The future modalities for purchases into pillar 3a are subject to many restrictions. Households with a high income should be able to close any contribution gaps, but it will be difficult for others.
In summer 2020, the Swiss parliament adopted motion 19.3702 «Enabling purchases into pillar 3a» by Erich Ettlin of the Council of States. This aims to allow subsequent payments into pillar 3a to close any contribution gaps. This winter, the Federal Social Insurance Office (FSIO) submitted an amendment to the ordinance on the tax deductibility of contributions to recognized forms of pension provision (BVV3) for consultation. It sets out the conditions for such purchases into pillar 3a, as the economists James Mazeau, CFA, and Elisabeth Beusch, PhD, of UBS Switzerland AG explain in an analysis.
Who are the purchases intended for?
The majority of people of working age are entitled to pay contributions into pillar 3a. However, some of them choose not to do so for various reasons, while others do not contribute the maximum amount permitted. According to the authors, this leads to contribution gaps, i.e. differences between the actual contributions made and the maximum amounts permitted by law.
In their analysis, they point out that not all people have the financial capacity to make payments - let alone additional potential purchases - into pillar 3a. They cite the Household Budget Survey (HBS) of the Federal Statistical Office (FSO), according to which the first two income quintiles of households of people under 65 did not meet the conditions. However, part of the middle class is able to make 3a purchases. These are people whose annual savings capacity is above the maximum permissible 3a amount. The authors assume that households with a higher income would have no financial difficulties in closing any gaps in pillar 3a.
FSIO proposal severely restricts purchasing options
In the following, the authors discuss the various restrictions in the FSIO proposal for the ordinance amendment to BVV3. It is clear to them that the shopping opportunities for some of the middle class would be severely restricted. The authors therefore present suggestions for improvement on how purchases could be made accessible to a broader section of the population.
1. How is a contribution gap defined?
According to the FSIO's proposal, years without income subject to AHV contributions are not considered for the definition of a gap.
According to the authors, this definition disadvantages people who have given up work for a certain period of time. This particularly affects women who have taken breaks from work to care for their children. Overall, 20% of women with young children have no income subject to AHV contributions. The authors therefore suggest that all years with missing contributions should be considered when calculating the gaps, regardless of whether an income subject to AHV contributions was earned.
2. What is the upper limit for the annual contribution gap?
The FSIO proposes limiting the maximum annual gap for all employed persons exclusively to the amount of the standard contribution («small» contribution) for the corresponding year.
The authors emphasize that certain people are entitled to pay in more than the «small» contribution (CHF 7’056 in 2024). These include, in particular, self-employed persons without a pension fund connection and, in principle, employees with several employers who earn a salary below the BVG entry threshold with each employer. These persons could pay in 20% of their net income each year up to a fixed limit (CHF 35’280 in 2024). The proposed annual purchase limit would potentially disadvantage several tens of thousands of self-employed persons, the authors criticize. They therefore propose setting the upper limit for calculating the annual gap at the maximum amount that could have been paid in, whereby at least the «small» contribution would be counted as a gap. For people without income subject to AHV contributions, the gap should be set at the amount of the «small» contribution.
3. What is the upper limit for the annual purchase?
The FSIO wants to limit the total purchase amount per year to the «small» contribution, even if payments are made for gaps from different calendar years.
The authors put forward a counter-proposal and call for no annual purchase limit to be set. This is because working people insured in a pension fund could have the opportunity to make potentially much larger purchases into it. They argue that employees who only benefit from Pillar 3a are therefore not on an equal footing with those insured under the occupational pension scheme.
4. Purchase only in conjunction with a full annual subscription?
The FSIO sets the condition that the entire «small» contribution for the current year must first be paid in before gaps from previous years can be closed in the same calendar year.
The authors see this provision as problematic if the restrictions in points 3, 5 and 6 were to apply. In fact, this would mean that a person who is unable to pay the «small» contribution in a given year would ultimately lose the opportunity to close previous gaps over time due to the retroactive period. However, if the restrictions mentioned in points 3, 5 and 6 were lifted, this limitation would no longer be problematic.
5. Closing the gap of one year only with a one-off payment?
The FSIO proposes that the gap each year should initially be closed by a single purchase and that this amount should not be spread over several years.
According to the authors, this restriction could make it impossible for some people to close certain gaps completely. Due to a lack of financial resources and the limitation period for entitlement to back payments (retroactive period, point 6), a person could lose the opportunity to close the gap for a particular year completely.
The BSV fears that the tax authorities would not be able to check whether the amount of the purchases exceeds the amount of the gaps, the authors further argue. However, the tax authorities have the data of all persons who have declared their pillar 3a contributions. The only case in which the tax authorities have no knowledge of the contributions is if this declaration is forgotten. However, it is precisely in this case that the contributors would not have benefited from the tax relief in the year in question. The authors advocate removing the restriction that the gap in a particular year must be closed by a single purchase.
6. How long can subsequent payments be made?
The FSIO wants subsequent payments to be limited to the ten calendar years prior to the year of purchase.
For the authors at UBS, this is too short. Sometimes it takes more than ten years before there is sufficient savings capacity for purchases. The larger the gaps are, the more difficult it will be to close them if there is a time limit. In addition, gaps that are older than ten years remain irrevocable. This restriction has a particular impact on families with young children. Young parents often have a reduced income due to a reduced level of employment of one parent as well as higher costs due to the larger household, which reduces their savings capacity. The authors therefore call for no time limit to be introduced for purchases.
7. When should the retroactive period begin?
For the FSIO, the retroactive period should begin in the year in which the amendment to BVV3 comes into force.
The authors criticize the fact that this restriction disadvantages anyone with contribution gaps from years before the amendment came into force. The authors therefore propose allowing purchases from the date on which the provisions on pillar 3a came into force in 1987.
Being able to choose freely between 2nd and 3rd pillar purchases is important
The currently proposed amendment to BVV3 establishes important differences between the modalities for purchases into Pillar 2 and Pillar 3a. The authors regret this, as they believe that harmonizing the purchase modalities would allow more working people to choose freely between purchases in the two pillars. This free choice is of crucial importance, as pillar 3a offers the opportunity to choose a higher-yielding, but also riskier investment medium. In addition, not all employees are insured with a financially sound pension fund, as some pension funds redistribute pension benefits across generations in favor of pensioners and at the expense of employees.