A closer look at the Swiss LPP for cross-border workers

Whether you’re just starting your career in Switzerland or approaching retirement, it’s essential to understand this key pillar of the Swiss pension system so that you can plan for your future with peace of mind. In this article, b-sharpe explains everything you need to know about the LPP, or second pillar.

What is the Swiss LPP?

Unless you live in Switzerland or have worked there for a long time, you’re probably not familiar with the term ‘2nd pillar’ or the acronym ‘LPP’. Let’s take a closer look!

The LPP (Occupational Pensions Act)

What is the Occupational Pensions Act (LPP)? This Swiss law concerns occupational pensions (i.e. retirement insurance). It forms part of the three-pillar system, Switzerland’s social security system. Its aim is to provide all Swiss citizens with social protection, particularly in relation to retirement. Whether you are on the Swiss minimum wage or earn a higher salary, the LPP applies to you. It is based on three pillars:

The three-pillar system

If the LPP constitutes the second pillar of the Swiss pension system, what are the other pillars?

• The first pillar covers basic social security, old-age and survivors’ insurance (AVS). It is funded by contributions from employers and employees, as well as by state contributions. It guarantees all Swiss residents a minimum income, as well as health and disability insurance. It is administered by federal, cantonal and municipal authorities.
• The second pillar covers occupational pension provision and retirement insurance, governed by the Federal Act on Occupational Pension Provision (the famous LPP!). It is compulsory for all employees working more than 20 hours a week. This also applies to cross-border workers. Contributions are paid throughout the insured person’s working life.
• The third pillar: this refers to private pension provision. This is optional and allows individuals to supplement their mandatory occupational pension scheme and build up retirement savings. It therefore includes various insurance products, such as savings schemes, life insurance policies and investment funds.

The LPP, or second pillar, with its complex workings and upcoming structural changes, can raise many questions, particularly among foreign workers and cross-border workers in Switzerland. 

The case of cross-border workers and expatriates

Are you a cross-border worker or an expatriate? Even if you are not a Swiss national, the Swiss pension system applies to you and you pay contributions into it.

Who is required to contribute to the LPP?

 Who contributes to the Swiss 2nd pillar? The LPP is compulsory for all employees in Switzerland aged over 17 who are subject to the AVS (i.e. the 1st pillar). The annual salary paid by a single employer must exceed the minimum set by the Swiss Federal Council: this is the BVG entry threshold. In 2024, this amount stands at CHF 22,050.

You must be an employee

• You must already be covered by the AVS (first pillar)
• You must be over 17
• Your annual salary (paid by a single employer) must exceed the minimum amount set by the Federal Council, which is CHF 21,330 per year.

A portion of their salary is deducted each month to build up their retirement savings, which are managed by a pension fund. The employer also contributes by paying an equal or higher amount. These savings grow over the years and, upon retirement, are converted into a pension using the conversion rate, which is currently set at 6.8%.

How much are LPP contributions in Switzerland?

Currently, the contribution rate for the second pillar varies, ranging from 7% to 27% of gross salary. The employer is also required to contribute at least 50% of this amount.

The different contribution brackets under the Swiss LPP

Contributions to the Swiss 2nd pillar (or LPP) scheme vary according to the employee’s age. The contribution rate increases as the employee gets older. This is intended to reflect the need to accumulate more savings as retirement age approaches. Total contributions are shared between the employer and the employee. Currently, the age brackets and minimum contribution rates defined by Swiss law are as follows:

1. Aged 25 to 34: 7% of the insured salary
2. Aged 35 to 44: 10% of the insured salary
3. Aged 45 to 54: 15% of the insured salary
4. Aged 55 to 64/65: 18% of the insured salary

These percentages include both the employee’s and the employer’s contributions. The employer must contribute at least as much as the employee, but in most cases contributes more. Companies now view pension schemes as a genuine human resources benefit. Employers who are most generous with their pension schemes are seen as more attractive to candidates and appear to be better at retaining talent. 

Swiss LPP: what are these contributions used for?

Contributions to the second pillar may be transferred in the following cases:

• Retirement: employee’s pension, child’s pension
• Death: widow’s pension, orphan’s pension
• Disability: disability pension (in addition to the AVS or first pillar, i.e. health and disability insurance), child’s pension

How and under what circumstances can you claim back your LPP contributions?

Depending on your circumstances, it may be possible to claim your Swiss LPP contributions. As a foreign worker who has spent part of your career in Switzerland, you will need to take specific steps to be able to claim your pension. As for early withdrawal from the second pillar, this is subject to certain specific conditions… Let’s take a look: 

I’m retiring

Your career is coming to an end, and the time has come to claim your well-earned pension contributions. Congratulations! Now is the time to claim your second pillar, the Occupational Pension Plan (LPP), from your compensation fund. The accumulated funds can be received as a pension or a lump sum, or both. The choice is yours! Please note, however, that this decision is final.

A word of advice: plan ahead! Response times from the health insurance funds may be longer than usual, so you’ll need to submit your claim in good time to ensure you receive these payments on time. 

I would like to make a large purchase

If you are planning to make a major purchase (such as buying a home), it is possible to withdraw funds from your 2nd pillar before retirement. This applies specifically to the purchase of a main residence. However, this scheme can also be used to repay a mortgage or to purchase shares in a housing cooperative.

Please note, however, that there are a few specific conditions: 

• The age requirement: if you are under 50, you can withdraw the full amount from the 2nd pillar. If you are over 50, the amount will be limited.
• You can only apply for early withdrawal once every five years. 
• For married couples, the consent of the spouse is required
• If the property in question is sold, the sums withdrawn from the 2nd pillar must be repaid

Are you thinking of taking an early withdrawal from your 2nd pillar pension scheme to buy a home?

How do you go about making an early withdrawal from your LPP? Contact your pension fund, which will ask you to provide a large number of documents (bank financing statements, a financing plan, a notary’s certificate, etc.). The process can also take quite a long time. 

I’m going freelance

Are you leaving employment and wondering whether you can access the funds accumulated through the Swiss 2nd pillar? When you become self-employed, you will no longer be required to make contributions to the 2nd pillar. You can therefore withdraw the funds you have accumulated so far. Here too, there are specific conditions: 

• The application for withdrawal must be made in the year following the start of your new self-employed activity
• you will need to provide proof of registration in the commercial register
• For married couples, the consent of the spouse is required

What if I leave Switzerland?

Is your life in Switzerland – whether professional or personal – coming to a definitive end? What happens to your LPP then? You will only be able to withdraw your entire 2nd pillar pension if you decide to settle in a country outside the EU/EFTA area. If you are a Franco-Swiss cross-border worker, you will therefore not be able to withdraw the mandatory portion of your LPP. However, you do have the option of withdrawing what is known as the non-mandatory portion, which covers the additional amounts allocated to your pension contributions. Find out here how to withdraw your Swiss pension.

Towards a reform of the Swiss LPP?

On 22 September 2024, the Swiss public will vote on the reform of the occupational pension system proposed by the Swiss government, which has been put to a referendum following a petition by the Swiss Trade Union Federation. This reform, which aims to adapt the pension system to the country’s changing demographics, has been the subject of much debate and appears, at first glance, to be rather complex. 

Changes to the calculation of the LPP

What is the aim of this reform? Its aim is to strengthen the funding of the LPP (2nd pillar) in order to maintain the financial stability of pension funds. It also aims to improve cover for part-time and low-income workers by lowering the minimum income threshold above which an employee is required to contribute to the 2nd pillar. This will ensure that more Swiss citizens are covered by the LPP.

The pension conversion rate, currently at 6.8%, will also be reduced to 6%. This will therefore lead to a reduction in pensions in the long term. To offset this reduction, the Swiss government plans to pay a lifetime supplement to the so-called ‘transitional’ generation, i.e. insured persons aged between 50 and 65 at the time this reform of the LPP comes into force.

This reform also aims to simplify the BVG contribution scale, which currently comprises four rates, adjusted according to age. It proposes introducing two rates: one of 9% for those aged 25–44, and another of 14% for those aged 45–65. As a result, younger workers will pay slightly higher contributions, whilst their older counterparts will pay slightly less. This means that older workers will cost companies less, with reduced contributions. The aim? To make them more attractive on the labour market. 

Reform of the LPP: what will change for cross-border workers?

Cross-border workers are also covered by the Swiss pillar system. Consequently, the entry into force of this reform would affect them too. Changes to thresholds or conversion rates will therefore, in the long term, affect the amount of their pension. This means that the adjustments to contributions or benefits provided for in this reform will need to be taken into account in order to accurately estimate their future pension. As a cross-border worker, it is therefore essential to stay informed about developments in the pension system and the upcoming vote on the reform of the LPP.

Good to know: given the complexity of the Swiss pension system, it is often advisable to seek guidance from an expert, particularly if you are a cross-border worker, as this situation presents unique challenges. Personalised advice will enable you to optimise your pension provision whilst ensuring you comply with the regulations in force on both sides of the border.

Would you like to repatriate your 2nd pillar funds from Switzerland? To convert your Swiss franc funds into euros, you will likely need a reliable and transparent online currency converter. b-sharpe is here to help, whether it’s your personal savings or your 2nd or 3rd pillar funds. We guarantee a simplified process and competitive exchange rates.

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