Reforms intended to strengthen the sustainability of Luxembourg’s pension system will largely take effect from 1 January 2026, with the associated bill approved by members of parliament yesterday.
The contribution rate into the statutory pension scheme will rise from 24% to 25.5% (8.5% each from employee, employer and the state, from 8% at present).
While the legal retirement age will remain at 65, the 40-year contribution period required for early retirement at 60 will be increased gradually from 1 July 2026, adding a further eight months by 2030.
Employees working until 65 despite qualifying for early retirement will receive a tax-free allowance of €9,000 per year on their taxable income. There will also be more flexibility for phased retirement, such as working part-time while claiming a partial pension, if the employer consents.
And the tax deduction ceiling for contributions into third pillar savings will increase from €3,200 to €4,500 per year.
The government has said these measures should extend the financial sustainability of the pension system by up to four years, until 2042.
However, Fondation IDEA, the think-tank created by the Chamber of Commerce Luxembourg, cast doubt on how far the reforms would be successful in providing the predicted sustainability.
In a working paper published last month, the think-tank highlighted what it considered to be two main weaknesses in the proposals: first, the absence of progressive measures to correct the pension system’s deficit trajectory and second, the lack of cost-saving measures for benefits.
Meanwhile, the tax incentives for staying in employment until 65 and for contributing to the third pillar should mean greater and more predictable contributions flowing into funded schemes.
So how will this affect their investment strategy?
Serge Weyland, chief executive officer of the Association of the Luxembourg Fund Industry (ALFI), said it was too early to tell, but suggested it would help investment flexibility.
He said: “Generally speaking, successful pension reforms in Europe should entail both an increase in contributions and a ban on capital guaranteed options, at least until the last decade of an individual funded pension scheme. This will allow schemes to offer a broader range of funds investing in higher-yielding assets, including alternatives offering high growth, while using risk-adjusted measures such as lifecycling structures to protect savers nearing retirement.”
He added: “A major opportunity for pension funds is exposure to private markets, which can make substantial returns for long-term investors. For assets such as private equity, private debt or infrastructure, they can use so-called evergreen funds, which are open-ended funds allowing ongoing investment and potential redemptions to savers by offering periodic liquidity.”
As a consequence, he said, tax incentives for retirement saving had a wider impact: “We believe that developing funded pension savings is the biggest lever Europe has to create deep capital markets.”
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