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The conversion rate determines how high the Pension from the pension fund is. This is used to calculate how much money you will receive from your accumulated capital each year after retirement.
The subject is often presented in a complicated way and while the details are indeed relatively complex, you only need to know a few basic details to understand the principle. The following is therefore the Conversion rate explained simply.
The conversion rate is a Percentagewhich determines what percentage of your Pension fund (2nd pillar) saved capital you annually as a pension will be paid out.
The 2nd pillar consists of a mandatory and a non-mandatory credit balance.
All employees with a salary between CHF 22,050 and CHF 88,200 (2024) are subject to the mandatory scheme. Pension schemes offer additional pension solutions for the salary below and any salary above this, for which they are free to determine the conditions.
The conversion rate for the mandatory part of the pension fund is set by the federal government and is the same for all institutions. If your employer has also taken out extra-mandatory insurance, a different rate may apply.
If the same rate applies to both the mandatory and the extra-mandatory scheme, this is referred to as a enveloping conversion rate. If this is not the case, the Conversion rate split.
The so-called Minimum conversion rate for the mandatory pension is currently still 6.8%. This is to be reduced to 6% as a result of an upcoming BVG reform. However, there will be another vote on this in autumn 2024.
With today's Conversion rate of 6.8% you will receive an annual pension of CHF 6,800 per CHF 100,000 of your retirement assets. With a Savings capital of CHF 1,000,000 this results accordingly CHF 68,000 per year or CHF 5,666 per month.
With an enveloping rate, this can even be lower than the minimum conversion rate, provided that the minimum pension theoretically achieved is not undercut.
If your pension fund has a split conversion rate the retirement assets are divided.
Let us assume that 80% of the capital saved consists of mandatory assets and 20% of extra-mandatory assets. The conversion rate for the mandatory scheme is still 6.8%, while for the extra-mandatory scheme it is 6%. The calculation would then look like this:
In total, you therefore receive CHF 66,400 per year or 5,533 per month.
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The Confederation sets the conversion rate in the Federal Law on Occupational Retirement, Survivors' and Disability Pension Plans (BVG) for the mandatory pension fund. This is defined in particular on the basis of general life expectancy and the expected return.
Each pension fund can set its own rate for the extra-mandatory scheme.
By the way: It can all get complicated very quickly. Even some politicians can't explain the conversion rate, even though they debate it. If you don't think so, take a look at this Fintool video an.
Yes, the conversion rate can be adjusted with a Revision of the law which is due to happen soon.
Changes are mainly necessary due to increased life expectancy. While it was assumed in 1948 that 65-year-old men would live an average of 12 years and 65-year-old women an average of 13 years, it is now assumed that 65-year-old men will live an average of 12 years and 65-year-old women an average of 13 years. today of around 20 and 22 years. This means that the capital saved will have to last much longer, which is why the conversion rate is to be lowered.
Also relevant are Survivors' pensionsif the insured person dies. It must also be possible to pay these from the capital saved.
Another factor is the Technical interest rate. This is an arithmetical value that reflects the Expected return determined. If future returns on the financial market are low, a high conversion rate can no longer be guaranteed.
The Minimum conversion rate is the same for all pension funds. This means that your retirement assets in the mandatory scheme are always converted at 6.8%.
The conversion rate for the extra-mandatory scheme may vary from one pension fund to another.
According to Pension fund comparison.ch Spida currently offers the highest overall conversion rate of 6.5%. However, this can change annually.
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The conversion rate is a Percentagewhich is used to calculate how high your Annual pension from the 2nd pillar is. The current conversion rate is 6.8%. However, this is to be reduced to 6%. With retirement assets of CHF 1,000,000, you would now receive an annual BVG pension of CHF 68,000 (or CHF 60,000 after the revision).
This is based in particular on the average life expectancy and the expected return. As life expectancy is steadily increasing and the expected return is tending to fall, the statutory conversion rate is to be adjusted.
However, pension funds are still free to set a different rate for extra-mandatory assets.
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