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Companies in Luxembourg have, until recently, had little incentive to introduce supplementary pensions for their employees. The Grand Duchy has one the most generous state pensions in Europe, promising between 60% and 70% of final salary after 40 years’ contributions.
This has meant that occupational pension plans in Luxembourg have tended to be top-up schemes for people who are above the earnings ceiling. As for plan type, tax incentives have favoured internally funded book reserve schemes rather than externally funded insurance or pension plans.
Nor has there been much demographic pressure to change. The state pension fund, run by the Inspection Générale de la Sécurité Sociale (IGSS), has a surplus of E4bn, thanks to a large workforce of young people.
However, Luxembourg is highly dependent on a supply of workers from neighbouring regions in France, Belgium, and Germany. Currently some 95,000 cross-border workers commute daily to Luxembourg, a country of only 430,000 people.
An International Labour Organisation (ILO) report for the Luxembourg government in 2001 said that, in a worst case scenario where the GDP remains low (2%) and the number of cross-border workers levels off in 2004, the IGSS will no longer be able to pay out pensions solely from contributions after 2013.
So now Luxembourg, in line with other European governments, is trying to encourage employers to introduce funded schemes. James Ball, head of employee benefits consultants JBI Deloitte in Hamm, says: “We have a less of a problem than lots of people but we still have a problem. So the two factors driving the domestic pensions markets are the same as everywhere else – self-provision and employer provision. As each year goes by the pensions law is getting more and more generous in the sense of tax breaks to encourage employers and individuals to take the self-provision route.”
Pension plans set up by Luxembourg companies for their employees are regulated by the law of 8 June 1999 on occupational pension schemes, commonly known as Loi RCP. Loi RCP law created, for the first time, a legal framework for occupational pensions.
Fernand Grulms, director of pension consultants Pecoma International in Luxembourg says a law was necessary if Luxembourg was to implement three European Union directives: one on the rights of workers in the event of transfer of companies; one on the protection of workers in the event of insolvency of the employer; and one on the implementation of the principle of the equal treatment of men and women.
“In many plans beneficiaries could not get any pension rights if they did not stay to retirement with a company. There was also no protection of pension rights. For tax reasons most pension plans were book reserve funded and if the employer went bust the pension rights disappeared in the bankruptcy liquidation.”
Luxembourg’s 750 occupational pension schemes must comply with the Loi RCP by the end of this year. Among the requirements are a maximum vesting period of 10 years, and the possibility of transferring vested rights to a new employer. Insolvency insurance is now mandatory for all book reserve plans, and Luxembourg is using the German Pensions-Sicherungs-Verein (PSV) scheme to provide this.
A key feature of the new law was the creation of a level fiscal playing field for internally funded and externally funded company pension plans. At the same time, a separate but coincidental law created two new pension fund vehicles – the Sepcav and the Assep – to capture a share of the international and pan-European pensions market. A year later, the law was extended to allow insurers regulated by the CAA to promote pension funds.
A Sepcav is a defined contribution (DC) arrangement while an Assep and a CAA plan can be either DC and defined benefit (DB) schemes. As a result, Luxembourg now has a ‘suite’ of pension options which can be extended from the purely local to the international as the need arises. Geoffrey Furlonger, pensions adviser to Lombard International Assurance, which set up a Sepcav for the Luxembourg based partners of KPMG two years ago, explains: “There are broadly three categories of pension being created in Luxembourg at the moment. In the first category, you set up a plan purely for Luxembourg companies for Luxembourg staff with no thoughts of including anybody else. In this case there are other options besides a Sepcav.
“In the second category, you can create a structure which is suitable for Luxembourg now but at some time in the future you can also include other countries in the scheme, tax barriers permitting. One of the purposes of the KPMG/Lombard Sepcav is to introduce the possibility of broadening it out and allowing partners and other staff of KPMG in other countries to join the scheme.
“In the third category you can set up an international or pan-European pension scheme with maybe nobody from Luxembourg in it.”
Pension plans promoted by Luxembourg’s leading bancassurers and other financial institutions generally fit into the second category. KPMG has set up Sepcavs initially for its Luxembourg staff but ultimately for Europe-wide employees. Similarly, the Asseps created for employees of Dexia, HVB Banque Luxembourg, Banques Générale du Luxembourg and Clearstream, and the CAA plans set up for Crédit Européen and ABN Amro are all domestic plans that can rolled out internationally if required.
As an overlay to this, there has been a discernible move to DC among the new schemes, Christophe Lentschat, head of product development at investment and pension fund administrator EFA says: “There is a very strong incentive for companies in Luxembourg to move towards defined contribution pension schemes for the same reasons of cost and risk as in other countries.”
EFA plans to set up its own DC pension scheme in the next six months. However it will be an insurance-based scheme rather than one of the new pension funds. Lentschat says many medium-sized companies in Luxembourg are taking this route. “The companies who went for Assep or Sepcav were mostly banking or audit groups – people who have an interest in promoting these type of products. Most industrial groups will have gone for insurance products.
“A second reason is that banks are among the largest companies in Luxembourg and to set up pension funds rather than insurance products you have to be a certain size.”
One drawback of the new pension funds for companies that want to provide investment choice in their DC plans is the way the funds are structured. “The pension fund product in Luxembourg is not an individualised 401(k) type of product. So if you want to offer varieties of investment choice in a pension fund you would have to define a number of compartments in your pension scheme. And the more compartments you have the more expensive it becomes.”
Another reason why employers might choose an insurance vehicle rather than a pension fund vehicle for a DC plan is the requirement that at least one of the investment options must offer a guarantee – a capital guarantee for employers’ contributions and a return guarantee for employees’ contributions.
For employees’ contributions, the minimum rate of return must correspond to the minimum return guaranteed for insurance products by the CAA, currently 2.5%. “This is something that is relatively easy to achieve with a with-profits type pf insurance product. It is a lot more difficult with a pension fund,” sys Lentschat. However, he believes that Luxembourg’s new vehicles are well positioned to attract the pension funds of multinationals. “Siemens, which has just launched its own Assep, may well catalyse future developments,” he says.
One way the market is likely to develop is through companies graduating from insurance-based arrangements to pension funds, says Mike Duhr, employee benefits manager at Fortis Luxembourg Assurances. “Some clients have to choose group insurance for their DC plans because they haven’t reached critical size. So we are hoping to be able provide a flexible solution where they would start in group insurance and once they had reached a critical size they would go into a pension fund.
“Depending on a company’s size we would start with group insurance, unit-linked, with Fortis Luxembourg Assurances funds. When there were sufficient assets, we could then provide group funds from the Fortis Group, which has more than 80 sub-funds. A third solution would be unit-linked but third party, where we go to BGL and can access more than 6,000 funds.
“Finally, we could move with the company to a pension fund where we could still provide the risk coverage and, if necessary for local plans, propose an investment strategy with a guaranteed minimum rate.”
This pragmatic, even opportunistic strategy is typical of Luxembourg’s approach to pensions in general and DC plans in particular. The aim is not to force companies to take a particular pensions path but rather to open as many gates as possible. The next couple of years will show if this strategy has succeeded.

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