Luxembourg’s pension system – one of the most generous in Europe - was created in 1931 through the ‘general retirement pension law’.
A subsequent law which came into into effect on 1 January 1988, however, was the first to create a ‘single contributory pension scheme’, thus unifying the Duchy’s different public pension schemes. The law also introduced invalidity and ‘survival’ benefits into the pensions framework.
The country’s largest fund at present is the State Pension Fund, with total assets of e3,396m.
Luxembourg citizens are entitled to a full career pension benefit from the state and to other compulsory pension systems after 40 years of service.
General retirement age is currently 65, although 1991 legislation stipulates that a person may retire at the age of 57 or 60 subject to certain conditions.
Conversely an individual may also extend his/her years in service up to a maximum age of 68.
The annual pension sum is based on working life duration (maximum 40 years) as well as average contributions. If a full career benefit is not attained, the sum is reduced on pro rata basis.
In the near future, few amendments to the current legislation are expected.
Luxembourg’s first pillar is financed by way of a ‘pay-as-you-go’ system and substantial reserves in the system mean that actuarial simulations anticipate no major financial crisis before 2020.
To expand its viability as a financial centre of choice for international companies, the Luxembourg Parliament voted into law legislation on international pension funds on 19 May 1999.
Two separate legal structures are now available: The Association d’Eparne-Pension (ASSEP), and Sociétés d’Eparne-Pension á Capital Variable (SEPCAV).
The Luxembourg financial supervisory authority is responsible for investment funds and the Commission de Surveillance du Secteur des Finances (CSSF) takes on a regulatory role.
While the rules for an ASSEP or a SEPCAV will define most of the plan’s legal elements, all important issues are covered by a mandatory, yet flexible set of guidelines created by the plan sponsor.
The principal difference between an ASSEP and SEPCAVs is that the former allows for lump sum and life-long payments, thereby qualifying as both defined contribution (DC) as well as defined benefit (DB) plans.
The ASSEP structure is of a non-profit organisation and beneficiaries are creditors of the company.
SEPCAVs allow lump sum payments only and so avoid the liability risk inherent in DB plans. Its relatively simple legal set-up and umbrella structure makes it the preferred vehicle for DC plans – particularly on a pan-European level for those companies wishing to offer retirement savings plans to their employees internationally. SEPCAV scheme members are shareholders in the company.
Both structures, however, depend on the use of double taxation treaties to ensure tax neutrality.
The multi-compartment ‘umbrella’ structure allows for the assembly of several different pension plans within the same vehicle, thus increasing efficiency and control.
In June this year Anglo/Dutch group Unilever become the first international pension scheme to set up a Luxembourg-based umbrella fund for its expatriate employees under the ASSEP/SEPCAV pension fund legislation.
With the exception of custodian banks, Luxembourg law does not require service providers to be based in Luxembourg as long as they are registered with the Luxembourg supervisory authority.
Ratification is currently awaited on legislation to allow insurance companies to compete with banks and investment funds for DC business.