“It seems that Luxembourg has no pension problem, because we have €30bn in reserves… but the system has hidden risks,” said Claudia Halmes-Coumont, director at Lalux-Vie. She reported that, according to projections made by the IGSS, a Luxembourg economy growing even at 3% would not prevent the use of the reserves to pay for pensions already by 2028, while they may be depleted by 2047.

Halmes-Coumont thinks that demographic shifts with an aging population, longer retirement periods and shorter contribution periods, coupled with high pension payouts relative to contributions (75% of the average salary in Luxembourg against 44% for Germany), will contribute to the depletion of these reserves.

Besides, Halmes-Coumont noted that the number of workers supporting each pensioner is decreasing. This problem is not unique to Luxembourg, but is prevalent across developed countries in Europe with a pay-as-you-go system.

Amar: “If Luxembourg is not going well, we have a problem everywhere”

Globally, there is a significant pension protection gap, estimated at $51trn according to the Global Federation of Insurance Associations, “with Europe accounting for 25%-30% of it,” reported Anne de Lanversin, CEO at Generali Global Pension. She explained that the gap represents the difference between the savings needed for a 70% income replacement in retirement and expected inflows from current systems.

“Life expectancy globally was 47 years old after WWII. Today in the OECD, it's broadly north of 80,” said Gad Amar, head of Western Europe at Natixis Investment Managers International. The increase in life expectancy further exacerbates this issue, making existing pension structures designed for shorter lifespans unsustainable.

Broadening solutions to maintain lifestyle at retirement

Halmes-Coumont reminded the audience that, as for many other countries, Luxembourg has three pillars: pillar one is the pay-as-you-go legal pension system; pillar two copes with employer pension schemes; and the third pillar is related to individual savings.

, deputy CEO and general counsel at Alfi, argued that the development of pillar two pension solutions is crucial and has been implemented with great success in countries such as Sweden and the Netherlands. These occupational pensions can unlock significant savings if employers offer these products and employees participate through workplace savings. In addition, pillar two is seen as a key lever to bring more savings into capital markets and to address the unsustainability of pay-as-you-go systems.

Barriers hindering growth of pillar two pensions

One significant obstacle is reaching the people who need these schemes, both at the corporate and individual levels. “In Europe, it’s only 30% of the population that is saving voluntarily,” stated de Lanversin. She believes that awareness of the need for long-term saving is insufficient, and the lack of effective distribution channels and trust in proposed products prevents widespread adoption.

Another barrier is the relatively high levels of payouts from pillar one pensions in some countries, which can mask the need for individuals to save and invest independently. “Luxembourg scores very low [amongst OECD countries] on the second pillar because of the importance of the first pillar,” noted Halmes-Coumont. It also lessens the importance of pillar three savings as “they feel very secure on the first pillar.”

Complex administrative processes for employers also discourage the implementation of complementary pension schemes. Smaller companies, unlike large multinationals, often lack the resources to implement pension schemes for their employees. Furthermore, Lamesch noted that local protectionism and hurdles related to labour and social laws have also hampered the development of efficient cross-border pension products.

Features of successful pillar two pension schemes

“More and more standard features of wealth management products are applied to pillar two,” said de Lanversin. She explained that simplicity is key in product design and offered a range of investment options, like wealth management platforms, enabling clients to make personal contributions as well as selecting funds.

Digital administration is also key, providing easy access to account information and management “because people tend to save more when they have access to their accounts and they see how their savings are doing,” observed de Lanversin.

Otherwise, de Lanversin commented that auto-enrolment at both the company and employee levels, company contributions, and profit-sharing arrangements are powerful mechanisms to increase participation and can further incentivise savings.

Lessons from abroad

Amar thinks that tax incentives are deemed crucial for the success of pillar two and three pensions, drawing parallels with successful models like the 401K in the US and registered retirement savings plan (RRSPs) in Canada. Employer matching of employee contributions, coupled with the power of compound interest, can drive significant long-term savings, which amount to around $13trn and CA$1.5trn.

“A proper diversified fund allocation that is going to deliver, let's say, around 6% to 7% on average per year. Every 10 years, you double your capital… So time is on people's side. It's about staying, as long as you can, invested in the market.”

Some proposals

As a principle to account for national tax rules, Halmes-Coumont suggested a tax treatment on contributions at the employer level, with no taxation on benefits at the end. “What is very essential is that we have simple transparent and predictable rules across borders.”

De Lanversin and Amar added that tax advantages can also be used to steer investments towards specific asset classes, across the spectrum from private equity to listed markets, from active to passive. Amar suggested that encouraging investment in European assets, could also provide crucial funding for European businesses and innovation, preventing them from relocating to regions with more readily available capital. “Investing in cash is not a sustainable solution.”