Investment funds Pillar 3a: active or passive?
Which pension fund belongs in my Pillar 3a? Compando shows what separates actively managed and passive funds, how much the TER eats into your final capital and why your fund unit stays protected in a bankruptcy.
1. What are investment funds in Pillar 3a?
An investment fund pools the money of many investors and invests it simultaneously in various asset classes such as equities, bonds or real estate. Instead of buying individual securities, with a fund unit you acquire a share in the entire portfolio.
The central advantage is diversification: typical pension funds invest in several thousand individual securities at the same time. The risk is spread broadly instead of being concentrated on few positions. Compared to the classic 3a savings account, investment funds offer more growth potential, but with fluctuations.
In Pillar 3a, investment funds form the basis of all securities solutions. Anyone who invests their pension money does so through a fund, actively managed or passively as an index fund. How much equity sits inside ranges across the investment products of Pillar 3a from zero to 95 percent.
2. How do investment funds work?
When buying a fund, you acquire unit certificates. Their value changes continuously with the development of the contained investments. A fund with 60 percent equities reacts more strongly to stock market developments than a defensive fund with a high bond share.
Pension funds in Switzerland are almost invariably accumulating: earnings such as dividends or interest are automatically reinvested instead of being paid out. You therefore have to reinvest nothing yourself for the compound interest effect to take hold. The annual tax saving works in parallel to the investment return.
In practice, this means:
- Rising markets: fund value rises
- Falling markets: fund value falls temporarily, declines of 20 percent or more are possible
- Long holding period: more time to make up declines again
Example calculation: a 38-year-old civil engineer from Chur has been investing for 8 years in a pension fund with 40 percent equities. Despite the price declines in 2020 and 2022, her capital today stands around 18 percent above the pure contribution amount.
3. Active or passive investment funds?
The difference lies in the management. With an active fund, a fund management continuously decides which securities are bought or sold, with the goal of beating the market. A passive fund replicates an index and keeps the costs low.
Criterion | Active fund | Passive fund |
|---|---|---|
Approach | manager selects securities | replicates an index |
Costs (TER) | 0.5–1.0 % | 0.2–0.5 % |
Goal | beat the market | track the market |
Result | mostly below the index | matches the index |
The majority of actively managed funds perform worse than their benchmark over long periods once the fees are deducted. An active fund therefore has to make up its cost disadvantage before it earns you anything at all. What counts in the end is the return after costs.
Passively run funds come in two forms in Pillar 3a. Providers mostly work with institutional index funds and less often with exchange-traded ETFs. For you this makes little difference, because you hold for decades and do not trade continuously.
4. Investment fund fees: how high is the TER?
The ongoing costs of a fund are stated as the TER (Total Expense Ratio). It covers administration, custody and operation. With individual providers, issue surcharges or redemption fees are added.
Passive index funds and ETFs sit at 0.2 to 0.5 percent per year, actively managed pension funds at 0.5 to 1.0 percent. Insurance solutions cost up to 1.2 percent and are therefore dearer than any fund variant.
The TER is deducted from your entire balance every year, regardless of how the market develops. It grows along with your capital. At CHF 100'000 a TER of 1.0 percent costs CHF 1'000 per year, at CHF 200'000 it is CHF 2'000.
Over decades this deduction decides a five-figure sum. Just 0.5 percent more in fees per year mean, on a balance of CHF 50'000 over 25 years, around CHF 15'000 less final capital. That is more than the gap between a good and a bad stock market year.
Anyone holding an existing fund can switch providers, with digital providers free of charge. Fees, fund selection and minimum deposit of the 3a providers lie far apart between banks, insurers and pension apps.
5. How secure are investment funds?
Investment funds in Switzerland count as segregated assets. The fund assets are held separately from the assets of the fund management company and the custodian bank. If either institution goes bankrupt, your fund unit does not fall into the bankruptcy estate. Supervision of collective investment schemes lies with FINMA.
This protection applies against the institution, not against the market. A fund can lose value without anyone becoming insolvent. How much it loses is determined by the equity share. Whether you can bear that is decided by your investment horizon. It also decides whether you should invest your pension money at all.
6. Conclusion: are investment funds in Pillar 3a worthwhile?
Investment funds are worthwhile with a long investment horizon. From around 10 to 15 years the higher return potential outweighs the fluctuation risk, amplified by the compound interest effect. If a withdrawal is due in the next few years, the 3a account remains the safe choice.
Which fund fits is decided by three points. The investment horizon determines the possible equity share: the longer, the higher. The costs have a strong effect over the years; just 0.5 percent lower TER adds up to a five-figure amount. The spread distributes the risk over thousands of positions.
For short horizons, defensive funds with a low equity share are suitable, for long horizons low-cost index or ETF solutions. Within your 3a solution you switch the fund at any time.
Calculate pension capital with your own figures
Which final capital can be built up from your own situation is calculated by the Pillar 3a calculator in four scenarios.
