"LOB 21" occupational benefits reform. An overview.

The conversion rate is used to convert the retirement savings accumulated by an insured person up until retirement into a lifelong retirement pension.

The LOB minimum conversion rate is used for the compulsory component of occupational benefits provision. This is currently 6.8 percent and will be reduced to 6 percent upon the reform. If the retirement benefits are drawn as capital, the conversion rate is irrelevant.

The reduction in the LOB conversion rate to 6 percent results in a lower LOB retirement pension where the capital remains the same. However, the supplementary component of occupational benefits provision is unaffected by the reform. Therefore, the adjustment in the LOB conversion rate – without taking into account the changes in the insured salary, the retirement credits and any pension supplements – will not affect all insured persons (see example showing the details). In addition, the reform provides for measures to compensate for the reduction in the LOB conversion rate.

Only new pensions will be affected by a change in the conversion rate; existing pensions will remain unchanged.

Example showing the details

In the case of a pension fund that applies a conversion rate of 5.4 percent to the total retirement savings, the reduction in the LOB conversion rate has no effect on people whose supplementary retirement savings make up more than 20 percent of the total retirement savings at retirement. For people with less supplementary provision, on the other hand, the result is a reduction in their pension. This does not take into account the compensatory measures provided for by the reform.

The adjustment in the LOB conversion rate takes account of the fact that the life expectancy of the Swiss population has increased significantly in recent decades and the accumulated capital must suffice for longer in order to fund the retirement pension through to the end of the insured person's life. Without this step, the unsystematic and unwanted redistribution from young to old will persist.

At present, employers must compulsorily insure all employees who earn an annual salary of more than CHF 22,050 (2024 value) under an occupational benefits plan. When the reform enters into force, this salary threshold will be lowered to CHF 19,845 (90 percent of the current value).

With the entrance threshold reduced by 10 percent, people on lower annual salaries will also benefit from occupational benefits provision. According to official federal figures, around 100,000 people will be affected by this change: 70,000 will be compulsorily insured in the second pillar; 30,000 people with multiple jobs will have additional small incomes insured.

According to the latest publication from the Federal Statistical Office, more than 4.6 million people in Switzerland had occupational benefits coverage in 2022. The lower entrance threshold will result in an increase in insured persons of around 2 percent.

The purpose of the coordination deduction is to coordinate the first and second pillars. As a general rule, only the salary component that is not already covered by OASI/IV should be insured under an occupational benefits plan. The coordination deduction is therefore deducted from the OASI salary* and only the difference insured under a compulsory occupational benefits plan.

The LOB coordination deduction is CHF 25,725 (2024 value) – regardless of how high the earned OASI salary is. When the LOB reform enters into force, the coordination deduction will no longer be a fixed amount in Swiss francs; rather, it will be 20 percent of the OASI salary*.

^{* up to a cap of CHF 88,200}

The aim of the reform is to ensure that 80 percent of the OASI salary is always insured up to the LOB salary cap of CHF 88,200 (2024 value). In the case of low OASI salaries, the insured OASI salary will rise sharply and sometimes reach a multiple of the current value. Even in the upper salary bands, the insured salary will increase upon the reform. The maximum LOB coordination deduction for an OASI salary of CHF 88,200 is CHF 17,640 (based on 2024 values).

The change to the coordination deduction will improve the situation of part-time employees and people on lower incomes because a far larger salary component will be compulsorily insured. In some cases, the benefits coverage in the event of old age, death and disability will improve significantly as a result. Conversely, the affected will have to accept higher salary deductions.

Irrespective of the reform, many pension funds have adjusted the coordination deduction to the level of part-time employment or decided to waive it altogether. The effects of the reform around the coordination deduction and the insured salary will therefore very much depend on the existing employee benefits solution.

The savings contributions, which together with the interest form the retirement savings, are referred to as retirement credits in the occupational benefits system. The employer must fund at least half of the contributions, with the remainder being deducted directly from the employee's salary. The law specifies minimum retirement credits, although these are exceeded by most pension funds. The following explanatory notes refer only to the LOB minimum requirements. Whether the adjustment to the retirement credit rates in the compulsory component affects the actual savings contributions will depend on the features of the current pension solution.

At present, the retirement credits in compulsory occupational benefits provision are 7 percent of the insured LOB salary for 25- to 34-year-olds, 10 percent for 35- to 44-year-olds, 15 percent for 45- to 54-year-olds and 18 percent for 55- to 65-year-olds.

In order to promote employment and continued employment among the over-55s, the LOB savings contributions will be less sharply graduated. There will be only two age groups: the retirement credits will be 9 percent of the insured LOB salary for 25- to 44-year-olds and 14 percent for 45- to 65-year-olds. Older employees will thus become less "expensive" for companies.

The effect of this measure must be considered in conjunction with the changes in the insured salary. Although the total salary deductions in percentage terms will fall, retirement credits in Swiss francs will normally rise due to the increase in insured salaries. This is intended to ensure that the level of compulsory occupational benefits does not deteriorate compared with today, despite the reduction in the LOB conversion rate.

Only for those aged 55 to 65 with an OASI salary of over CHF 68,000 will the LOB retirement credit in Swiss francs fall compared with today.

As a general rule under the reform, the reduction in the coordination deduction and the adjustment to the retirement credits should largely compensate for the reduction in the LOB conversion rate, i.e. benefits should not be reduced compared with before the reform.

However, this will not work for employees retiring over the next few years: they face the threat of pension losses. In order to reduce those losses, compensatory measures in the form of pension supplements are provided for a "transitional generation" spanning 15 cohorts. The first five cohorts to reach the age of 65 after the reform enters into force will receive a pension supplement of a maximum of CHF 200 a month, the next five cohorts a maximum of CHF 150 and the last five cohorts a maximum of CHF 100 a month. Depending on an insured person's total retirement savings at retirement, the pension supplement will be reduced or cease to apply entirely. In order to be entitled to a pension supplement, various conditions must also be met.

The Federal Social Insurance Office (FSIO) estimates that around 25 percent of insured persons in the transitional generation will receive a full pension supplement and a further 25 percent a reduced pension supplement.

Around 50 percent of insured persons have retirement savings of over CHF 441,000 (compulsory and supplementary) or do not meet the other eligibility requirements. They will not receive a pension supplement.

The chosen system does not take into account whether and to what extent an insured person is actually affected by a reduction in their retirement pension as a result of the reform. Consequently, people will receive supplements that greatly overcompensate for the pension reduction, or there will be insured persons for whom the supplements are not sufficient to compensate for the reduction.

According to the Federal Social Insurance Office (FSIO), the pension supplements for the 15 cohorts add up to around CHF 11.3 billion. They are to be financed by the pension funds, which could access subsidies from the Guarantee Fund. The subsidies from the Guarantee Fund are to be financed by all pension funds and insured persons, irrespective of whether they are affected by the pension supplements or not. In the first year, the salary-based contribution will be a maximum of CHF 339 per person (2024 value). For subsequent years, the Federal Council will set the contributions anew.