequent enactments.

Equal representation in the administration of a pension fund is a central principle of occupational pensions. It is designed to ensure that the social partners organise, implement and monitor the pension plan jointly. The strategic management body – the board of trustees – is composed of equal numbers of representatives of the employees and the employers.

The BVG Guarantee Fund is a nationwide institution with special tasks in the area of occupational benefits. All pension schemes subject to the Vested Benefits Act are affiliated to the Guarantee Fund.

see BVG minimum interest rate

Voluntary savings contributions (Plus and Extra) are monthly salary deductions in favour of the occupational pension plan. The voluntary savings contributions, plus interest, are credited to the retirement savings and fully taken into account when calculating the retirement pension.

Under certain circumstances, the life partner of a deceased insured person is entitled to a life partner's pension. The amount of the life partner's pension is calculated in the same way as the spouse's pension.

Performance is the sum of the returns on investments.

The totality of investments available to a person, organisation or company is referred to as a portfolio.

Portfolio managers are asset managers. In practice, the term portfolio manager refers to the person responsible for an individual portfolio (assets or sub-portfolio) as well as the institution or bank that carries out portfolio management (asset management).

The amount of money that corresponds to the value of future services or contributions at a specific point in time.

Rating refers to the classification of the creditworthiness of various players in the financial sector. The term encompasses both the process of determining creditworthiness and the result of the analysis. Major professional rating agencies in the financial sector include Standard & Poors, Moody's and Fitch.

The Substitute Occupational Benefit Institution is a nationwide pension scheme set up by the umbrella organisations of employers and employees. It is available to employers who have not joined a pension scheme. The Substitute Occupational Benefit Institution is obliged to insure unemployed persons for mandatory occupational benefits. In addition, since 1995, all termination benefits of insured persons who do not specify a (new) pension scheme to which these earmarked termination benefits can be transferred must be transferred to it.

The reference age (age of normal retirement) is 65 for both men and women (born in 1964 or later).

Registered partnerships between same-sex couples are treated the same as marriage. The provisions that apply to married couples therefore also apply to same-sex couples.

If a pension scheme is underfunded, it is obliged under the BVG to take measures to remedy the shortfall. By law, it has various options for doing so.

Men and women are entitled to claim AHV old-age benefits from the age of 65. Insured persons are entitled to claim occupational retirement benefits from the time they reach the reference age. The regulatory provisions of a pension fund may, however, stipulate that the entitlement to retirement benefits arises when gainful employment ceases, from the age of 58 and at the latest from the age of 70.

The retirement pension is the most common form of retirement benefit. It is calculated by multiplying the retirement assets at the time of retirement by the corresponding conversion rate. Pension recipients have a lifelong entitlement to the retirement pension defined at the time of retirement.

The retirement assets are the sum of the retirement credits (also called savings contributions) that an insured person and their employer pay into the 2nd pillar during their working life, plus all deposits (purchases, vested benefits, repayment of WEF or divorce) minus all withdrawals (WEF, divorce) and plus interest from the pension fund. At the time of retirement, the amount of the retirement pension is determined on the basis of the retirement savings.

Risk contributions are used to finance disability and death benefits (risk benefits). Risk contributions are levied from the age of 17. Depending on the pension plan, the employer may contribute to these.

see Pension savings

see retirement savings

Savings contributions are contributions that each insured person and their employer make to the insured person's retirement savings. The amount of the savings contributions is set as a percentage of the insured salary and depends on the age of the insured person.

Pension schemes calculate the benefit entitlements of insured persons in accordance with the regulations on the one hand and the statutory minimum entitlement on the other. With this so-called shadow calculation, pension schemes prove that they comply with the minimum standards of the BVG in every respect.

In the event of the death of an insured person or pension recipient, the widowed spouse is entitled to a pension (spouse's pension) under certain conditions.

The technical interest rate indicates how high the interest on the capital saved (actuarial reserve) must be after retirement in order to ensure the financing of a current pension. The technical interest must be financed by the investment return. As only assumptions can be made about future investment returns, the technical interest is a calculation assumption.

The technical provisions, together with the savings or actuarial reserves, form the obligations (actuarially required pension capital) of a pension fund. The calculation of the technical provisions takes into account the specific features of the portfolio of insured persons, the Pension Fund regulations and assumptions about the future.

The retirement assets that an insured person has accrued up to the date of leaving an employment relationship are referred to as the termination benefit (vested benefits). The termination benefit is either transferred to the pension fund of the new employer or, if no new job is taken up, to a vested benefits account.

According to the BVG, pension schemes must be in a position to fulfil their obligations at all times. Pension funds primarily have obligations towards pension recipients (pension payments) and active insured members (existing retirement savings). These obligations (liabilities) must be 100 per cent covered by assets, as the 2nd pillar is financed using the capital cover method. If the assets are less than the liabilities, this is referred to as underfunding.

The value fluctuation reserve takes into account the risk of fluctuation in the value of the investments. The accumulation of value fluctuation reserves allows pension funds to meet their obligations even in poor investment years, without falling into a shortfall.

When an insured person leaves an employment relationship, there is usually also a change of pension scheme and thus a transfer of the acquired entitlements. This is done either to the pension fund of the new employer or, in the event of a longer break in employment or unemployment, to a vested benefits institution. In Switzerland, full vested benefits are guaranteed; however, the funds are tied to the purpose of the occupational benefits scheme.

Employees remain insured against the risks of death and disability for one month after termination of the pension relationship, provided they have not taken up a new position.