A new Luxembourg law that was adopted last summer substantially amended the 1999 law on supplementary pension schemes. While the provisions of the new law concerning the acquisition of rights went into effect on August 21, 2018, other provisions of the new law, detailed below, have only been fully applicable since January 1, 2019.
Extension to the self-employed and liberal professions
Under the previous legislation, the only persons who could be members of a supplementary pension scheme were a company’s employees. The new law has extended the legal framework to allow the establishment of supplementary pension schemes for the self-employed and the liberal professions. From now on, a new supplementary pension scheme may be set up by a promoter (professional group of self-employed individuals, insurers, or pension fund managers, etc.), provided that it is approved, in advance, by the General Inspectorate of Social Security.
Adaptation of the tax framework
The new law has introduced the deductibility of premiums that are paid to a scheme for self-employed persons as special expenses. This deductibility is limited to 20 percent of the net annual income. In addition, as with employer contributions paid by a company to an employee, contributions paid by a self-employed person to a supplementary registered pension scheme are also subject to a flat-rate “entry” tax of 20 percent as an income tax deduction.
Acquisition of rights
The period for acquiring rights in a supplementary pension has been reduced by the new law from 10 years to 3 years. More specifically, for members who started working after May 20, 2018, the total cumulative period of the acquisition period and any waiting period can now not exceed three years. For members who entered service before May 21, 2018, the total cumulative period of the acquisition period and any waiting period may not exceed 10 years or extend beyond May 20, 2021.
Protection of member’s rights in the event of departure or changes to the supplementary pension scheme
Previously, the law only provided that the maintenance of acquired rights had to be guaranteed in the event of departure or in the event of changes to the scheme. The new law now specifies the treatment of rights acquired by the member in the event of early retirement or in the event of an amendment to the scheme.
If vested rights are maintained, there are now rules for determining the value of vested rights where a member has chosen to maintain them in the system of his or her former employer until the member’s retirement. In addition, the new law stipulates that when leaving a company, outgoing members must be able to opt for the repayment of their acquired reserves in the event of death before retirement age, while accepting a possible recalculation of the value of their acquired benefits.
With regard to the transfer of rights, the acquired rights may be (i) transferred to another supplementary pension scheme set up with another company or group of companies, (ii) transferred to another company scheme, or (iii) transferred to a registered or repurchased supplementary pension scheme. However, the transfer of acquired rights to a life insurance company is no longer permitted under the new law. It is also specified that, in the absence of the member’s consent, the rights acquired under a defined benefit plan may only be transferred to a defined benefit plan guaranteeing retirement benefits at least equal to the transferred acquired rights.
Regarding the redemption of rights, in the event of termination of an employment contract with an employee over 50 years of age, the possibility of redeeming, i.e., benefiting from its supplementary pension capital, is now limited to two situations:
- If the acquired reserves have not exceeded an amount equivalent to three times the unqualified monthly minimum social wage, i.e., EUR 6,213.30 (index 814.40 on January 1, 2019);
- If the worker is no longer subject to Luxembourg health insurance, the redemption is possible regardless of the amount of reserves acquired.
Finally, the new law has clarified the treatment of acquired rights in the event of a transfer of undertakings by providing, in particular, that such a transfer may not lead to any reduction in these rights.
Information of the outgoing member
The employer’s obligation to provide information has been extended. The list of data that must be communicated in writing to members at least once per year has been completed. The new law also provides that the company is now required to communicate in writing to the member, who so requests, the possible consequences of a termination of employment on his supplementary pension rights. The employer is also required to inform the outgoing member of the choices available to him or her regarding the destination of acquired reserves, and of the conditions of treatment of the acquired reserves in the event of maintenance of acquired rights. This information must be given within 30 days of the member’s departure.
As this new law makes significant changes, employers must ensure that they comply with these new rules and adapt their internal procedures, if any, accordingly.
Written by Harmonie Méraud and Anne Morel of Bonn Steichen & Partners and Roger James of Ogletree Deakins
© 2019 Bonn Steichen & Partners and Ogletree, Deakins, Nash, Smoak and Stewart, P.C.