While Europeans are trying to grasp how their future pensions will look like, the Luxembourg government has not yet decided to grab the bull by the horns, even though the signals of cash drought could become as alarming here as elsewhere. Given Luxembourg’s solid social security system, setting up some kind of complementary pension schemes is still not on Luxembourg companies’ priorities list.

The obstacles to set up complementary pension schemes are well-known in Luxembourg and elsewhere. The government’s own timid attempts at reforming the system recently have shown how inadequate the current social and legal environment is at the European level.

A deep reform of social legislation in each country would be necessary for smart, multiple-sourced pension financing vehicles to see the light of day. Except in the Netherlands, in the UK and in some Scandinavian countries that have invested for a while in parallel pension financing systems (the second and third pillars; the legal pension system being referred to as the first pillar), European Member States are ill-prepared to face the challenges of society’s demographic transformations, especially with budgetary problems looming.

Recently the European authority for insurance and occupational pensions (EIOPA), created in the wake of the financial crisis, urged the European governments to start a pension reform at their own level. EIOPA wants to push for a new European directive on pension funds by the end of 2012. The Luxembourg Pension Funds Association (ALFP) together with the funds industry association (ALFI) contributed to the EIOPA’s call for advice last December.

“This is not a call for advice but a call for reasoning”, said Anne-Christine Lussie, president of the ALFP. The association has repeatedly called on the government to start looking for alternatives to the legal pension system together with companies. Today, social security benefits are quite generous in Luxembourg. As a result the majority of contributors don’t need complementary pension funds to ensure their retirement income. According to the CNAP, which manages Luxembourg’s legal pension system, the national reserves represent about EUR 10 billion, almost 4 times the sum annually contributed by workers to finance the system. “Our social security system is currently not in deficit”, Mrs Lussie said. “But we still need to reform our pension system to avoid problems caused by the expected deterioration of demography.”

Marc Lauer, vice president of the insurance companies association (ACA), is very critical of the Luxembourg government’s recent plans to reform the pension system. If no solutions are developed to finance pensions in parallel with the first pillar, the system will be indebted by the 2030’s, he said. “The government’s measures even if implemented will not go far enough because they’re based on today’s optimistic premise of economic growth”, he said.

He added that the government’s premise that people will live longer lives and hence will contribute for a longer time is wrong. As people are educated until later in their lives, their contributions are only delayed – and such calculations will mean changes will only be cosmetic. “We feel like the government is giving homeopathic remedies when what we need is a cure to a relatively severe disease”, he said. “Even if the calculations are correct, as there is no retroactive effect, the impact of these changes will only be fully felt in 40 years’ time. If we want our legal pension budget to be in balance in 40 years, the contributions taken from salaries must rise by 25 percent – that is if we keep an optimistic vision of the economic growth of Luxembourg.” Such arguments have been strictly rejected by trade unions, which have kept any kind of deep reform in wonderland.

An arm-wrestling game

Since pension funds were introduced on the Luxembourg market in the 1960’s developments in the sector have been shy at best. In 1999, the three pension funds (ASSEP and SEPCAV, under the CSSF’s supervision, and the Insurance Commissariat’s pension funds) “were created to attract foreign operators who would decide to domicile their pension vehicles in Luxembourg”, said Mrs Lussie. “We wanted to create a new success story after the UCITS. But UCITS funds are very different from pension funds: investors can easily choose where their personal investment is located whereas complementary pensions are regulated locally, in the country of establishment of the employer who does not enjoy total freedom in the choice and the location of his pension institution.”

(Anne-Christine Lussie, president of the ALFP – copyright: colorblind.lu)

In the case of pension vehicles, a European directive only liberalised the sector in 2003, thus enabling the funds to operate freely in Member States and improving their mobility. “So far, it never developed on a large scale”, said the ALFP president. “In Luxembourg today we mostly have pension funds directed at the local market, and very few at the international market. I think everyone would like to have more of the latter type of pension funds. But further efforts must be made to convince all stakeholders that large and well-managed pension funds are an efficient tool for securing retirement benefits.”

“Cross-border funds are still an utopia”, said Pierre Doyen, legal counselor at ESOFAC Luxembourg, a company member of the ALFP. “There are very few cross-border pension funds in Europe, no more than a hundred and hardly any spans over more than two countries. We keep to our residential zone: the UK does business with Ireland, and Belgium with Luxembourg.” In theory, pension funds domiciled in Luxembourg use the Luxembourg financial centre to invest. We have the financial mechanisms in hand in order to develop more of these funds. We cannot forget that pension funds are not just investments: there are men and women who depend on them. We’re often quoted along with Ireland and Belgium as the countries having the ideal framework to support this business.”

The current debate, who wants to support the development of cross-border pension funds, is a “small step”, he said. “Financing a pension funds is a long-term goal. You cannot wait until legal pensions can’t be financed anymore before you start thinking about complementary regimes. It’s now that we need to place markers for the future.” But more changes beside the 2012 European directive will be needed - and the variety of social and tax legislation across countries may continue to block them. “Pension funds must respect the law where the companies depending on them are operating,” Pierre Doyen said.

He added that the general mindset needs to evolve. “The employer who makes the choice of putting the company’s pension funds in foreign hands may be perceived as risking assets”, he said. “The bottom line is that you can’t have less strict social rules for a cross-border fund than you do on a national level.” Anne-Christine Lussie said there cannot be an unbridled harmonisation of social rules. “Pension funds in the UK differ greatly from France’s caisses de retraite. But we can push for a basic nucleus of rules each country should follow.” Marc Lauer believes bilateral agreements are more promising than harmonisation. But even so, he said, “when public pensions represent in average 87 percent of your former salary in Luxembourg, compared to Belgium’s 50 percent or so, such agreements are utopian. It’s politically unsellable.”

By Delphine Reuter