I think using my LPP might be better than stocks!

Investing / Others
41

I think that there is loads of mis-understanding around, when we talk about pension funds. Just a few facts that apply IF YOU ARE PART OF A WELL MANAGED PENSION FUND:

  • Funds are invested in a more efficient way than most personal investors or robos are able to achieve (risk/return)
  • Absolute Return the Pension Fund generates equates to a roughly a 50/50 Portfolio
  • Interest granted to actively insured (aka employees) exceeds the Absolute Return the Pension Fund generated; you can expect a return of something like 50/50 with 1.25 leverage; so about 60/40
  • There is Zero Downside risk

Clearly, this only applies if you are part of a well managed pension fund meaning:

  • Competent asset management with sensible TER
  • Competent Reserve Management, indicators are a technical interest rate < 2% / conversion rate <= 5% and a coverage rate >118%
  • Number of retired employees in the range of 35% to max 50%
  • No material inflow of employees / insured individual (aka either no Company that heavily grows its employer base or no multi-company setup that keeps attracting new contributing companies)

Meaning, that Pension Funds are an efficient and high performing alternative to a Vested Benefits account like Finpension. Clearly, with current uncertainities re. capital withdrawal tax - its a different story if you still want to max your pension or even invest into it (at the moment, I no longer do). But thats a different story than the decision if you constantly keep your funds outside of your pension and iinvest them with Finpension and the like.

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42

Check your fund, most funds should be balanced now (esp. on the extra-mandatory), many fund changed their setup in the past 5y to fix the imbalance.

from https://www.oak-bv.admin.ch/inhalte/Themen/Erhebung_finanzielle_Lage/2024/Rapport_sur_la_situation_financiere_des_institutions_de_prevoyance_2024.pdf

Au cours des quatre dernières années, les estimations ne montrent pas
de redistribution significative, de sorte que la moyenne sur les cinq dernières années atteint
actuellement 0,0% du capital de prévoyance.

(the last 3 years have been in favor of active contributors)

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43

I’m curious, what’s the intuition behind this?

44

I agree that recent OAK BV reports show much less redistribution — but for me that only reflects favourable market conditions (higher interest rates + strong returns in 2023/24). My concern is more structural: Switzerland still runs a system where politically fixed promises (conversion rate, guaranteed pensions, minimum interest) must be financed through conservatively regulated portfolios operating in real markets. When markets or interest rates fall again, the mismatch reappears — and historically this has led to redistribution from active contributors to retirees because retiree pensions can’t be adjusted.

That’s exactly the point: the problem isn’t today’s numbers, it’s the design. Other countries, like Sweden, run adaptive pension systems where benefits adjust automatically to funding conditions — even for retirees — so the system stays actuarially fair without cross-subsidies. Switzerland doesn’t have that flexibility, so I personally put a premium on capital that stays under my control and outside this political/regulatory framework.

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45

Isn’t that only true of the mandatory part? At least for the funds I was in, this was a small part of their liabilities. There is indeed some potential cross financing between high earners and low earners (but at least for me personally I don’t think this has been significant, esp with fund that now use blended rates rather than separate mandatory/supplemental split).

It’s true that lack of healthy inflation is a concern since that’s the standard way to fix imbalance (you can decide how much to raise existing pension if there’s the fund runs too much in favor of retirees).

46

Employees of growing companies will with „their“ return of the pension fund constantly fund fluctuation reserves of new entrants, so you don‘t get your share of Investment return. The reverse happens with shrinking companies. Its less a case with pension providers that take on new companies (as most of them come with some fluctuation reserves), but they may very well be too small. So you to a certain effect experience this as well.

Re return and re-distribution. Well managed pension funds right now are too conservative, meaning that return on pensioneers assets exceeds required return. This gives active participants an extra return. I enjoyed higher interest than Investment returns for both 24 and 25.

47

The core issues I see with the Swiss 2nd pillar are structural. The hard-defined payout rate on the mandatory part (6.8%) is completely detached from today’s market and demographic reality. It was set at a time when retirees lived well under 20 years after pension age and when safe yields were 4–5%. With much longer life expectancy and far lower real returns, this rate is mathematically unsustainable. At the same time, many existing retirees still receive pensions calculated with historically higher conversion rates (7.0–7.2%), and that gap must be financed — mostly by active contributors.

To compensate, pension funds increasingly apply blended conversion rates for the total capital, often around or below 5%. At such levels, a disciplined investor could often run a private withdrawal strategy, preserve principal, and potentially achieve higher long-term returns than the implicit return inside an annuity.

Another factor: pensions are fully taxed as income, year after year. In contrast, a self-managed portfolio allows you to realise capital gains tax-free in Switzerland as long as you invest as a private individual. Only dividends and wealth tax apply. For long-term, disciplined investors, this is a significant advantage — because the entire appreciation of the portfolio is outside income taxation.

There is also the issue of variability: your effective pension depends entirely on the pension fund your employer happens to use when you retire. Two people with identical capital can end up with very different lifelong pensions simply because they were insured with different Pensionskassen. This makes long-term planning uncertain.

A further structural weakness is that Swiss 2nd-pillar pensions have no automatic inflation adjustment. Once retired, the annuity is nominal and steadily loses purchasing power. Voluntary inflation adjustments exist almost only in the healthiest funds and are the exception, not the rule.

Finally, the political environment adds risk. There are ongoing discussions about reducing or even removing the possibility of lump-sum withdrawals in the future. Once capital is locked inside the 2nd pillar, you have no control over future legislative changes.

For me, these structural issues — unsustainable mandatory conversion rates, blended rates below 5%, lack of inflation indexation, employer-dependent outcomes, political uncertainty, and the tax advantages of managing one’s own capital — all increase the value of keeping a meaningful portion of my wealth under my own control rather than within a rigid and politically constrained system.

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48

Lucky you, we got like 2% interest on 8% investment return :clown_face: .

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49

I think one of the structural problems is that many SMEs lack the skills and/or interest to find a good pension fund and/or aren’t attractive to them so can’t access them or won’t know they exist and default to a solution provided by your basic insurer that distributes returns at or near the legally mandated minimum.

The incentives between the employee, the employer and the insurer aren’t really aligned in this case and the actor with the least amount of leverage is the employee.

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50

There’s a flip side to this: the pensioners who lump summed and run out of money. Tax payers pay for these mistakes.

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51

but do they really. i’d be interested to see any figures on this.

52

Yeah, me, too.

Does it surprise you that in 2022 37% of new pensioners chose to withdraw their entire savings as a lump sum, with another 19% choosing a combination.

I’m kind of flabbergasted that almost 4 out of 10 new pensioners have (a) enough money to lump sum retire on it and (b) apparently (think they) know how to live off that sum for the rest of their life.
Another 2 out of 10 take a partial lump sum – world trip? – and then a pension for the rest.

I’d almost bet on there eventually – and rightfully – being future legislation on regulating who and how much can be lump sum withdrawn once the numbers of lump sum pensioners requiring Ergänzungsleistungen will show up in the stats and the newspapers.
The arguments in favor of it are already being made (see below).

This risk (IMO) to savvy investors like the ones on this forum (excluding Goofy, of course) is that such regulation will overshoot, some political parties (I won’t mention any to not further anger our Dear Leaders on this forum) will absolutely pound the table that it can only be pensions, and with an at least 6.8% conversion rate both for mandatory and non-mandatory pillar 2, and … ok, I’ll stop here.

The numbers are pulled from this article: Für steigende Ergänzungsleistungen ist gesorgt | Schweizer Personalvorsorge

English summary:

The article, “Für steigende Ergänzungsleistungen ist gesorgt” (Provision is made for increasing supplementary benefits), from Schweizer Personalvorsorge (Swiss Occupational Pensions), discusses the significant and rising trend of Swiss pensioners opting for a lump-sum payout (capital withdrawal) of their occupational pension (BV) instead of a regular annuity (pension).

The core argument is:

  • Rising Capital Withdrawals: A record high of 37% of new pensioners choose to withdraw their entire savings as a lump sum, with another 19% choosing a combination.
  • The Consequence: This short-term “privatization of advantages” leads to a long-term “socialization of disadvantages.” By consuming their capital early, many retirees will eventually deplete their funds.
  • The Outcome: This will cause a sharp increase (“explosion”) in future applications for Supplementary Benefits (Ergänzungsleistungen), placing a growing financial burden on the general public and the younger generations, as the state must then step in to ensure a guaranteed minimum standard of living.
  • Underlying Issue: The dominance of the defined contribution system (Beitragsprimat) in the second pillar shifts the long-term risk (including inflation and longevity risk) onto the employee, making a lump sum withdrawal more tempting but ultimately riskier for society.

English translation:

This is the full English translation of the article “Für steigende Ergänzungsleistungen ist gesorgt” (Provision is Made for Increasing Supplementary Benefits), published on September 17, 2024, by Roman von Ah in Schweizer Personalvorsorge.

Provision is Made for Increasing Supplementary Benefits (Rising Capital Withdrawals from Occupational Pensions)

37 percent of newly retired individuals choose to withdraw their retirement savings from their occupational pension (BV) as a lump sum. This is an unprecedented number. Another 19 percent choose a combination of pension and capital (FSO 2022). Future applications for supplementary benefits will explode. But let’s take it step by step.

In the Defined Benefit (Leistungsprimat, LP) system, pension fund annuities are defined relative to the last insured salary. This offers high security for the insured. Together with the AHV (Old-Age and Survivors’ Insurance), the accustomed standard of living is adequately guaranteed, and inflation is also taken into account. However, financing the LP is demanding and heavily burdens employers. It is no surprise that they have mostly abolished these risks.

Defined Contribution (BP) Provides Insufficient Pension Coverage

The Defined Contribution (Beitragsprimat, BP) system, which dominates occupational pension provision, is the response to the risk avoidance practiced by private and public employers in the LP (while the performance goal in the original message for the BVG compulsory insurance in 1975 was still formulated in the spirit of the LP, the BP found its way into the proposal during parliamentary discussions). The accrued retirement capital multiplied by the conversion rate (UWS) defines the pension. Theoretically, the BP can generate similar benefits to the LP, but this rarely happens in practice. In the BP, the pension risk shifts to the employees.

Clash of Interests in the Sphere of Socio-Political Solidarity

In 2022, 13 billion Swiss francs were paid out as lump sums—15 percent more than the year before and 120 percent more than ten years ago.

The relevant narrative of the financial service providers is as follows: The trend towards capital withdrawal is no coincidence. Anyone with the necessary financial leeway often concludes that withdrawing capital is the more attractive solution compared to the annuity. This attractiveness includes flexibility, the possibility of fulfilling long-held (consumption) wishes, a lower tax rate, higher-yielding investment opportunities, and the inheritance of unused retirement capital.

Who Benefits from Capital Withdrawal?

1. Pension Funds
Pension funds benefit doubly from capital withdrawals: Firstly, the longevity risk disappears from their balance sheets; it is passed on to the pensioners who withdraw their capital. Secondly, the surplus coverage of benefit obligations (funding ratio > 100%) remains pro rata with the pension providers; it is not paid out upon withdrawal.

2. Financial Service Providers
The withdrawn capital is, in the best case, reinvested. Individually provided investment advice or asset management is likely 4 to 6 times more expensive than that provided collectively in the competitively organized 2nd pillar. No wonder capital withdrawal is heavily promoted.

3. New Retirees with Low Life Expectancy
Those who expect to die prematurely (in the left half of the mortality distribution) benefit from capital withdrawal (“negative selection”) at the expense of the collective.

Is Society Being Duped by Capital Withdrawal?

Life expectancy is constantly rising and is around 82 (men) and 85 (women) years. Many people expect to live longer. Healthy pensioners should plan for at least 25 to 30 years of remaining lifespan.

Private longevity risk hedging (LLR) is unlikely to be possible for 90% of the Swiss population. Anyone who thinks that withdrawing capital will improve their financial situation in old age underestimates the high cost of annuities. Furthermore, coping with additional expenses and/or leaving inheritances to descendants misunderstands the challenges.

Once the withdrawn capital is used up, unforeseen expenses, illnesses, or costs for old age/nursing homes quickly become millstones around one’s neck. The AHV does not save people from drowning; applications for supplementary benefits certainly do.

The privatization of advantages and the socialization of disadvantages occur at the expense of the general public and on the backs of younger generations.

Roman von Ah concludes:
Capital withdrawals, if permitted at all, should be strongly limited. One approach could be to allow partial capital withdrawals only if the annuity from the occupational pension amounts to at least 50,000 francs per year.

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53

It made me think of this:

image
image675×499 50.8 KB

Maybe you’re tipping me to the other side of the curve now :wink:

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54

Many articles frame capital withdrawal as dangerous and imply that only the pension fund benefits. The above article, which argues that lump-sum withdrawals “privatize advantages and socialize disadvantages,” does raise valid points for certain groups of retirees — but it also misses important nuances that matter for financially literate investors.

For risk-averse or financially inexperienced retirees, taking the pension is absolutely fine. It provides guaranteed lifetime income and removes longevity and investment risk, and for those who don’t want to manage volatility or budgeting, it’s the right choice.

But the fact that pension funds benefit from lump-sum withdrawals does not mean the retiree loses. Both sides can benefit simultaneously: the fund reduces its long-term liabilities, and the retiree gains flexibility, control, and potentially far better long-term outcomes. The framing that it’s zero-sum is simply incorrect.

A key misunderstanding is the idea that a 5.5% (rather favorable blended rate) conversion rate equals a 5.5% return. It doesn’t. Using realistic assumptions (CHF 1,000,000 capital, 5.5% rate, 15% tax, 2% inflation, 20–30 year lifespan, no inflation indexing, capital forfeited at death), the picture is very different. After tax, the first-year payout is around 47k. But the real value steadily erodes: roughly 38k after 10 years, 31k after 20 years, and about 25k after 30 years. The internal real return of such an annuity is only around 0–1% (and negative if you live long), because you are essentially receiving your own capital back over time plus an insurance component, with no inflation protection.

If you compare this with withdrawing flexibly from a 100% global equity portfolio, the difference is huge. With the same 1,000,000 CHF, withdrawing around 3–4% (conservative) in normal years (and less in downturns) tends to produce 30–40k after tax initially — lower than the annuity in year one, but unlike the annuity, this income grows with markets and inflation. Over 20–30 years, annual withdrawals commonly reach 60–80k (real), while the portfolio itself often grows to 2–4 million CHF, preserving capital and inheritance potential. Of course this approach requires discipline and tolerance for lower withdrawal phases (minimum income from capital > Minimum spending needs).

It’s also fair to acknowledge that some retirees, especially those with low savings or little discipline, might overspend and eventually require Ergänzungsleistungen. For that group, restrictions or safeguards on lump-sum withdrawals make sense to avoid shifting costs to society. But for disciplined investors who manage withdrawals responsibly, capital withdrawal can provide higher lifetime income, full inflation protection, and long-term wealth preservation compared to today’s non-indexed annuities.

Importantly, the best approach for experienced investors may be a hybrid: take the mandatory part as an annuity (where the conversion rate is legally protected) and withdraw only the extra-mandatory part. In practice, this separation can sometimes be achieved by splitting pension assets when leaving an employer without an immediate successor, and transferring only the mandatory component to the new pension fund while leaving the extra-mandatory part in a vested benefits account. This is a grey-zone strategy, not formally encouraged, but it does occur in practice and can provide much greater flexibility while still preserving a base lifetime pension.

Both choices have their place — the key is matching the option to the retiree’s risk tolerance, financial discipline, and long-term goals.

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55

Regelmässige Publikationen und Analysen

Kapitalbezüge bei den EL zur Altersversicherung, 2014 (PDF, 557 kB, 02.11.2016)

Zusammenfassung

Im Jahr 2014 gingen bei den EL-Stellen der Schweiz 32 300 Gesuche ein, in denen eine Ergänzungsleistung zur Altersversicherung (EL zur AV) beantragt wurde. Für 29 400 Gesuche erstellten die EL-Stellen eine Verfügung. 10 100 dieser Gesuche, das entspricht 35 Prozent, wurden abgelehnt. Für die übrigen 19 300 Fälle ergab sich ein EL-Anspruch.

Von diesen neuen EL-Fällen im Jahr 2014 haben 33 Prozent in irgendeiner Form Kapital aus der zweiten Säule bezogen. Dieser Anteil hängt sehr stark vom Alter der antragstellenden Person ab. Bei den jungen Pensionierten (jünger als 75) hat vor der EL-Anmeldung mehr als die Hälfte einmal Kapital bezogen. Bei den älteren (älter als 80) sind es noch gerade 12 Prozent. Der Medianwert aller Kapitalbezüge betrug 90 000 Franken.

I haven’t found newer data, but 33% doesn’t seem exactly alarming to me…

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56

Which LLM did you use to write this up?

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57

Na, it is like somebody gives you money to gamble. If it is gone, “Ergänzungsleistung”.

So you take it out if you are rich and you take it out if you are poor…

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58

I use LLMs to save time writing fluent texts that explain the ideas I want to express. Every single point is my idea and conviction.
I also use LLMs in emails and other long text, basically giving the LLM the keypoints, I want to express and let it write it up, correct and rework it were necessary until it expresses my message. It saves readers from unnecessary grammatical and random borderline legastenic mistakes (I often tend to make). LLMs can be used as a very advanced autocomplete/correct. Ultimately its the content and the ideas that counts, imo.
Hope that makes sense?

59

I think what would be interesting is the amounts and a comparison with the people who are not on social benefits, otherwise hard to draw a conclusion (even then would still be hard to split the various factors).

Also im curious, but if you eg own a place, won’t the social benefits be taken out of whatever is left of the inheritance (after paying back potential mortgage).

60

It might be easier to look at who is taking social benefits and how many withdrew pension and even in this case, whether that worsened their position - after all, they could have been in an even worse position had they left the money in the pension.