Luxembourg's pension assets are as elusive as much else in the Grand Duchy. What we can say about Luxembourg is that, small country or no, it faces the same struggles in breaking the mould of over-generous pay-as-you-go pensions as its neighbours.
The latest figures on social security date from 1995, when total income was Lfr139bn ($3.7bn). It is interesting to note that the state's budget in 1995 was Lfr68bn for the social security department alone, and Lfr82bn for all other departments.
The biggest pension fund in Luxembourg, the Caisse de Pension des Employes Prives, is operated on behalf of all private employers in the country, although there is no publicly available information as to its size. According to Francine Weydert of Banque Generale du Luxembourg (BGL): Investment policy favours exclusively Luxembourg government debt as well as loans contracted to local development projects. It can in no way be compared with the pension fund schemes existing in other countries."
There are no official statistics on the extent of private state pension provision in Luxembourg. Baudoin Valentin of consulting actuaries Esofac says that in the financial sector the level of pension provision is between 75% and 80% of final salary. For the industrial sector, it is around 60-70% of average salary for the last five years. State employees qualify for five-sixths of final salary, a level that the government knows is unsustainable. It is only now going through the bitter struggle of negotiating with the unions, effectively forcing them to relinquish this privileged status.
Private schemes organised by companies function solely on the book reserve system. Over 95% of pension schemes are run on this basis. According to a study by the Luxembourg tax administration, in 1995, 35% of employees subject to Luxembourg social security were covered by an occupational pension scheme. All supplementary schemes are effectively insurances. In the past two years, the banks and insurance companies have begun to offer conventional and unit-linked insurance/ pension saving schemes. They are tightly regulated, based on the criteria imposed on insurance companies for the investment of reserves. The list of admissible assets for conventional policies includes a wide range of bonds, with no limit on first class corporate or sovereign debt, to a limit of 40% of the total technical reserves for lower-grade bonds. For shares, no more than 5% of the total technical reserves can be placed with any one issuer, and no more than 20% of the total may be invested in equities. No more than 25% of the total technical reserves may be allocated to collective funds complying with Luxembourg law. For unit-linked schemes, the investment restrictions are broadly similar.
As a rule, smaller companies in Luxembourg invest purely in their own bonds. Multinationals will invest in their own fixed interest securities, but also in deferred annuities. James Ball of consultants JBI Woodrow Milliman says the book reserve system ""is seriously tax advantageous for the employer and employee. I'm pretty sure that a lot of smaller companies are going to be in trouble if they have to segregate and fund pensions." The only institution operating a segregated scheme is BGL, one of Luxembourg's big three indigenous banks, which operates the only independent private pension fund on behalf of its employees. BGL's Manuel Baldorf comments: ""It is certainly true we have a lot of Luxembourg denominated bonds and perhaps our fund is the only one investing in equities. This is because of the regulations which are imposed in order to eliminate currency risk. Of course, there are other ways of achieving this through portfolio diversification and I think the trend is definitely heading towards a greater acceptance of the idea of diversification."" Baldorf is unable to divulge the extent of BGL's exposure to equities and other international securities, adding only that ""it is still limited"".
Claude Bettendorf of Banque et Caisse d'Epargne de l'Etat (BCEE) says the state savings bank has an informal pension vehicle in the form of savings plans invested in in-house funds. But again, "We invest only in first class Luxembourg franc-denominated bonds." At Banque Paribas, Pierre Corbiau says the bank has recently introduced a pension scheme for all employees. And again, the investment policy followed is concentrated almost exclusively on the bond markets.
The Luxembourg government's main concern in the current drive to introduce formal pension laws is in harmonising the level of pension for civil servants and private employees. This is not going to be easy: Civil servants not only have much higher salaries than many private sector workers, their five-sixths of final salary pension is indexed on a 'revaluation' basis, according to the salary of an active civil servant. "Of course, the government wants to put a stop to this," says Valentin, and just as obviously, the civil service wants to keep it. Industrial unrest is not something they are used to in Luxembourg, but this is now the reality as the pension rights issue comes to the fore.
Lucien Thiel of the Luxembourg Bankers Association (ABBL) says, "The evolution of pensions in Luxembourg hinges on this issue. Not to merge them, but to bring them closer together. Naturally, the civil servants are violently opposed to this change and this will be one of the major political topics over the next few months.""
The domestic pension issues do not really dovetail naturally with the cross-border ideal, which is being presented, by the ABBL in particular, as the blueprint for change. Ball says the proposed pension law for Luxembourg will ultimately include the ability to market cross border, primarily because the commission will not allow two laws, one for domestic and another for cross-border pensions. Ball says, "There will be a compromise between the domestic legislation and the view put forward by the Commisariat aux Assurances, that the best way to proceed is a law that will appeal to the multinational employer."
He adds that the Luxembourg code of conduct on tax, which precludes any withholding tax on residents or non-residents, creates the basis of a level playing field, which will help the idea of a cross-border pension. However, the idea that Luxembourg will become the centre for cross-border pensions in Europe is a little premature. "Do you think Germany, Austria and Belgium are going to allow further massive investment flows to Luxembourg?" asks Ball."