🖨️

Deep dive into Swiss Pension system - Part 1: History & Economics

September 17, 2026

In this article, we briefly described how the Swiss pension works. When asking whether the pension is guaranteed, our answer: to some extent. The so-called mandatory part is relatively secure, while the extra-mandatory part is less so.

In this series of 3 articles, we look at the pension system in greater detail and explain why we came to this conclusion. We also plan to examine proposed changes, such as the so-called 13th pension from the second pillar (the 13th pension from the first pillar is already in place). Before doing so, however, we need to lay out the framework for the analysis.

We analyze the pension system along 3 dimensions:

1. History & economics - how the current Swiss pension system came into being and the economics behind it.
2. Society & law - how the way the system is organized determines how resources are redistributed across different social groups, and how it is embedded in the broader legal framework.
3. Conclusions & future outlook - what conclusions we can draw and how the system might evolve in the future.

In this article, we focus on history and economics. Why combine the two? Because we want to examine the economic imbalances behind the system in their historical context and see how they have evolved over time.
First, we establish the methods to evaluate them, and then we will see that, with demographic, macroeconomic, and political developments over the last 40 years, the imbalances in the Swiss pension system have been increasing.

History

We do not intend to write a history book on the relatively narrow topic of the Swiss pension system. At the same time, some historical context is necessary to understand how the system came into being, how it acquired its current form, and which design choices were made along the way.

From a historical perspective, the collapse of a pension system is not an exceptional event. The 20th century offers several examples where pension promises, retirement savings, or the assets supporting them were effectively wiped out or severely devalued:

• Eastern Block in 1989-1991
• Germany post WWII
• French rentiers post WWI

There are also many examples where pension systems did not collapse completely, but a substantial part of the pension wealth was effectively lost. At the same time, with the new pension system re-emerged after the collapse (let's say after 10 years), the position gained in the old system was usually somehow recognized.
However, ten or fifteen years is a long period in a human life. If such a collapse happens at retirement, it basically means no pension, and even a later restoration of accrued rights may come too late and amount to a personal tragedy.

Swiss pension timeline

A very concise timeline of Swiss pension system (a more detailed timeline here):

• 1972 - the 3 pillar system is adopted as the constitutional framework for Swiss pensions.
• 1985 - the 2nd pillar is laid down
• 2004-2006 - essential revision: conversion rate reduced from 7.2% to 6.8%, retirement age for women increased, some tax incentives introduced etc
• 2024-2025 - important votings: NO to reduce the conversion rate from 6.8% to 6%, YES to 13th pension in pillar 1

When changes were made, they were usually introduced gradually, with long transition periods and compensating transfers to soften the impact.

Let's add some numbers to the timeline. We'll start with life expectancy and retirement age:

Year	Life expectancy (M/F), years	Retirement age (M/F), years
1985	76.9 (73.5/80.2)1	65 / 62
2005	81.3 (78.7/83.9)1	65 / 64
2025	84.5 (82.7/86.3)2	65 / 64.5

We can see that the gap between the life expectancy and retirement age is growing, thus, more years to be alimented from the pension system.
From a system-technical perspective, this is a problem. From a social perspective, however, one could see it positively: we do not require elderly members of society to keep working. Technically, the growing gap can be compensated for either by earning a higher return on the accumulated capital or by lowering the conversion rate.

In other words: either we earn more or we pay less. It is as simple as that.

Let's put this gap (l.e.@r. - life expectancy at retirement) into the table and compare it with the conversion rates and interest rates.

Year	l.e.@r. (M/F) years	Conversion rate	10y govt bond interest rate	Technical interest rate
1985	18.2 (14.9/21.5)3	7.2%	4.8%4	?
2005	20.3 (18.1/22.5)3	7.1%	2.1%4	3.87%5
2025	22.2 (20.7/23.7)3	6.8%	0.4%4	1.73%6

Technical note. There is some room for debate over which interest rate is appropriate. Pension-fund capital is invested for the long term, with capital preservation as a primary objective. One possible benchmark is therefore the 10-year Swiss Confederation bond yield, which we treat as a long-term risk-free rate.

At the same time, pension funds are expected to earn a return on their capital. We therefore also consider the technical interest rates used by pension funds themselves in their actuarial calculations.

We can see that interest rate are not rising, if anything, they've been falling. Thus, we can't rely on earning more on the accumulated capital in the current macroeconomic environment.
The conversion rate did go down, however, as we would see later not low enough. When the system was designed, it contained a certain safety margin. We argue that this margin has since not only disappeared, but turned strongly negative.

Economics

To understand what is happening to the value of pensions, we first need to express that value in monetary terms. This is not a trivial task, since pensions are not marked to market: there is no exchange where they are quoted.
A useful way to think about the monetary value of a pension is as a mortgage in reverse.

Conversion rate

The conversion rate is how much you get per year as a percentage of your pension capital. For example, with a conversion rate of 5% and pension capital of 300'00 CHF, you would receive 15'000 CHF per year, or 1250 CHF per month. Although it is expressed as a percentage, and therefore sounds like an interest rate, it is better to think of it as a regular payment. Here is why.

One can imagine a pension as a reversed mortgage. With a regular mortgage, the bank gives you a lump sum upfront, which you then repay over time through relatively small monthly payments.

With a pension, the direction is reversed: at retirement, you effectively hand over your pension capital to the pension fund and receive monthly payments in return. Once we think of it this way, we can use the same machinery that are used to value a mortgage to estimate the value of the pension.

Technical note One might be tempted to state something like "conversion rate = interest rate + amortization rate", e.g. conversation rate of 6% = interest rate of 2% + amortization rate of 4%. The short answer is no. What can be split is the payment, not the conversion rate itself. For example, out of a CHF 1'250 monthly payment, CHF 250 might represent interest and CHF 1'000 amortization. But this split is not constant: it changes from month to month as the outstanding balance declines. The interest component decreases, while the amortization component increases.
Following our analogy of a pension as a mortgage in reverse, the same logic can be applied to pension payments. In principle, each payment can be decomposed into an interest component and an amortization component. In practice, however, expressing these as fixed percentages is not useful, because they would have to be applied to a everchanging (sinking) outstanding balance which isn't provided anyway since it's abstract.

Pension as a mortgage - putting the pieces together

We grasped the conversion rate as conceptually a regular payment, we need also the loan term which is not so obvious.
The natural candidate for it is the life expectancy at retirement. The only problem (or bliss) is that it's not fixed at indivudual level which is inconvenient, but still allows to do the calculations at average, and, thus, spot the imbalances in the system.
Since we assume that the system is out of equilibrium, we also need to allow that for non-zero remaining debt at the end of the loan term. Since the mortgage is reversed, and we expect the pension system to be underfunded, it would be negative. Another way to measure the imbalance is to set the remaining debt to zero and calculate the implied interest rate. If the system is underfunded, it lies higher when the market interest rate (and someone has to make up the difference).

Finding the equilibrium

The system can't remain out of equilibrium in the long run, if there's a negative capital at the end of the loan, sooner or later someone has to compensate it. In the current system, the payers are the holders of so-called extra-mandatory capital: they finance the mandatory part.
One should be cautious when extending this analysis to the re-distribution among other groups, e.g. one can come up with the idea to calculate the re-distribution from citizens to foreigners, or fom young to old, or from men to women etc. However, none of these cases is straight-forward and even the direction of re-distribution can be questioned.
Take gender as an example. One could argue that unpaid care work already implies a substantial transfer from women to men, and that redistribution in the opposite direction through the pension system merely offsets part of it.

Measuring the safety margin in the system

Let's assume the parameters of the year 2005: 20 years and 4 months for the pension to be paid out, 2.1% interest rate, and 7'100 CHF on every 100'000 CHF of pension fund capital to be paid out annually (i.e. 591.67 CHF per month). As per calculation, the remaining debt is almost 30'000 CHF.
It's tempting to say that the system is underfunded by 30%, or that its safety margin is -30%. However, we need to discount the money that we have in 20 years back to today, at 2.1% the factor for 20.3 years is ca. 0.655, thus, we would end up with -19.6% of the negative capital in present-value terms.
To come up with lack of funds it's better to normalize the gap to the whole: 19.6/119.6 = ca. 16.4%. Thus, the end negative capital of -30% to the initial capital we interpret as being underfunded by 16.4%.

Technical note. This number is sensitive to assumptions, if we assume the interest rate to be 2.5% instead of 2.1%, we would end up with the safety margin of -15.0% (24'750 CHF remaining debt weighted with discounting factor of ca. 0.605, i.e. [1 + 0.025]^(-20.33)). The metric like "lack of funds of -19.6%" is easy to interpret. At the same time, as we have seen, it's sensitive to assumptions or policy changes, i.e. even a small policy change can have an essential impact.
That's why it's useful to look to the other metric we pointed out to: implied interest rate since it's a metric per annum. Maybe it's harder to interpret and overall more technical, but it shows by how much the annual parameters are out of equilibrium. E.g. with the 2005 parameters, the market interest rate is 2.1% p.a. while the implied interest rate behind the promises of the pension system is ca. 4% p.a., so we have to compensate (or re-distribute) somehow at the rate of ca. 1.9% p.a.

Safety margin in the system historically

Now that we have some method to estimate the reserves (safety margin) in the mandatory part of the system, we can complement the table as follows.

Year	l.e.@r. years	Conversion rate	Reserves @ 10y govt rate	Reserves @ technical rate
1985	18.2	7.2%	10% (link)
2005	20.3	7.1%	-16% (link)	-1% (link)
2025	22.2	6.8%	-33% (link)	-22% (link)

We orient ourselves rather on the last column (the reserves under the technical interest rate), the reserves under the "risk-free" rate are still informative, we can interpret it as a concervative approach, or a lower bound.
What we see is that the system started with a substantial positive safety margin in 1985, thus. Just 20 years later, by 2005, that margin had already disappeared if not turned negative. By 2025, the imbalance in mandatory part is visible.

As a reminder, for 2005 we use the parameters decided at the time as if they were already fully in force, although their implementation was phased in over roughly the following decade. We do this because the transition path had already been set, and we are interested in the final destination.

Who pays for it?

Someone has to cover the negative capital in the mandatory part that we found in our calculations. So who pays?
The minimal conversion rates apply only for the mandatory part, and for extra-mandatory part there's no limit from below (at least I couldn't find such, but I'm pretty sure it can't turn negative). Thus, one has to lower the conversion rate there, to generate the positive capital in extra-mandatory part to net out the negative capital in the obligatory part. Since most participants have both mandatory and extra-mandatory pension capital, whether an individual pays in or get funded depends at the end, on her personal split of pension funds into mandatory and extra-mandatory funds.
Now that we answered who would pay for the dinner, we can even estimate the bill. At the individual level, we can plug in a person's numbers and get the answer. At the aggregated level since we know how much money belongs to each part, we can estimate the redistribution across the system as a whole.

"Bericht zur finanziellen Lage der Vorsorgeeinrichtungen 2025"⁶ ("Report on the Financial Situation of Pension Institutions 2025") says that the system-wide part of the mandatory capital in 2025 is 37.3% and the average conversion rate is 5.17%.

If we plug the numbers, the calculation shows that each year ca. 0.6% of the capital gets re-distributed towards mandatory part, The assumed return of 1.73% p.a. splits into the implied return of mandatory part is 4.3% (due to minimal conversion rate), and that of extra mandatory part is 0% (to compensate the elevated return on the mandatory part).

Pension fund view

We looked at the pension system at the individual and at the system-wide level. It's also useful to consider the intermediate level - that of pension funds since they might differ quite much in their shape and performance.
The pension funds of large multinational financial corporations tend to achieve consistently higher returns on capital (since they have in-house know-how and low transaction costs) than the collective pension funds of small SMEs or municipalities - the difference over long period of time could be 5% p.a..
We're not comparing absolutely the best with absolutely the worst, since the worst even go bankrupt and have to be bailed out by the state fund, the returns are not bailed out in this case. It's more a upper 10% to lower 10% comparison.
A pension fund can thus be in a stronger or weaker financial position, which may in turn require more or less redistribution within the fund itself.

Conclusion

The current Swiss pension system was launched in 1985 with a safety margin under the demographic, economic, and political conditions of the time. Twenty years later, by 2005, this safety margin had been exhausted, leaving the system roughly in equilibrium. Today, the system shows significant imbalances, most notably an underfunded mandatory part that is cross-funded by the extra-mandatory part.

Eliminating these imbalances requires changes to the parameters of the Swiss pension system. In Part 2 (expected by 03.10.2026), we look at how these parameters are embedded in society and law—and therefore how realistic such changes are.