The Radical Swiss Thought Experiment

UBS has published a fifty-three-page thought experiment proposing to dismantle the foundation of the Swiss pension system. It suggests replacing the first pillar – the pay-as-you-go state pension (AHV / AVS) that everyone resident in Switzerland pays into – with a capital-funded scheme invested in financial markets, beginning in 2035.

Most of the coverage has framed this as a technical reform. In our opinion it is something rather more interesting than that.

The first pillar pension is not a fund, it is a promise – a mechanism that routes today’s workers’ contributions straight to today’s retirees, on the understanding that tomorrow’s workers will one day do the same for you. That arrangement works beautifully while each generation is larger than the one before it. In Switzerland currently, this is not the case. Birth rates are low, people are living longer, and the demographic pyramid that the ‘pay-as-you-go’ state pension depends on is quietly inverting.

The result is what the report calls, with unusual candour for a bank, an implicit debt: a vast off-balance-sheet commitment to pay future pensions that never appears in the national accounts and is therefore never put to a vote. The UBS proposal is to stop making the promise and start funding the pot – a state-backed scheme with guaranteed returns of around 4.2% for an eighteen-year-old entering in 2035, invested in markets rather than underwritten by the next generation.

It is an intellectually honest idea. It is also not a free one. And the reason sits in the part most readers will skip past.

To move from a promise to a fund, one generation has to pay for both. They must keep honouring the promises already made to today’s retirees while simultaneously building their own funded pot from scratch. UBS does not hide this. Tax revenue across all levels of government would need to rise by roughly 18% during the transition. The workers aged thirty to fifty-five when the switch begins in 2035 would absorb the impact, facing pensions up to 6% lower than under the current system. If you were born in 1991, you are, on the bank’s own modelling, the single most exposed cohort.

Which brings us to the question this newsletter exists to ask. Notice who is proposing to move a nation’s state pension into financial markets, complete with free choice of provider and individual investment strategies. It is the largest manager of wealth in Switzerland. This is not to impugn motives – UBS frames the work explicitly as a contribution to public debate, and the demographic problem it identifies is real, serious and largely unaddressed. But a pay-as-you-go system asks nothing of you as an investor. A funded, choice-driven system asks you to select a provider, a strategy, a level of risk and a path to drawing it all down. Every one of those choices is a door through which something can be sold to you.

The first pillar would shift from a pay-as-you-go promise to a funded scheme: a 20% contribution on the first CHF 50,000 of salary, a guaranteed cohort-specific return, and the state topping up any shortfall from general taxation. The second pillar – today’s occupational BVG – would become a pure defined-contribution scheme: age-uniform contribution rates, free choice of provider, market returns and no capital guarantee. Pillar 3a would have its tax incentives flipped from favouring high earners to favouring lower ones, with the contribution cap raised towards CHF 20,000. A new fourth pillar would add mandatory long-term care insurance from age 45. And the reference retirement age would be partially indexed to life expectancy, drifting towards 68 for today’s eighteen-year-olds and higher still for those who follow.

To its credit, the report is candid about the trade-off at the heart of all this. A funded system reduces your dependence on demographics – it matters rather less how many children the country has – but it increases your dependence on financial markets. In a severe and prolonged equity bear market, the state, meaning the taxpayer, becomes the backstop for the first pillar. The report even flags the political risk in its own pages: a public institution sitting on a national pension pot is a standing temptation for politically directed investment. We have watched that film in other countries, and it rarely ends with better returns.

What we are watching is whether this stays a thought experiment or becomes the seed of the next reform package. Switzerland changes its pensions slowly, by referendum, and rarely. But framing is powerful. Once funding the first pillar enters the national conversation, it shapes a decade of debate – and the direction of travel, from collective guarantee towards individual responsibility, is the same direction every developed pension system is already drifting.

First, non-residents would lose the guaranteed return. Today the AHV pays pensions abroad – around 15% of payouts went overseas in 2024. Under the proposal, non-residents other than cross-border workers would no longer benefit from the guaranteed returns unless a bilateral social security agreement said otherwise. For the many expatriates who build a Swiss pension and then leave, which is the base case rather than the exception, the terms on which you exit the system would change materially.

Second, long-term care insurance would begin at 45, and late arrivals would pay more. The new mandatory cover starts at age 45, and the report is explicit that those who come to Switzerland after 45 would face higher premiums. That cost lands precisely on the cohort Switzerland works hardest to attract: experienced professionals – senior executives, lawyers, traders, consultants, business owners and specialists across a range of fields – who tend to arrive mid-career rather than at the start of it.

Third, choice becomes your problem. A defined-contribution second pillar with free choice of provider is liberating if you know exactly what you are doing, but a minefield if you do not. For those who are already coordinating assets across several jurisdictions, “choose your own pension provider and investment strategy” is precisely the moment at which genuinely independent advice earns its keep – and precisely the moment at which commission-driven advice does its quiet damage.

None of this is law. It is a bank’s thought experiment. But thought experiments from UBS have a way of framing the debate that eventually becomes law, and the trajectory here is unmistakable.

One number

1991

The birth year that, on the UBS modelling, stands to lose the most. A median-income earner born in 1991 – forty-four years old when the proposed transition begins in 2035 – sits at the very centre of the thirty-to-fifty-five cohort that would carry the cost of the switch: pensions up to 6% lower at retirement, in exchange for funding the promises made to the generation ahead while building their own pot from nothing.

This is the quiet arithmetic of every pension reform. Someone always pays for the transition, and it is almost never the generation that designed the old system or the one that will inherit the new. It is the people in the middle – old enough to have paid in under the old rules, young enough to be told the rules have changed.

The reform may well be the right one. A funded first pillar is more honest about its costs than a pay-as-you-go promise that quietly accumulates a debt nobody ever votes on. But “more honest” and “free” are not the same thing. The bill for fifty years of unfunded promises does not vanish because the system that replaces them is better designed. It simply acquires a name, a date and a cohort to pay it.

The question remains, if the rules of your Swiss pension were rewritten in 2035, would you know whether you were a winner, a loser, or the one quietly paying for both?

Discover more

Blackden Financial is a long-established, FINMA-licensed Swiss wealth manager, specialising in advising internationally mobile expatriate clients with complex cross-border affairs. We are entirely independent and fee-only – no commissions, no retrocessions.

If it feels like the right time to review how you manage your wealth in a changing world, book a no-obligation discovery call. Contact us on +41 22 755 0800, email info@blackdenfinancial.com, or complete our contact form.

A member of our team will get back to you to arrange a time to talk through your situation, and, step by step, how best to proceed.