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It doesn’t make it particularly easy to sell a product overseas if people at home won’t set an example and use it. And so it appears the case with Luxembourg’s ASSEPs and SEPCAVs. When the government passed the two pensions vehicles, it also introduced legislation pressing domestic companies to take their book reserve pensions and place them in one of these newly created vehicles. Not only does this make sense, it also sets an example to those foreign companies considering the new schemes. Lucien Thiel, general manager of the Luxembourg Bankers Association, the ABBL, is one of the most vociferous about the country’s need to embrace its latest invention.
“From the beginning we tried to convince the authorities that, although our pension funds will be focused on international customers, we at least needed a domestic market, albeit only to show the models,” he says. Luxembourg’s new vehicles will certainly succeed and appeal to their target market but the reluctance of local companies to warm to them is down to unique circumstances – generous state provision and disincentives to make the switch.
Hopefully the situation will be mitigated by Thiel’s ABBL which is setting up a new pension fund for financial institutions in Luxembourg and launching its own complimentary scheme to replace its book reserve system. “The big banks here have the critical mass for their own schemes. We are trying to find smaller banks to interest them,” he says. Many are apparently interested in establishing something along the lines of a multi-employer fund, the relevant parties have agreed to set up the fund and William M Mercer has been recruited to oversee the project.
Thiel’s association should be congratulated, since the Luxembourg government – despite doing an impressive job in passing the legislation – has produced no incentive for swapping the book reserve system for the new pension schemes. Germany, for example, is coaxing companies with tax breaks and subsidies that, although small, are encouraging. Even if the Luxembourg government does change tack and introduce incentives it has another, more fundamental obstacle – its immensely generous state pension.
Pillar one provision is financed by a pay-as-you-go system and actuaries have estimated there will be no financial crisis before 2020 at the very earliest. In other words, the attitude towards ASSEPs and SEPCAVs at home is one of indifference rather than dislike. Says Thiel: “Luxembourg has the most highly developed legal pension … the people in Luxembourg don’t feel the need for complementary pensions because they have this highly developed legal pension system. In addition this legal system is very well funded.”
Luxembourg is in the enviable position where employment is increasing by around 7% per annum and so, therefore, are contributions to the pension schemes. Unions feel there is surplus money in the system and are pressing for increased state benefits. “It’s very difficult to convince people and the politicians that you need an additional complementary pension fund,” says Thiel. Attitudes towards supplementary provision appear rather black and white, with many of the unions convinced the introduction of a complementary scheme will be at the expense of the state pension.
Thiel says the association has persistently stressed that the supplementary systems does just that – supplement rather than substitute. But this message appears to have fallen on deaf ears. The association’s job has been made harder by the German government’s decision to cut the state pension – in fairness, it has offered incentives for complementary schemes. So, the argument goes, the introduction of funded systems means only one thing – a cut in state pension.
As if the unions’ lack of enthusiasm wasn’t bad enough, the government has shot itself in the foot by setting a punitive 25% withholding tax for funds coming off the book reserve and for those setting up new pension funds. Thiel describes the tax as crazy. “First, it’s too high, it makes no sense. Secondly, it’s not a sound system in that you withdraw tax at the entrance. The surrounding countries are doing it the other way around and, since one third of our employment are commuters, we will punish them by taxing them twice.”
The government’s 25% withholding rate has established a TEE system. According to James Ball, head of consultants JBI Associates, you can understand the rationale behind the decision. Most employees in Luxembourg are foreign and it’s easier to collect taxes before beneficiaries return to their countries. However, it is illogical since the vehicle is designed for international use and most of the neighbouring countries operate an EET system.
This anomaly can be traced to the different founders of the legislation. ASSEPs and SEPCAVs were designed by the ministry of finance, whereas the ministry for social affairs constructed the ‘domestic’ legislation. Thiel says the latter focused on the social rather than commercial aspect of pensions. “Even today, if we are talking to these people they have an entirely different approach, they cannot understand that pension funds are a commercial product. It’s a completely different approach and a completely different way of thinking to the Anglo-Saxon approach,” he says.
Fernand Grulms, head of Pecoma, a new pensions consultant, believes the government will cut the rate in the next two years. Under the old system, lump sums were taxed at 23%, half the top marginal tax rate of 46%. The withholding rate of 25% was based on the old lump sum rate of 23% and, by a series of links, the former should fall. Last year the government announced the top rate of marginal tax would be cut to 42% this year and 38% in 2002. As the rates are all linked, so the withholding rate should fall in line with marginal tax rates. “We are arguing the 25% should definitely come down to 20% or 15%. The lower the better,” says Grulms. The government faces hefty lobbying from employers, the banking association and the CAA to cut the rate. Civil servants Grulms has talked to acknowledge the link between the rates. The 25% tax seems doomed, much to the relief of employers and those trying to promote the new vehicles.
Even so, some local companies are already biting the bullet and setting up supplementary pension funds. Banque Générale du Luxembourg has a proposal at the CSSF to introduce a second pillar fund; Credit Bank and Banque International à Luxembourg are preparing to move to a fund and there are numerous smaller banks involved in the association’s proposed scheme. According to Thiel, Goodyear was considering moving its book reserve to a pension plan but was scared off by the withholding tax. Steel group Arbed has promised its employees pensions, has no book reserve, is paying out of the treasury and appears an ideal candidate for the new schemes. And Thiel says there are at least five proposals lodged with the CSSF.
Luxembourg is in the peculiar situation whereby its latest product is almost more popular abroad than at home. Reluctance to use ASSEPs or SEPCAVs at home will not affect their popularity. It would, however, make the job of marketing them abroad far easier.

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