In the absence of any expected domestic legislation in the near future, Luxembourg is concentrating its efforts on positioning itself as an international pensions centre, says BGL
The beginnings of the pension regulations in Luxembourg came early this century with the general retirement pension law coming into force in 1931. Many years later, the law of July 27, 1987 went into effect on January 1, 1988 creating a ‘single contributory pension scheme’. This brought harmonisation and the unification of the different public pension schemes. This law introduced a single contributory pension for retirement, invalidity and ‘survival’ (for a widow, divorced spouse, children, parents).
In the Grand Duchy of Luxembourg, a person is entitled to a full career pension benefit from the state and other compulsory pension systems after 40 years of service.
For the time being, the general retirement age in Luxembourg is 65. However, flexibility of the retirement age was introduced in the Grand Duchy of Luxembourg pursuant to the law of April 24, 1991. This means that an anticipated retirement may be granted to a person at the age of 57 or 60 subject to certain conditions. On the other hand, a person may also extend his years in service up to a maximum age of 68. He or she decides the timing of the beginning of this postponed pension and the date can be set between the age 65 and 68.
The annual pension sum is based on the effective duration as well as the average contribution of a person. If the full career pension benefit is not attained, as in 40 years, the sum is reduced on pro rata basis. This pension payment is increased by a proportional amount which is determined according to the amount of the salary of the pensioner. The effective pensioner’s net monthly pension is reduced by the health insurance contribution and tax.
In the near future, no profound amendments to the legislation relating to the legal pension are expected. However, some minor adjustments involving the older pensions of persons with very low salaries may be foreseen. The Luxembourg first pillar is financed by way of a ‘pay-as-you-go’ system. Thanks to reserves of Lfr137bn (E3.4bn) at year-end 1998 and due to the specific economic situation in the Grand Duchy, actuarial simulations anticipate no major financial crisis before 2020.
Second Pillar
In a move considered by many to be the next major step for the Grand Duchy of Luxembourg to maintain and expand its viability as a financial center of choice for international companies, the Luxembourg Parliament voted into law the legislation on international pension funds on May 19. Two separate legal structures are now available: association d’éparque-pension (ASSEP), and sociétés d’éparque-pension á capital variable (SEPCAV).
Characteristics that both have in common include governing articles that balance legal and financial security with flexibility. This is accomplished by putting international
pension schemes in one legal framework for the first time and by having the Luxembourg financial supervisory authority for investment funds, the Commission de Surveillance du Secteur Financies (CSSF), take on the regulatory role as well as by keeping most of the design parameters of the individual plans outside the law. This allows plans to be tailor-made according to the needs of the corporation itself in the various countries.
Thus, while the rule or guidelines of an ASSEP or a SEPCAV will define most of the plan’s legal elements, all important issues will be defined in a mandatory yet flexible set of guidelines to be defined by the plan sponsor.
The main difference between an ASSEP and a SEPCAV is the manner in which the pension is paid out upon the employee reaching retirement. The ASSEP allows for lump sum and life-long payments, thereby qualifying as both defined contribution (DC) as well as defined benefit (DB) plans.
The SEPCAV only allows for lump sum payments. Therefore, it avoids the liability risk inherent in DB plans and its relatively simple legal set-up will make it the preferred vehicle for DC plans. Those who are familiar with Luxembourg SICAVs will immediately recognise the close similarity between the SICAV and the SEPCAV.
l The legal framework
The Luxembourg law offers an innovative and safe legal framework for pension obligations with an international scope. Plans for expatriates, for example, are foreseen to be the first users of the new law.
l International DC plans.
SEPCAVs are the first legal vehicle for the rapidly growing DC plan business on a pan-European level. This makes the purely domestic schemes redundant for those companies wishing to offer retirement savings plans to their employees internationally.
l The umbrella structure
Commonly known from the investment fund side of the world, the multi-compartment structure allows for the assembly of several different pension plans under one roof. This type of structure will substantially increase efficiency, control and performance.
l Choice of providers
Pension funds require many service providers from benefits administrators, asset managers, custodian banks, actuaries, consultants, etc. Many companies already have relationships in place with local professional providers. And with the exception of custodian banks, the Luxembourg law does not require the service providers to be based in Luxembourg. Therefore, after registering with the Luxembourg supervisory authority, these firms may continue to serve their clients’ pension schemes under the Luxembourg pension fund framework as well.

BGL
Contact: Jacques Bofferding
Company: Banque Générale du Luxembourg
Address: 50, Ave JF Kennedy
L-2951 Luxembourg
Telephone: +352 4242-1
Fax: + 352 4242 2579
Email: info@bgl.lu
Presently, no national pension association exists in the Grand Duchy of Luxembourg. However, with the new law, the pensions industry is set to take off and BGL intends to play a leadership role in the establishment of such as association in the next 12 months.

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