Stable Outlook for State Pension Scheme

On Tuesday 26 April 2022, Luxembourg's Minister of Social Security, Claude Haagen, and the General Inspectorate of Social Security (l’Inspection générale de la sécurité sociale - IGSS), in the presence of its director, Thomas Dominique, presented the technical report of the general pension insurance scheme 2022.

The Social Security Code (article 238, paragraph 2) provides that for each period of coverage of the general pension insurance scheme, the IGSS produces a technical report and actuarial forecasts which serves as a basis for determining the overall contribution rate of the general scheme.

This forward-looking mechanism was reinforced by the pension insurance reform that came into force on 1 January 2013. Indeed, it increased the coverage period from seven to ten years and introduced regular monitoring, by the IGSS, of assumptions the basis of the reform and the updated financial trajectory of the regime. Thus, the first ten-year coverage period after this reform will end this year (2013-2022) and the second coverage period will therefore begin on 1 January 2023.

This technical report for 2022 therefore retraces the situation of the general pension insurance scheme in the current coverage period, i.e. between 2013 and 2022, as well as actuarial projections for the horizon of 2070.

This technical assessment relates exclusively to the general scheme determined by Book III of the Social Security Code and does not cover the other schemes (special and transitional schemes), in particular that of the public service.

The financing system of the general scheme

The financing of the general pension insurance scheme is based on a cost-sharing system (employee – employer – State) by ten-year coverage periods with a compensation reserve greater than 1.5 times the amount of the annual benefits.

The overall contribution rate, currently 24%, is set at the beginning of each period of cover so as to guarantee the funding of the scheme for the entire duration of the period.

The level of 24% has remained unchanged since 1990 since it allowed, and still allows, to meet the expenses of the scheme while increasing the reserve of the general scheme.

Coverage period 2013-2022

Since the entry into force of the 2012 reform, the number of beneficiaries of a pension has increased from 153,080 in 2013 to 194,441 in 2020 and the number of insured persons has increased from 374,925 in 2013 to 461,345 in 2020. These growths are reflected also at the level of income and expenditure which increased respectively by 44% and 47%.

However, the general scheme is still in surplus and the accumulated reserve also generates investment income which contributes to the increase in this same reserve and therefore to its financial equilibrium in the medium term.

In its technical report, the IGSS analyses four performance indicators of the general pension insurance scheme:

• The reserve level
  • The general scheme reserve amounted to €23.8 billion at 31 December 2020, thus amounting to 4.8 times the level of annual benefits (the minimum legal threshold is 1.5 times). Over the period 2013-2020, the reserve increased by 88%.
• The pure pay-as-you-go premium
  • In a simplified way, the pure pay-as-you-go premium indicates a theoretical contribution rate making it possible to cover the expenses of the general scheme without resorting to the reserve. This premium is set annually by Grand Ducal regulation on the basis of calculations made by the IGSS.
    Over the period 2013-2020, the distribution premium fell from 22.05% to 21.56%.

• The load factor
  • The cost coefficient is the ratio between the average number of pensions and the average number of pension insurance affiliates. Over the 2020 financial year, the general scheme had an average of 461,345 insured persons and 194,441 beneficiaries of a pension, i.e. 42.1 pensions out of 100 insured persons. Compared to 2013, the load factor increased by 3% (up 23% of insured persons and up 27% of residents).
• The reserve rate of return
  • The rate of return on the general scheme reserve is the result of the comparison between its net income and the change in its level. On average, the rate of return was 5.5% over the period 2013-2020.

In summary, the four indicators are all favourable and demonstrate the performance of the plan at this stage.

Projections 2020-2070

The data used as a basis for the projections are those of the general system and of the European authorities (forecasts of long-term demographic evolution), the data of which are also used for European documents, such as the Stability and Growth Program (SGP) and this year's National Reform Program (NRP).

For its technical assessment, the IGSS uses a base scenario and several alternative scenarios which appear in detail in chapter 3 of the assessment. The projections have as a starting point the year 2020 and are carried out until the horizon 2070.

In summary of the projections carried out, both revenue from contributions and expenditure for pensions will increase until 2070, but expenditure will evolve more quickly than revenue due to demographic changes, including in terms of GDP.

The projections make it possible to identify "critical events" of the general pension insurance scheme. These are (i) the excess of the overall contribution rate by the pure pay-as-you-go premium, (ii) the lowering of the reserve below the legal threshold of 1.5 times the amount of the annual benefits and (iii) the depletion of the reserve. These three events are located respectively in the years 2027 (i), 2041 (ii) and 2047 (iii).

The other alternative scenarios analysed by the IGSS show the same trends, the years of the critical events are practically identical (one to three years of lag for the depletion of the reserve and one to two years of difference for the exceeding of the threshold but no change for exceeding the pure pay-as-you-go premium).

Conclusions

Overall, the general pension insurance scheme is at this stage in a comfortable financial situation and can cope with demographic changes in the medium term.

In the long and very long term, however, economic, financial and demographic developments will have to be closely monitored.

With more specific regard to the next cover period 2023-2032, the technical report for 2022 shows that the condition defined in article 238, paragraph 1, CSS (minimum reserve greater than 1.5 times the annual benefits) will be fulfilled. throughout the period by keeping an overall contribution rate of 24%, taking into account the current reserve which is 4.8 times the annual benefits.

However, the technical assessment also shows that the overall contribution rate may be exceeded by the pure pay-as-you-go premium in the second half of the coverage period.

Taking into account the elements from the technical assessment of the IGSS and in application of the provisions of article 238 of the Social Security Code (minimum reserve of 1.5 times), the Government Council has decided to maintain the contribution rate of the general pension insurance scheme at 24% for the coverage period 2023-2032.

In addition, it was decided to submit the technical report of the IGSS to the Economic and Social Council to analyse, discuss and propose possible avenues in the future to guarantee the financial sustainability of the general long-term pension insurance scheme about demographic and economic developments in the Grand Duchy.

“Our general pension insurance scheme is financially sound and will continue to be so over the next few years. However, the demographic evolution is similar to that of many other countries and the growth of employment will not be able to compensate for this evolution to infinity. Therefore, challenges arise in the long and especially in the very long term, challenges that we must obviously address in order to find adequate solutions. This is how the government decided, in addition to maintaining the contribution rate at 24% for the 2023-2032 coverage period, to ask the Economic and Social Council to analyse, discuss and propose avenues that it considers possible in the future. The CES is the ideal body to have such exchanges at this stage, because it brings together the living forces of the nation. It is important to me that the government and the social partners address this essential subject so that all generations can benefit from a pension system that offers adequate protection,” concluded Minister Haagen.