Performance primacy and contribution primacy

What do monkeys have to do with retirement planning? Quite simply, Swiss pension funds use the benefit framework and the contribution framework as two different systems for calculating pensions.

With the help of the benefit framework and the contribution framework, Swiss pension funds determine the retirement savings of the insured individuals.

The Benefit Framework

In the benefit framework, the benefits of the pension fund are calculated based on the insured salary. The amount of the benefit is fixed as a percentage depending on the last insured salary before retirement. The determining factor is how high the last insured salary of the employee is before retirement.

Example:

Gross salary                        CHF 120,000

Coordination deduction        CHF 25,095

Insured salary            CHF 94,905

of which a fixed rate of 65% is paid out as a pension

Pension per year                 CHF 61,688

Pension per month              CHF 5,140

In the event of a salary increase, the higher benefits of the employee and employer must be purchased through a one-time supplementary payment. If this does not happen, the benefit target cannot be achieved in retirement.

The Contribution Framework

In the contribution framework, the pension benefits are calculated at the time of the insurance event (pension) based on the actual accumulated capital consisting of contributions and interest. The effective retirement savings is the determining factor. The annual pension results from the accumulated capital multiplied by the BVG conversion rate.

Example:

Accumulated capital:      CHF 500,000

with a conversion rate of 6.8%

Pension per year                CHF 34,000

Pension per month             CHF 2,833

Unlike the contribution framework, the insured person at the time of retirement is not dependent on the level of the last insured salary, but rather on the amount of contributions made and their interest. Most pension funds today apply the contribution framework system.

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