At Swissential, we are from all types of religions and beliefs.
We might disagree on a lot of fundamental questions of life but when it comes to 2nd pillars, we all sing from the same hymn sheet: the younger you are, the more of a mirage your 2nd pillar is, especially when it comes to your projected level of income / annuity at retirement.
Let us take the example of Daniel, a 38-year-old individual who works for Unilever, he has been in Switzerland for two years and earns CHF200’000 a year. When looking at his 2nd pillar statement, he can see that if he remains with Unilever with a similar salary his pension pot will be worth CHF2’000’000 at 65 years old or CHF1’500’000 at 58 years old. There are four key factors to consider, some more scientific than others.
Factor 1: do you see a lot of people with grey hair in your company?
On paper, he is a millionaire, but in the real world, he should primarily wonder: what if I lose my job at 50 years old instead of retiring at 58? If he retires at 50 it is safe to say his pension pot will be barely worth CHF800’000. Many international companies gently push their most “expensive” employees out before retirement. They therefore do not enjoy the higher contributions they and the company should make on their salary as they get older. They also do not benefit from the compound interest generated on their pension pot over time.
Factor 2: What growth rate is guaranteed on my pension pot?
In 2003, the minimum growth rate guaranteed was 3.25%. Projections were shown using this number back then. Today, it is 1% – projections today are now shown using this figure. Therefore, if Daniel had been in Switzerland in 2003 instead and looked at his pension projection with a 3.25% growth rate on his contributions instead of the current 1%, this would have made a significant difference over time. This rate is likely to go down to 0.75% going forward, lowering even further Daniel’s estimated pension pot at retirement.
Factor 3: What growth rate is achieved on my pension pot?
Daniel’s pension fund uses a 2% growth rate to project his expected pension pot at early retirement. What if the growth rate actually achieved is 1%? This will significantly impact Daniel’s pension pot.
Factor 4: What conversion rate is considered on my pension pot?
In French we say: “Un tiens vaut mieux que deux tu l’auras” (having something now is better than the possibility of having more later) – some of you might think “typical French”, but there is some truth in that proverb.
Therefore, when looking at your 2nd pillar statements, always remember it is less and less likely over the years for the number you see to be real, and therefore do not fall into the “mirage” trap, keep on efficiently saving 15 to 20% of your disposable income and your future financial security is guaranteed.