Complementary pensions bill proves controversial

Download article in original language : LU9711126FFR.DOC

The Luxembourg Government's August 1997 bill on complementary pensions has been roundly criticised by employers' associations as it provides for a fixed tax on pension contributions, thereby increasing total payroll costs, and also jeopardises growth in international pension funds.

In July 1995, the Luxembourg Government published a five-page document setting out the political options relating to complementary pensions. The final draft legislation on this issue was presented to the Chamber of Deputies on 5 August 1997 together with bills to reform private-sector and public-sector pensions (LU9706111F and LU9711121F).

What the bill says

To comply with EU Directives relating to complementary pensions, the bill sets out two principles:

  • the chosen schemes must ensure that pensions commitments are met; and
  • complementary pension rights must be guaranteed and workers must retain their entitlements if they move from one country to another or change jobs.

In respect of tax treatment, the bill makes no distinction between two types of scheme:

  • internal funding, built up inside the enterprise - known as "book reserves". Funding of this sort consists of the provision that enterprises make in order to provide employees with a complementary pension at a later stage; and
  • external funding, whereby management of the pension scheme is handed over to a party distinct from the enterprise. This might involve group insurance schemes, provided by insurance companies and pension funds, into whose funds companies invest their assets.

The bill also seeks to harmonise to some extent private sector and public sector pension schemes, by placing a ceiling on the amount of tax that may be deducted in respect of (private sector) complementary pensions. The pension paid on the basis of the statutory scheme in the public sector can be as high as around LUF 220,000 per month, whereas the maximum in the basic private sector scheme is no more than LUF 160,000. As a result, in the private sector, tax-exempt payments will not exceed the amount needed to provide a monthly complementary pension of LUF 60,000.

When complementary pension contributions are made, they will be taxed overall at 10% if they go towards the funding of future monthly benefits, and at 20% if they are to pay for a lump sum.

The positions of the trade unions

The LCGB trade union confederation set up a working party to produce a critical report when the bill was presented. The working party has said it is looking for a clear statement from the Government that the bill is not going to introduce a new "pillar" of social security through the back door, and thereby bring down the value of pensions. It has also expressed astonishment that the bill says nothing about indexing complementary pensions to ensure that they keep up with cost-of-living increases.

The OGB-L confederation has not yet fully clarified its position. Following a discussion with the Association of Insurance Companies (Association des compagnies d'assurance, ACA), the union has said that the bill contains technical and fiscal imperfections, and that it should be reconsidered in a consultation exercise involving the social partners.

The positions of the employers' associations

The Association of Luxembourg Banks and Bankers (Association des banques et banquiers luxembourgeois, ABBL) believes that the bill on pensions seriously endangers the growth of Luxembourg-based international pension funds. The ABBL is not the only organisation to make its criticisms known: insurance companies and the Federation of Industrialists (Fédération des industriels, Fédil) also want the Government to take another look at the bill's tax implications.

Bankers have made their opposition to the bill loud and clear because the stakes are high. In the world of finance, pension funds offer outstanding opportunities for the future and, in a market that is still in its infancy, the prospects for growth are enormous.

Leaving to one side the arguments relating to the prospects for international growth, it is a fact that complementary pensions constitute an integral part of the remuneration of senior executives. The new tax system will substantially raise the outgoings of banks in Luxembourg, and thereby increase their overall payroll costs. It follows that parent companies of foreign-owned banks in Luxembourg are likely to repatriate the management of their senior executives' complementary pensions.

The ABBL says that the expected tax changes will force enterprises to raise gross salaries so that employees' net pay remains at the same level after covering their complementary pensions. Added to the ceiling on tax-deductible payments, this will substantially increase banks' payroll costs. Among those most affected will be highly-paid banking executives who are drawn to Luxembourg by attractive salaries, of which complementary pensions form a major part.

Another sensitive issue is the taxation of complementary pensions contributions as they are made. Hitherto, employees only paid tax when they drew their monthly complementary pension or took a lump sum; this led to abuses of the system with some pensioners leaving the country just before the tax authorities had time to recover their share. The ABBL acknowledges that the law should ensure that the state receives the revenues to which it is entitled, but also believes that the principle of "taxation in advance" is unacceptable. The new law could also place non-resident employees in a difficult position because of conventions preventing them from being taxed twice. These agreements normally provide for the tax to be levied in the country in which the pensioner is living when he or she draws the pension; under the new system, non-residents could be taxed twice.

Government claims it has been misunderstood

For the time being, the Government awaits the opinions of the Council of State and the professional chambers. It says it is keen to discuss the issue and to make improvements to the bill, but it is not prepared to back down on the principle of imposing a limit on the state's contribution to funding complementary pensions (ie through tax breaks). As the Social Security Minister has stated: "at a time when we are calling on the public sector to pull its weight, there is no way we can allow unlimited exemptions on payments that go to pay for complementary pensions. As soon as the principle is accepted, I will be happy to consider possible improvements."


Luxembourg cannot do without a law dealing with complementary pensions. As soon as the arguments and proposals have been clarified, a solution acceptable to all is on the cards, so long as the tax problem can be resolved. (Marc Feyereisen, ITM)

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