LUXEMBOURG – Luxembourg is likely to face “stiff” competition in the race to become the domicile of choice as European pension funds are privatised, according to a new report.

“Laws on pension funds (SEPCAVS and ASSEPS) passed in 2005 were intended to position the industry for potential further privatization of pension systems within the EU, and a 2004 law would spur private equity and venture capital business (SICAR),” the International Monetary Fund stated.

“However, all agreed that competition for the pension fund business was likely to be stiff, and that the impact of these initiatives would be felt only gradually.”

The country is facing competition for its Fonds Commune de Placement, (FCP) pension pooling from rivals such as Ireland with its Common Contractual Fund. Just last month the Dutch Finance Department endorsed a Fund for Joint Account as a tax-transparent vehicle for international asset pooling.

The IMF, in a report on Luxembourg, said local authorities were “more sanguine” than the fund itself about the prospects for continued rapid financial sector expansion.

It said they “expected strong retail and institutional demand for investment funds to continue”.

The IMF continued: “On pensions, the fund has consistently advised that the pay-as-you-go pension system is unlikely to be sustainable under plausible growth assumptions.”

Future funding problems needed to be addressed “upfront” – by taking advantage of Luxembourg’s overall favourable growth developments.

Proposed measures included linking the replacement rate to the contribution base and the statutory retirement age to life expectancy, while introducing an intergenerational solidarity factor in the benefit adjustment formula.

The IMF noted that n increase of the retirement age is currently under consideration.

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