1. 1 Inspection générale de la sécurité sociale (IGSS) Reforming the LU pension system ELSA May, 2 nd 2012

2. 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

3. Context (cont.) «Luxembourg sucess story»: over 4% of economic growth on average over the period 1980-2010 3 New entrants to the general pension scheme, IGSSAverage entry age of lux. new entrants - males, IGSS

4. Context (cont.) Pension level 4 gross replacement rate gross pension wealth Belgium427 France499 Germany428 Luxembourg8721 Pensions at a glance, OECD

5. 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....

6. Overview of the system Old age schemes general pension scheme for the private sector special pension schemes for the public sector supplementary pension schemes for the private sector private pension plans social assistance Risks covered by pension schemes disability, early old age, old age and survivor 6

7. 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 years NY: non-contributory years QY: qualifying years (CY + NY) 7

8. 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

9. 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

10. Overview of the system (cont.) System parameters (general scheme) 10 pensions per 100 contributors required contribution rate reserve fund as multiples of annual scheme expenditure 198048.622.82.0 199047.022.72.6 200043.220.82.9 201039.920.83.8 Rapport général sur la sécurité sociale, IGSS

11. Expected future evolution of pension system Reserve fund (general scheme, %of GDP) 11 Pension expenditures (general scheme and special schemes, %of GDP) 2% scenario, AWG – 3% scenario, IGSS

12. Policies under the actual legislation Pension benefits (article 225 CSS): expenditures (% of GDP) and gross replacement rate 12 2% scenario, AWGGross concept, OECD methodology

13. 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

14. Pension reform Longevity anchored in pension formula 14 proportional part (P2) flat part (P1) proportional increases (P3) rate (%) age+CYp.p. increase < 20131.85023.500930.010 20201.80024.000940.013 20301.73824.630960.017 20401.67525.250970.021 20501.61325.880990.025 > 20521.60026.0001000.025

15. Pension reform (cont.) Longevity anchored in pension formula (cont.): gross replacement rate 15 Gross concept, OECD methodology

16. 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

17. Pension reform (cont.) Sustainability mechanism (cont.) if legal contribution rate < required contribution rate, reduction/drop of adjustment of current pensions to wage evolution 17 if legal contribution rate < required contribution rate, drop of the end of the year allowance (P4 in pension formula)

18. Financial impact of the reform Expenditures (general and special schemes, % of GDP) 18 2% scenario, AWG3% scenario, IGSS

19. Financial impact of the reform (cont.) Required contribution rate 19 2% scenario, AWG3% scenario, IGSS

20. Financial impact of the reform (cont.) Reserve fund (% of GDP) 20 2% scenario, AWG3% scenario, IGSS

21. Social impact Net replacement rate: 2% and 3% economic growth (AWG and reform scenarios) 21 Net concept, OECD methodology

22. Thank you for your attention 22