The IMF is backing the findings of a recent Luxembourg government actuarial study, which states that according to current trends a substantial funding gap is threatening the pensions of people aged 40 and under.
“Pension benefits should be reformed as a means of alleviating the funding gap and addressing inter-generational inequities,” says the International Monetary Fund in a report on Luxembourg.
It continues: “This could be achieved through the introduction of a ‘solidarity factor’, adjusting the system’s replacement rate to the contribution base and the statutory retirement age to life expectancy.”
Increasing the retirement age would therefore be a step in the right direction, says the report. A cut in public spending could close the remaining funding gap.
“While the contribution rates of employers and employees could be raised in principle, the mission advises against such a step with a view to maintaining Luxembourg’s non-wage labour costs and tax wedge at their internationally competitive level,” says the report.
Luxembourg’s department of finance declined to comment on the report.
Overall, the short- and medium-term outlook for Luxembourg’s finance sector was positive. The report stated that economic recovery was “well advanced” and growth was likely to remain “robust” in 2006.
However, there is speculation that the speed of expansion of Luxembourg’s asset management industry - the second largest in the world behind the US - will probably normalise over the medium term.
This is because the shift from traditional, high-margin banking activities to lower-margin activities supporting the asset management industry is in an advanced stage, says the report.
It adds: “Against this background, the mission commends intensifying efforts to diversify the economy.”
According to the IMF, Luxembourg’s flexibility, business-like approach to legislative matters (such as those involving equity capital funds and private pension funds), and continued ability to attract and retain qualified staff both locally and abroad, means it is ideally situated “to seize business opportunities”.
Strategy changes and cost cutting following the 2000 equity fall have also made Luxembourg more competitive financially, says the report.