## Liechtenstein’s Pension System

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**Canonical URL:** [Liechtenstein’s Pension System](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025048.pdf)

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### A. Overview and Structure
- Three-pillar framework: (i) Old Age and Survivors’ Insurance (AHV-IV-FAK); (ii) mandatory occupational scheme (Pillar II); and (iii) voluntary insurance (Pillar III).
- Accumulated savings: reserves exceeding 150 percent of GDP, ranking third globally after Denmark and Iceland, and higher than in Switzerland.
- Objective: guarantee a basic income level for all employees while encouraging supplemental private savings.

### B. Pillar I — AHV-IV-FAK: Design, Funding, and Reforms
- Purpose and benefits:
  - Retirement age: 65 years for both men and women; early retirement possible at 60; deferral possible until 70.
  - Redistribution objective: high-income earners typically contribute significantly more than they receive; low-wage earners receive higher returns relative to contributions.
  - Minimum monthly pension with a replacement ratio of about 35 percent.
- Funding composition (statutory pension):
  - AHV contribution rates: employers (4.2 percent), employees (4.0 percent), self-employed (8.3 percent), and non-active persons benefiting from state contributions.
  - IV (Invalidity Insurance) contribution rates: employees (0.7 percent), employers (0.7 percent), self-employed (1.4 percent). IV is pay-as-you-go and also holds reserves.
  - FAK (Family Compensation Fund) funding: employers (1.9 percent), self-employed (1.9 percent), and non-active people.
  - Additional contributions: state and municipalities provide mean-tested supplementary benefits for pensioners, vulnerable, blind, homecare, and medical rehabilitation.
- Asset allocation (AHV-IV-FAK target):
  - Bonds 50 percent (of which Switzerland accounts for 67 percent of bonds)
  - Shares 33 percent (of which Switzerland accounts for a third)
  - Alternative investments 7 percent
  - Real estate 7 percent
- Revenue shares:
  - Contributions from insured persons and employees: 67.2 percent
  - Government contribution: 13.1 percent
  - Capital gains: 19.8 percent
- Key reforms and measures:
  - 2001: introduced early retirement at 60.
  - 2011: reduced state contribution; pensions indexed to CPI; re-introduced actuarial reduction coefficients for early pensioners; re-allocation of 0.2 percent of wage contributions from overfunded FAK.
  - 2016: annual state contribution of CHF 30 million to AHV with inflation adjustment; equalized statutory retirement to 65 years for men and women; implemented five-year financial examination and intervention mechanism when assets fall below five years of annual expenditures.
  - 2022–23: shifted contribution rates from overfunded IV towards FAK and indexed pensions to an arithmetic average of consumer price index and wage index.
  - Future: EU directive on work-life balance effective January 2026 guaranteeing four months parental leave per parent (children up to three years), financial compensation for two months (about CHF 4,900 per month); additional leave of 10 days for fathers with compensation of 80 percent of wages.
- Intervention mechanisms and current reserve metrics:
  - Trigger 1: If reserves decline to below five times annual expenditures, the ability to adjust pensions according to inflation is halted.
  - Trigger 2 (IV): If IV reserves decline to below 0.05 of annual expenditures, a state contribution is guaranteed in accordance with the Disability Insurance Act.
  - Trigger 3 (FAK): If FAK reserves drop below one annual expenditure, a defined state contribution to the Fund is stipulated.
  - Current metrics reported: current annual expenditures are at a ratio of 2.25 (see Figure 2). Current FAK reserves are at 5.29 times the annual expenditure.
  - Projection reported to parliament: ratio of the AHV fund to annual expenditure is projected to decline from 9.9 to below 5.0 by 2043, requiring specific proposals to be presented to parliament.
  - Alternate projection statement: Pillar I projections indicate that assets will fall from 9.8 to 3.1 years of annual expenditures by 2043, below the statutory 5-year minimum.

### C. Pillar II — Occupational Pension Scheme: Coverage, Funding, and Risks
- Size and coverage:
  - Total assets: over CHF 8.4 billion or 118 percent of GDP in 2023.
  - Participants covered: 45,500 people in 2023; 32,547 or 83 percent actively insured; 6,462 or 17 percent pensioners.
  - Non-resident and foreign participation: 60 percent of actively insured are foreigners; commuters comprised 46 percent of total pension payments in 2023.
- Funding and contributions:
  - Fully funded by employer and employee contributions plus interests and deposits.
  - Total contributions amounted 7½ percent of GDP in 2023, of which 53 percent was employer contributions and 47 percent was employee contributions.
- Plan type and portability:
  - Occupational funds comprise nine company foundations and six collective foundations.
  - Defined-contribution plan (DCP) structure for almost all: 96.8 percent of actively-insured covered under DCP.
  - Benefits upon leaving employment: transferred to a vested benefit account (Swiss nationals’ vested benefits move to a new pension fund).
- Investment composition (2023):
  - Bonds 36 percent of total assets
  - Equities 33 percent
  - Real estate 17 percent
  - Alternative investments 10 percent
- Funding ratios and market sensitivity:
  - Coverage ratio history: 120 percent in 2021; 106 percent in 2022; median coverage ratio rebounded to 109 percent in 2023.
  - Dependence on investment income exposes funds to equity and interest rate fluctuations; a return to sustained low or negative interest rates could lead to accumulation of risks from search for yield.
- Reforms enhancing resilience:
  - EEA accession: legislative amendments including equal treatment for men and women, early retirement provisions, division of entitlements on divorce, and risk insurance for the unemployed.
  - 2005: introduced information and transparency regulations, strengthened accounting conventions, and created a security fund.
  - 2017–2018: increased retirement contributions, lowered entry thresholds for compulsory insurance, and strengthened governance.

### D. Pillar III — Voluntary Pension Savings
- Voluntary individual pension savings and private old-age insurance policies supplement Pillar I and Pillar II to provide additional retirement income.

### E. Demographic Drivers, Projections, and Fiscal Implications
- Demographic projections and impacts:
  - Population expected to grow by 11 percent by 2060.
  - Number of individuals over age 65 expected to increase by 59 percent by 2060.
- Longevity trends:
  - Life expectancy at birth: 81.8 years in 2020 to 84.6 years in 2023.
  - Life expectancy after age 65: 19.8 years in 2020 to 23.3 years in 2023.
  - EU 2024 Ageing Report implication: an increase in life expectancy at birth of around two years compared to the baseline would push up average pension expenditure by 0.4 percentage points of GDP in 2070.
- Projected funding gaps and statutory thresholds:
  - Pillar I asset projection: assets projected to fall to below statutory minimums by 2043 (examples reported: decline from 9.9 to below 5.0; alternative figures: from 9.8 to 3.1 years of annual expenditures by 2043).
  - If reserves fall below the statutory minimum, the law suspends inflation adjustment of old-age, survivors', and disability insurance benefits.

### F. Policy Options and Issues for Consideration
- Principal policy levers identified to address future financing gaps:
  - Increase the effective retirement age.
  - Raise contribution rates for employers, insured persons, and/or the state.
  - Use intervention mechanisms defined in law when reserves breach statutory thresholds.
- System strengths and vulnerabilities:
  - Strengths: high accumulated assets across the three pillars; well-capitalized funds; built-in intervention mechanisms; substantial occupational pension coverage and defined-contribution portability.
  - Vulnerabilities: demographic aging and rising longevity; reliance on investment returns (particularly in Pillar II) subject to market and interest rate volatility; significant foreign participation affecting benefit flows.
- Recommendations implied by analysis:
  - Monitor and prepare measures pursuant to the statutory five-year financial examination when assets approach the five-year threshold.
  - Consider reforms to the retirement age and contribution structure to align long-term sustainability with demographic trends.
  - Address investment and governance risks in occupational funds to mitigate sensitivity to prolonged low interest rates.

### G. Conclusion
- The Liechtenstein pension system combines a three-tiered structure and high accumulated assets, positioning it with substantial buffers. Nevertheless, population aging and increased life expectancy will pressure the system going forward. Policy measures such as raising the retirement age and/or increasing contributions will be required to ensure long-term sustainability.

*Prepared by Rodgers Chawani; IMF Selected Issues Papers, SIP/2025/048 (completed March 5, 2025).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025048.pdf_