LUXEMBOURG – The International Monetary Fund has proposed a “solidarity factor” as a further pension reform measure for Luxembourg.

Such a move, it argues, would signal the Grand Duchy’s intent to remain attractive to invest and work in.

“Major progress has been made already in reforming the pension system but further measures are necessary, not only to achieve the medium-run budget targets but also to prepare for the demographic challenges that lie ahead,” the IMF said in a report on Luxembourg.

“For old-age pensions, we recommend that a "solidarity factor" link the replacement rate to the contribution base and the statutory retirement age to life expectancy.”

“The introduction of such a factor would not reduce benefits but it would signal a determination to maintain the country's attractiveness as a place to work and invest in,” the IMF said.

“This would foster a continued expansion of the revenue base that would forestall the need for more drastic entitlement cutbacks in the future, thereby leveraging the efficiency gains from the recent, impressive tax reforms.

It said the “solidarity factor" could help to ensure a “fair distribution across generations” of the burden of adjusting to population aging or other economic shocks.

And it said that the credibility of the commitment to maintain low tax and contribution rates could be enhanced by a continued accumulation of public sector assets that might later also serve to sustain a minimum pension.

In general, the IMF said that Luxembourg was “enviably well placed” to address the challenges of the global slowdown.