this is the contribution table for a large audit & consulting firm:
Not sure what is ment by “Supplementary”, but 53+ contribute up to 43.7%. On top, there is an 1e-pension fund available for executives.
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Hi @Teacup, I am not knowledgeable in this area and really value your input as you have a lot of expertise. I tried reading your point several times and don’t get how you get to the assumption of higher returns. Would you be able to share a numerical example?
I think what you are saying is that if the discount rate increases, the Present Value of the pension fund’s promise to pay you an annuity of 6% per year (say) when you reach retirement age decreases. Therefore the pension fund could move into an over funded position which could be returned to members of the plan.
I had even assumed the opposite: for the discount rate to increase, wouldn’t bond yields have to increase, which means a capital loss on existing bonds of which most pension funds have most of their assets, and similarly on real estate funds?
I have barely more than half that 
Did you max out your pillar 3a as well? There isn’t much of a point buying into 3a if you haven’t maxed out your 3rd pillar, is there?
The supplementary could mean when excédants are paid….very rare in the past few years, but I’ve had exceptional 2ieme contributions from my employer when the pension fund performance exceeded expectations and coverage was above 120%….gave us anywhere from 2-4% « bonus » and even 8.5% in 2007 I think….
Édit: cant be excédents if the individual pays too actually…weird…I’m not sure anymore
So that above regular contributions which normally a combined pension contribution around 25% of salary and going up above 30% combined when I hit 54…so my company clearly uses it as incentive to be loyal and stay working a bit longer and is a clear advantage to negotiate / compensate if the pension contribution isn’t as good should I change jobs.
Overall, I think @teacup has described it well…of your pension is strong and well covered like I’m lucky enough to have, I’m comfortable to use it as the « bond » part of my allocation that gives me security and piece of mind to complement everything else being invested as aggressively as I am comfortable with using 3ieme and FIRE fund (excluding CH since I work for a big SMI company).
Closer to retirement (within 3-5 years) I plan to buy back more years as I lower exposure to risk and gradually cash out 3iemes as required but at a higher marginal rate (I hope) by then…no sense too buy back before that as far as I know - better to invest outside for the potential of better returns since I accept more risk with that money.
attention: buying back years less than 3y before retirement would block lump sum payments of my pension and require me to only have a monthly pension….as this would restrict my ability to manage my estate and passively invest it - i’ll probably have to be very careful on timing - still need to calculate that lump sum balance point.
Oops….I rambled- sorry. 
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I think that maxing out 3a makes a lot of sense for anyone wanting flexibility. The 2ieme is less flexible and less risk by definition so it depends on how good/safe it is for that decision I think……I max both for combined tax/portfolio exposure advantage and invest FIRE as much as reasonable on top….
It probably relevant to say that I like my job so FI is priority for me will be reducing % more than RE. So i am probably less aggressive than some here and I like the balance contributing to all three represents……
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Here’s my take on the whole 2nd pillar contributions and buy-in:
Most pension funds will probably pay 1-2 % per year in the foreseeable future. With aging populations and the current rules on solvability it’s not really realistic to hope for more.
There are some pension funds that pay substantially more, but those are usually limited to high earners and have low share of retirees. I’ve seen one offer from a 2nd pillar provider that consistently offers more than 2 %, but they only admit medical professionals).
So, from an investing point of view, 2nd pillar pension fund payments should be avoided if you go all in on other investments because they have a low long term return. Whatever you save in taxes now, you pay through forgone returns.
I made up an example, and I am calling on all experts to point out flaws.
Example
Let’s assume that you pay an additional CHF 1000 into your pension fund. Here’s what you get:
- You get a marginal return of, say, 1.5 % per year (gross)
- On top of that you get the tax savings, say a 25 % marginal taxe rate.
- You can invest these 250 CHF in the stock market with, say, 5 % (gross, being conservative)
- You get a weighted rate of return of:
1000*1.5%=15 CHF +
250*5%=12.5 CHF
27.5 CHF,
which would yield 2.75 % on those CHF 1000 your originally invested. - Now, if you had put those 1000 in the stock market, you’d get 5 %. So, over the very long run, you would get a much higher return. With more volatility to be sure, and get to use the money as you want.
You’ll have to pay taxes when you withdraw the capital later, but with smaller sums the tax is not that high. It’s a one time fee of 5-10 % (30’000 it is only around CHF 1350, so not even 5 %).
The higher contributions have a much better return if you withdraw within 3-7 years of paying more contributions.
The 2nd pillar is more interesting from a savings and insurance point of view.
You should choose higher contributions or buy into the second pillar in the following cases:
Near term
- You plan on withdrawing the money within a few years for opening a business or buying property. (In case of buy-in you cannot withdraw for the next three years). The tax savings work mostly short time (up to 7-10 years).
- You are about 10 years before retirement and want to max out on the tax savings and increase your pension.
- You plan on changing jobs or FIRE-ing and plan on investing the money in a vested benefits account in the foreseeable future (VIAC, Finpension).
- You plan on leaving the country for good in the foreseeable future (depends on the country), see double taxation and social security rules.
Longer term
- You want a nice safety cushion.
- You have gaps in your 2nd pillar because you’re from abroad or because of studies, sickness, absence from workforce.
- If invalidity or death benefits are linked to the sum in the pension fund, you may want to increase your contributions to increase the sum you or your loved ones will get if you get ill or die. (Your mileage may vary.)
- You are fickle with money and want to lock away the money from yourself or people near you, e.g. if you or someone in your family have a history of gambling addiction or drug abuse.
- You fear that you might go bankrupt and want to protect the money from collectors.
Caveats:
- Always check with your pension fund which rules apply in your case. They can vary a lot.
- Check taxation in your place of residence. This might spoil the prize.
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Also if you don’t want to be all in in equity (which probably would be the case for the majority). Stock market may (or may not) have a long term 5% return, but there’s a huge variance. That’s why most people advise towards a more balanced portfolio.
Don’t forget that the last 10y+ have been fairly abnormal (200% return, vs 60% if we had 5% on annual return) a reversion to the mean is possible.
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Thanks for summing it up. My personal reason for the highest contribution option (not buyins):
- I’ll probably buy RE within the next 3-10 years.
- I’ll probably change jobs within the next 3-5 years. I’m not going to transfer it to the next emoloyees pension fund, instead I’m going to invest it at ValuePension. I know that this is in the grey zone, but it already worked in 2020.
- Pension funds offer you a garanteed 1% return, so they should be considered als bonds. My pension fund was in the 2.5-3.0% range in the last couple of years. I think that’s an amazing return for tax-free bonds.
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Excellent points! I also like the fact that it guarantees that I won’t be obligated to take out my investments if the market is down when I decide to retire. It also gives this piece of mind.
I think I’m interested in hearing more @Cortana - let us know how it goes and if there were any specific things not to miss. I’m not planning on leaving my employer but my wife yes….
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I’m sorry to hear that. I hope you both work it out.
Maybe it’s just the wife planning to leave her employer ? 
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This is not Grey zone, this is illegal.
You will also lose insurance coverage.
Do not forget the objectives of the 2nd pillar.
I agree that I wasn’t super clear. I see both interpretations as I re-read.
@Cortana I really appreciate the message, sincerely since ironically we are indeed working through some things that could be better 
…bref.
…but it was indeed a reference to her moving employers.
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excellent summary - in my scenario, I max the personal contributions but will not buy into P2 because I will buy RE in less than 3 years.
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Biased maths again… Seen this several times before 
When you save taxes it doesn’t mean you get to invest them. The saved taxes are already “invested” in your pension fund.
Using your numbers.
You either pay CHF 1000 into your pension fund and receive 1.5% interest per year,
or you don’t then you pay CHF 250 in taxes once, leaving CHF 750 which you can invest at 5% per year.
Break even point is around 7 years. And that is not even including any kind of risk premium when investing personally. Taking risks needs to be rewarded.
With 2% interest rate and 30% marginal tax rate the break even point is roughly at 11 years.
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Precision: you may get 5% per year based on historical return, with very high yearly variance. It might also stay flat for 10y.
(People tend to forgot that, esp. given the past 10y+)
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I agree. Hence the risk premium which should be added when investing yourself.
Pension fund interest rates are not guaranteed either, but at least they involve less risk exposure. People compare them to bonds. But they are usually invested around 30% in company shares nowadays.
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Though the investment horizon of the fund is such that it still doesn’t behave the same as if you held equity directly (at least if you’re not on an 1e plan).
They’ll smooth out the returns so that the variance is much smaller (they’ll build reserves on good years, that can be used later while maintaining a decent risk profile).
I tend to view them as safe bonds because I’m not invested in their assets. What I have is a financial claim to a monetary amount that they are required to give me under certain circumstances.
That amount is affected by a given interest rate with a lower threshold set by the Federal Council. Unless in dire difficulty, that’s a “yield” the pension fund is required to credit to me.
To me, this all looks very bond-like. I can buy a corporate bond of Microstrategy, which is invested in Bitcoin, but the coupon on my bonds doesn’t depend on Bitcoin’s performance. I’m not invested in Bitcoin, I’m invested in a claim against a company that will have to pay it to me unless they go bankrupt, and that happens to be exposed to Bitcoin (which ups the risk of bankruptcy).
In the case of pension funds, they are heavily regulated and there would be heavy political backlash (in my opinion) if one of them were to fail. For those who are sufficiently funded, which they have to display, the risk is very, very low in my opinion and as close as it gets to swiss government bonds without being a bond issued by the government, a canton or a cantonal bank. Except they pay at least 1% instead of -0.2%.
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I would adjust this sentence and say: “they should build reserves in good years”
The P2 provider I picked for my first company did not really do that, from what I saw in the annual reports.
I think it wasn’t too long ago that some pension fund failed massively (see Pensionskasse Phönix). Yes, it was a rather small pension fund, but still. Personally, I would rather choose a large pension fund compared to smaller ones (only applicable if you are owning a company of course).
What are the reasons for your opinion? I’m just curious. When I had to pick a pension fund for my 2nd company, I compared a lot of different options. One of the things which was/is worrying me is the large exposure to real estate for a lot of pension funds. E.g. if your pension funds asset allocation includes 35% real estate, then any downward trend in this area will have an influence. I also asked about actual location of the real estate. It’s different if you own houses in Huttwil vs. you can rent out something in Zurich Kreis 1.
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