Legislative changes introduced in Luxembourg at the beginning of the year will encourage companies to externalise their book reserves into occupational pension funds. Luxembourg is one of the few European countries with a TEE system and until the end of last year contributions were subject to 25% tax, a rate that has now fallen to 20%.

The new rate also applies to the 25% rate previously levied on lump sum transfers from book reserve schemes to external schemes including pension funds and insurance companies. Previously pension funds had five years to pay the 25% when making the transfer, under the new legislation they have to pay the 20% in cash immediately.

Actuarial calculations suggest there is little monetary difference between the two approaches but Fernand Grulms, director of Pecoma Consulting in Luxembourg, says despite this, the change will encourage more employers to opt for an external pension fund.

“Psychologically it is very important that the tax has been reduced….this was a major issue when trying to launch pension funds. Because of this tax, many employers were reluctant to transfer vested rights,” he says.