Government decides to reform civil servants' pension scheme

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The Luxembourg Government has recently announced plans to legislate to reform the civil service pension scheme, following inconclusive negotiations with the civil servants' trade union. The aims are to cut costs and bring about a degree of convergence between private and public sector pensions - an issue which has been politically controversial for some years.

A "Five-sixths pension for everyone" action committee was set up in April 1987, calling for a single pension scheme with identical rights and obligations in both the private and public sectors. Ten years on, the Luxembourg Government has now announced its intention to table a draft law reforming the public sector pension scheme. While it may be the declared intention of Luxembourg's largest political party (the Social Christian Party) to strip this politicised action committee of its legitimacy, there is still a danger that the ratio between paying members and beneficiaries of public sector pension schemes will rise sharply over the next few years, and that the working population, which is growing at a slower pace, will no longer be able to fund the pensions of a growing section of the population.

The current civil service scheme

Pension entitlements for civil servants are in a ratio of 1:5 between employees on the lowest grades and those on the highest. Until 1963, civil servants received a pension equal to 5/6 of final salary, but that year saw the introduction of a deduction that was also applied to pensions. This deduction was increased to 3% in 1969, and the replacement rate of the pension benefit fell to 4/5.

Following the introduction for working civil servants of a non-pensionable end-of-year payment of 50% of December pay in the early 1990s, the replacement rate slipped to 77.6%.

A law of 8 January 1996 provided for a progressive deduction which was to be levied on pension entitlements at the following rates:

  • from 1 January 1995 onwards - 4%;
  • from 1 January 1996 onwards - 5%;
  • from 1 January 1997 onwards - 6%;
  • from 1 January 1998 onwards - 7%; and
  • from 1 January 1999 onwards - 8%.

Assuming there are no further changes in the law, civil servants and private sector employees will both pay identical contributions from 1999 onwards.

Without wishing to enter into any debate on the figures, and given the non-pensionable end-of-year December payment of 100% that will also be introduced in 1999, the final pay replacement rate is likely to settle at around 3/4.

Factors that triggered a reaction from the Government

The "Five-sixths pension for everyone" group won four of the 60 seats in Parliament in 1989; after changing its name to "Action committee for democracy and decent pensions", it won five seats in 1994.

Although the rise in this political grouping's popularity undoubtedly showed how clearly voters understood the fundamental difference between public sector and private sector pensions, the Government justifies its reform of the public sector pension scheme on the grounds that it wants to guarantee funding of pension entitlements in the long term. In Luxembourg, as in all industrialised countries, the main reason for this lies in demographic growth, a reduction in the length of working life, and a concomitant extension of the period during which pensions are paid out.

There is a danger that the sharp increase in the number of people employed by the public sector since the war (to approximately 10% of the working population) could lead to a rapid rise in the ratio between paying members and beneficiaries of public sector schemes in the coming years.

Government proposals for reforming public sector pension schemes

The proposed reform has a dual objective:

  • halting the increase in the cost and funding needs of public sector pension schemes; and
  • a convergence between public and private sector schemes in terms of mechanisms for calculating entitlements.

The structure of the new system is as follows:

  • wholesale continuation of the current system for retired employees when the reform comes into force;
  • continuation of the current "final salary" philosophy during the transitional phase for for those civil servants working when the reform comes into force, and minimising changes to the current system. This will mainly involve lowering the current ceiling in order to meet the financial objective set out above, and at the same time guaranteeing acquired rights; and
  • setting up a scheme for future civil servants which will be comparable to the scheme currently in force in the private sector, but will incorporate a number of specific features relating to calculation of pensions and scheme management.

Negotiations to date have produced no concrete results

No one denies that funding civil servants' pensions out of state coffers poses few problems at the present time. What are giving grounds for concern are projections for 20 years hence.

The sole representative trade union in the public sector, the General Public Sector Confederation (Confédération Générale de la Fonction Publique, CGFP), does not feel there is any need to act, either to abolish the public sector scheme which reflects the specific features of the sector, or to reduce the benefits of future retired civil servants.

In the event of the economic, financial or social situation in Luxembourg deteriorating to such an extent that comprehensive measures would have to be imposed on the national scheme, the CGFP believes that public sector pay and pensions structures are designed in such a way as to fall in line with any adjustment dictated by the more serious interests of the nation.

As a result of these diametrically opposed positions adopted by the social partners, they parted after a number of meetings, the Government having announced its intention of setting out its views in a draft law to be submitted to the Chamber of Deputies.

Commentary

As the writer of this article is a civil servant himself, his comments could well be seen as tendentious.

The main question is whether we should be resolving these problems while they are still of manageable proportions or whether we should wait until they are insurmountable. The latter solution seems most inappropriate; the former, given the electoral potential of civil servants, comparable categories of employee and their families, could be suicidal at the 1999 election, as the Government's current intentions provide for substantial reductions, particularly for civil servants with short contribution records.

Given that it is always ill-advised to touch "acquired rights", I think the best plan would be to introduce a new scheme for new civil servants at once, and as a matter of urgency. Once this has been done, the issue of a transitional scheme can be tackled calmly by all concerned.

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