The Swiss pension system consists of a compulsory public pension program, financed on a pay-as-you-go basis, supplemented by mandatory occupational pension plans. The mandatory second-pillar was introduced in 1985. The net replacement rate after taxes for the first two pillars amounts to 70 - 80% of preretirement income, on average. A third pillar is composed of various voluntary tax-exempt savings vehicles operated by the country's banking and insurance institutions.
As regards the second pillar, the initial conversion rate was fixed at 7.2%. The conversion rate is considered the legal minimum and pension funds are free to use higher rates. The initial conversion rate remained in place through 2004 when a new law provided for the gradual reduction in conversions rates to between 6.8% and 7.15% - depending on age and sex - over a 10-year period starting in January 2005.
In a referendum held in March 2007, a vast majority of Swiss voters (almost 75%) rejected a law approved by the parliament which would have lowered the conversion rate used to calculate individual annuities for mandatory occupational pension plans to 6.4% by 2016. Actuarial experts had advised the government to lower the conversion rate in anticipation of declining investment returns and increasing life expectancy of the Swiss population.
The referendum outcome was interpreted as reflecting widespread uneasiness among voters about the future level of retirement incomes. Following the referendum, the government announced that further parliamentary negotiations would be needed to build a new consensus regarding future levels of retirement earnings.
Sources: "Switzerland," International Update, October 2004, U.S. Social Security Administration; "Should You Take A Lump-Sum or Annuitize? Results from Swiss Pension Funds," CESIFO Working Paper No. 1610, November 2005; "Swiss Pension Plans for SMI Companies," Towers Watson, 2009; "Referendum Result: No Reduction in the Minimum Conversion Rate," Credit Suisse Pension Fund, March 2010; "Swiss Voters Reject Government-Backed Occupational Pension Scheme," HISGlobal Insight Daily Analysis, March 8, 2010; "Seven in Ten Voted Against Swiss Conversion Rate Cut," IPE.com, March 8, 2010.