PensioTec

28 October 2025

How Our Retirement Is Financed: The Three Pillars and Why Emerging Economies Lag Behind

If you grew up in a developed economy or an OECD country, you’re likely familiar with the concept of the three-pillar retirement system. It’s a framework designed to ensure financial stability and dignity after retirement, but in many emerging economies, the structure remains incomplete or inaccessible for most people. For a general definition of the three-pillar framework, see OECD and other comparative references.

Let’s break down what these pillars mean and why the third pillar is often missing in developing markets.

About 70% of adults working-age adults worldwide do not contribute pension coverage and may lack pension when they retire.

How Are Pensions Funded?

Most pension systems are built on the “three-pillar models”.

  • Pay-As-You-Go (Public)

    • How it works: The current workforce pays contributions (taxes or social security), which are immediately used to fund benefits for today’s retirees.

    • Examples: Swiss AHV, US Social Security.

    • Collection: Contributions are deducted directly from salary (shared by employee & employer). Collected by social security authorities (AHV compensation offices).

    • Challenge: With aging populations, fewer workers must support more retirees.

    • Receipt of pension payment: From the statutory retirement age (currently 65 for men, 64 for women; moving toward 65 for both by 2028).

    • How paid: Monthly payments until death.

    • Amount: Based on years of contribution and income.

  • Occupational – Employer-Based

    • How it works: Employers and employees contribute to a pension fund throughout the employee’s career.

    • Investments: The fund is invested in assets such as stocks, bonds, and real estate.

    • Outcome: At retirement, benefits are paid from the worker’s accumulated savings plus investment returns.

    • Collection: Employers automatically deduct contributions from salaries and forward them to the employee’s pension fund (Pensionskasse). Employers also contribute their share.

    • Receipt of pension payment:

      At retirement, the pension fund (not the government) pays either:

      • A monthly annuity for life, or

      • A lump sum (if chosen)

    • How it works: Individuals make voluntary contributions into private pension accounts, or retirement funds.

    • Funding: Fully financed by the individual, often with tax advantages since third-pillar contributions are deductible from taxable income.

    • Examples: Swiss Pillar 3a/3b, US IRAs, UK ISAs.

    • Collection:

      Individuals contribute voluntarily into a bank account or insurance product.

      No employer involvement (unless employer arranges a group 3a plan).

    • Receipt of pension payment:

      At withdrawal (retirement, home purchase, self-employment, emigration), private financial service providers releases the funds.

      Usually a lump sum.

Why we think this is crucial? The challenge today:

  • 70% of the global working age population are not covered by pension (ILO, 2025).

  • 85% of $55 trillion pension assets concentrated in wealthy OECD nations (IMF, 2025).

  • Traditional systems exclude mobile and informal workers. Most developing markets lack digital rails to support retirement savings (OECD, 2024; World Bank, 2022, 2025). More than 2 billion people globally are informally employed (about 60 % of the world’s workforce) (WEF, 2024). Without digital infrastructure, and as AI disrupts some of traditional jobs, this gap may be only widen.

    • Switzerland

    • Netherlands

    • Denmark

    • Sweden

    • Germany

    • United Kingdom

    • Norway

    • Finland

    • Ireland

    • Iceland

    • Poland

    • Czech Republic

    • Hungary

    • Slovakia

    • Croatia

    • Romania

    • Latvia

    • Lithuania

    • Estonia

    • Slovenia

    • Bulgaria

    • United States

    • Canada

    • Chile

    • Peru

    • Mexico

    • Colombia

    • Uruguay

    • Costa Rica

    • El Salvador

    • Dominican Republic

    • Australia

    • New Zealand

    • Japan

    • Singapore

    • Hong Kong

    • South Korea

    • India

    • China

    • Turkey

    • Israel

    • South Africa

List of countries with established three-pillar pension systems

Emerging economies that have officially adopted or are actively developing a retirement system based on the multi-pillar (three-pillar) model

    • Indonesia

    • Malaysia

    • Vietnam

    • Thailand

    • Philippines

    • Brazil

    • Argentina

    • Ecuador

    • Paraguay

    • Kenya

    • Nigeria

    • Ghana

We believe it‘s possible to build digital rails for Third Pillars in emerging markets.

Switzerland Case: how the third pillar is taxed

Pillar 3a contributions are tax-deductible from your taxable income up to the yearly cap. You claim the amount in your annual tax return.

Withdrawals are taxed, but at a preferential rate. When you cash out Pillar 3a, the payout is taxed once as a capital benefit. Cantons (In Indonesia, so called Provinces) apply a separate, reduced “pension tariff,” not your normal income rate.

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