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Certain employers grant their employees a supplementary pension in addition to the legal system which provides for mandatory enrolment in the legal social security schemes.
"Supplementary pensions" are benefits paid in cases of retirement, disability or survival, and are intended to supplement the legal social security schemes for the same risks.
A supplementary pension scheme is a scheme or mechanism arising from a collective promise to provide a pension, established at the initiative of a business or group of businesses. Supplementary pension schemes are aimed at either all employees, or certain categories of employees.
When an employee leaves their company before retirement age, after having been enrolled in a supplementary scheme, they may choose, under certain conditions, between several solutions providing for early entitlement to the rights they acquired through their contributions. This is referred to early payment of the supplementary pension.
Who is concerned
The mechanism for early payment of the supplementary pension implemented by a business or group of businesses concerns employees (or certain categories thereof) in the public and private sectors who leave their jobs before the retirement age, regardless of whether they:
- resign (under certain conditions);
- are dismissed with notice or even for serious misconduct (under certain conditions);
- sign a termination by mutual consent agreement (under certain conditions).
Supplementary pension schemes do not concern workers whose status is other than that of an employee (e.g.: self-employed workers, or corporate officers.
How to proceed
Definition of the supplementary pension scheme
The supplementary pension scheme is a scheme or mechanism, arising from a joint promise to pay a pension, that is implemented by a business or group of businesses.
Currently, 3 different systems (commonly known as pillars), cover old-age risk:
- the 1st pillar comprises the legal schemes;
- the 2nd pillar comprises the retirement schemes organised at the level of the business. Through this pillar, businesses (or the Government as an employer) can implement supplementary pension schemes to grant their employees benefits intended to supplement those of the legal social security schemes in the event of retirement, death, disability or survival;
- the 3rd pillar comprises personal insurance schemes (e.g.: a pension insurance agreement entered into directly and individually by the beneficiary with an insurance company).
Types of supplementary pension schemes
There are 2 types of supplementary pension schemes:
- internal schemes with a promised pension guaranteed by provisions in the business' balance sheet. In that case, financing is obtained from within the business itself;
- external schemes, in the form of either a pension fund or a group insurance scheme. In such schemes, financing is obtained from outside the business, namely through a distinct legal entity.
Operation of the 2 types of pension schemes
The schemes operate:
- either as a defined benefits scheme, which guarantees its subscribers a certain level of benefits when they retire;
- or as a defined contribution scheme, which is based on a business' commitment to pay into the supplementary pension scheme a specific amount of the contributions in favour of the subscriber. However, the level of benefits to be paid to the employee when they retire is not guaranteed.
Rights of employees who belong to a supplementary pension scheme.
The employment contract of an employee who belongs to a supplementary pension scheme must mention:
- the existence and nature of the supplementary pension scheme (defined benefits/defined contributions);
- the mandatory nature of the employee's subscription;
- the rights to benefits (e.g.: retirement/death/survival and other benefits);
- whether or not there are any personal contributions.
Enrolment and conditions for acquiring rights
If a supplementary pension scheme is implemented, employees who satisfy the conditions for enrolment in the scheme, as provided for in the pension regulations, must enrol in it. The same goes for any new salaried worker who meets the requirements established in the pension regulations.
The business' pension regulations are required to define the terms for the vesting of rights arising from the supplementary scheme.
In theory, the salaried worker may not claim to maintain, repurchase or transfer rights that were granted to them during the traineeship period provided for in the pension regulations if they leave the business before the end of this traineeship period, which may not exceed 10 years.
Therefore, if the pension regulations provide for a 5-year waiting period, an employee who is dismissed before the 5th anniversary of their initial enrolment date may not claim to have accrued employer benefits paid under this supplementary scheme. These lost non-acquired rights are thus used to fund the supplementary pensions of other subscribers.
Conversely, any contributions they may have paid personally into the supplementary pension scheme will remain definitively acquired even if they leave the business before the end of the waiting period.
The lengths of service taken into account to determine the waiting period and benefits include periods of paid leave or leave paid by the Government (e.g.: parental leave, maternity leave,, etc.), periods of exemption from work, notice periods, early retirement periods and periods that are legally treated as effective work days (e.g. sickness).
Calculation of the amount of acquired rights
There are 2 possible scenarios:
- under a defined benefits scheme, the value of a subscriber's rights is determined by calculating the value of the retirement benefit with regard to the maximum length of service possible within the business, then prorating this amount based on the employee's actual length of service in the business when they retire;
- under a defined contributions scheme, the value of the acquired rights is equivalent to the amount of the accrued provisions, in other words, the current value of the benefit deferred to the retirement age as provided for in the pension regulations.
Preservation of employees' acquired rights
Maintaining acquired rights
If the employee leaves before retirement age, the business must preserve all of their rights, even in the event of a dismissal for serious misconduct.
The rights acquired in the company will be lost in the event of a transfer, repurchase or retirement. When an employee receives their old-age pension, their acquired rights may be paid in the form of an income or lump-sum capital payment, as determined by the pension regulations. They will then contact their former employer.
Repurchase of acquired rights
If acquired rights are repurchased, the subscriber receives the current value of the acquired rights in the form of a lump-sum capital payment. The rights and obligations of the supplementary pension scheme cease.
Repurchase is possible under the following conditions:
- the subscriber joins a business whose registered office is located outside the Grand-Duchy of Luxembourg;
- the subscriber has reached the age of 50 at the time of departure;
- when supplementary retirement benefits are paid in the form of an income, the income amounts may not exceed 10 times the monthly social minimum wage for an unqualified worker aged 18 or over;
- when the scheme provides for the payment of a lump-sum capital payment, the lump-sum may not exceed 10 times the monthly social minimum wage for an unskilled worker aged 18 or over;
The employee can submit a request to repurchase their acquired rights only if the pension regulations provide for such repurchase, and if they satisfy at least one of the 4 conditions mentioned. In that case, the employer cannot deny their request.
Individual transfer of acquired rights
Should the subscriber leave the business before the retirement age, an individual transfer of acquired rights is possible, if the pension regulations so allow:
- either to the supplementary pension scheme implemented for employees of the new business. Such a transfer requires the agreement of all of parties concerned, and must not entail any transfer fees for the salaried worker;
- or to a duly authorised external scheme (pension fund or group insurance or individual life insurance). Such a transfer does not require the approval of all parties. However, it must not entail any transfer fees for the employee.
The transfer of rights is an option not only for cross-border workers, but also for those workers in Luxembourg who frequently change employers.
One of the advantages of such transfers is that the employee is not required to contact their former employer to assert their rights when they retire.
Forms relating to the preservation of employees' acquired rights
In the event of an individual transfer or repurchase, the employee and their employer must fill out individual certificates—which can be downloaded from the Ministry of Social Security website—and returned them within 3 months to the Social Security Inspectorate (Inspection générale de la sécurité sociale - IGSS) for the changes to be recorded. After verification, the IGSS establishes a certificate for the Luxembourg Inland Revenue.
As supplementary pensions are taxed at entry (in other words, when rights are established) and payable by the employer, the employee will have no further taxes to pay upon collection of their pension, if they reside in Luxembourg.
Conversely, if the employee resides abroad, the supplementary pension benefits to be paid will, in theory, be taxable in their country of residence. Indeed almost all foreign countries tax supplementary pensions at the time of exit (i.e. when rights are paid).
Therefore, employees residing in France and those residing in Germany risk being subject to a double taxation of supplementary pensions.
Only employees residing in Belgium should, in theory, be free of any taxation when they collect their supplementary pension rights (in the form of income payments or a lump-sum capital payment), in application of the rider to the Non-double taxation treaty signed between Luxembourg and Belgium on 11 December 2002.
Furthermore, the part of the supplementary pension accumulated before the effective date of the Law of 8 June 1999, and which was not subject to tax on entry, will be taxable upon exit (when the benefits are paid) and will be borne by the beneficiary.