1

Inspection générale de la sécurité sociale (IGSS)

Reforming the LU pension system

ELSAMay, 2nd 2012

Context

Ageing society: life expectancy at age 60 increases by over 5 years over the period 2010-2060

2

Life expectancy at 60 - males, EUROSTAT

10,0

15,0

20,0

25,0

30,0

35,019

71

1976

1981

1986

1991

1996

2001

2006

2011

2016

2021

2026

2031

2036

2041

2046

2051

2056

Context (cont.)

«Luxembourg sucess story»: over 4% of economic growth on average over the period 1980-2010

3

0

5000

10000

15000

20000

25000

30000

35000

40000

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

non resid

resid-non lux

resid-lux

New entrants to the general pension scheme, IGSS

15

16

17

18

19

20

21

22

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Average entry age of lux. new entrants - males, IGSS

Context (cont.)

Pension level

4

 gross

replacement rategross pension

wealth

Belgium 42 7France 49 9Germany 42 8Luxembourg 87 21

Pensions at a glance, OECD

5

Past evolutions

December 2005: IGSS long term projections on general pension scheme April 2006: Tripartite coordination committee - working group on pensions April 2009: IGSS report on reform proposals presented to parliament July 2009: pension reform included in the government program January 2010: approval of general orientations by government March 2010: endorsement of global concept by parliament June 2010: public debate on pensions in parliament March 2011: discussion of proposals in parliament April 2011: presentation of reform to social partners January 2012: agreement by the government on bill ....

Overview of the system

Old age schemes

general pension scheme for the private sectorspecial pension schemes for the public sector

supplementary pension schemes for the private sectorprivate pension planssocial assistance

Risks covered by pension schemes

disability, early old age, old age and survivor

6

Overview of the system (cont.)

Pension formula (general scheme + new special schemes)

P = P1 + P2 + P3 + P4, where

P1 = min[40,QY] / 40 * 0.235 * SMI (flat part)

P2 = 0.0185 * I (proportional part)

P3 = ( max[0,age - 55] + max[0,CY - 38] ) * 0.0001 * I (proportional increases)

P4 = min[40,QY] / 40 * 0.025 * SMI (end of year allowance)

I: total income over the career (at 1984 wage level)SMI: social minimum income (at 1984 wage level)CY: contributory yearsNY: non-contributory yearsQY: qualifying years (CY + NY)

7

Overview of the system (cont.)

Retirement age

57 if CY >= 40

60 if (CY+NY) >= 40

65 if CY > 10

Financing (general scheme)

8% employer/employee/central government

reserve fund > 1.5 times annual expenditures over a fixed 7 period

Indexation of pensions (to prices)

100% to price evolution (CPI)

8

Overview of the system (cont.)

Pension adjustment (to wages)

“Every two years, the Government considers whether to proceed or not to revise the adjustment factor by law, given the resources and the evolution of the average level of wages and salaries.” (article 225, paragraph 4, Code of social security CSS)

9

wage

20(1984)

60 80

wage base 1984

pension base 1984

pension

adjustment coefficient adjustment

factor

age

retirement

Overview of the system (cont.)

System parameters (general scheme)

10

 pensions per 100

contributorsrequired

contribution rate

reserve fund as multiples of annual

scheme expenditure

1980 48.6 22.8 2.0

1990 47.0 22.7 2.6

2000 43.2 20.8 2.9

2010 39.9 20.8 3.8

Rapport général sur la sécurité sociale, IGSS

Expected future evolution of pension system

Reserve fund (general scheme, %of GDP)

11

Pension expenditures (general scheme and special schemes, %of GDP)

0%

5%

10%

15%

20%

25%

30%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2% full

3% full

-400%

-350%

-300%

-250%

-200%

-150%

-100%

-50%

0%

50%

100%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2% full

3% full

2% scenario, AWG – 3% scenario, IGSS

2% scenario, AWG – 3% scenario, IGSS

Policies under the actual legislation

Pension benefits (article 225 CSS): expenditures (% of GDP) and gross replacement rate

12

0%

5%

10%

15%

20%

25%

30%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2% full

2% half

2% scenario, AWG Gross concept, OECD methodology

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012

2052

ful

l ad

j.

2052

hal

f ad

j.

earnings related (P2+P3)

f lat part (P1)

Policies under the actual legislation (cont.)

Contributions (article 238 CSS): required contribution rate and net replacement rate

13

2% scenario, AWG Net concept, OECD methodology

0%

10%

20%

30%

40%

50%

60%

70%

80%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2% full

2% half

0%

20%

40%

60%

80%

100%

120%

2012

2052

ful

l ad

j.

2052

hal

f ad

j.

earnings related (P2+P3)

f lat part (P1)

Pension reform

Longevity anchored in pension formula

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proportional part (P2)

flat part (P1)

proportional increases(P3)

rate (%) rate (%) age+CY p.p. increase

< 2013 1.850 23.500 93 0.010

2020 1.800 24.000 94 0.013

2030 1.738 24.630 96 0.017

2040 1.675 25.250 97 0.021

2050 1.613 25.880 99 0.025

> 2052 1.600 26.000 100 0.025

Pension reform (cont.)

Longevity anchored in pension formula (cont.): gross replacement rate

15

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2052

ful

l ad

j.

2052

re

form

2052

+3

refo

rm

earnings related (P2+P3)

f lat part (P1)

Gross concept, OECD methodology

Pension reform (cont.)

Sustainabilty mechanism

legal contribution rate fixed at the beginning of a 10 year period so that the reserve fund > 1.5 times annual expenditure over this 10 year period

if legal contribution rate < required contribution rate, expenditures exceed receipts and the reserve fund covers the deficit, then the mechanism comes to play

16

required contribution rate26%

28%

24%

28%

legal contribution rate

fixed 10 year period

no sustainability mechanism

required contribution rate26%

28%

24%

26%legal contribution rate

fixed 10 year period

sustainability mechanism

Pension reform (cont.)

Sustainability mechanism (cont.)

if legal contribution rate < required contribution rate, reduction/drop of adjustment of current pensions to wage evolution

17

wage

20(1984)

60 80

wage base 1984

pension base 1984

pension

valorisationcoefficient valorisation

factor

age

retirement

readjustmentfactor

if legal contribution rate < required contribution rate, drop of the end of the year allowance (P4 in pension formula)

Financial impact of the reform

Expenditures (general and special schemes, % of GDP)

18

0%

5%

10%

15%

20%

25%

30%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2% full

2% reform

0%

5%

10%

15%

20%

25%

30%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

3% full

3% reform

2% scenario, AWG 3% scenario, IGSS

Financial impact of the reform (cont.)

Required contribution rate

19

0%

10%

20%

30%

40%

50%

60%

70%

80%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2% full

2% reform

0%

10%

20%

30%

40%

50%

60%

70%

80%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

3% full

3% reform

2% scenario, AWG 3% scenario, IGSS

Financial impact of the reform (cont.)

Reserve fund (% of GDP)

20

2% scenario, AWG 3% scenario, IGSS

-420%

-370%

-320%

-270%

-220%

-170%

-120%

-70%

-20%

30%

80%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2% full

2% reform

-420%

-370%

-320%

-270%

-220%

-170%

-120%

-70%

-20%

30%

80%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

3% full

3% reform

Social impact

Net replacement rate: 2% and 3% economic growth (AWG and reform scenarios)

21

Net concept, OECD methodology Net concept, OECD methodology

0%

20%

40%

60%

80%

100%

120%

2012

2052

ful

l ad

j.

2052

re

form

2052

+3

refo

rm

earnings related (P2+P3)

f lat part (P1)

0%

20%

40%

60%

80%

100%

120%20

12

2052

ful

l ad

j.

2052

re

form

2052

+3

refo

rm

earnings related (P2+P3)

f lat part (P1)

Thank you for your attention

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