Luxembourg pension reserve hits €30.67bn but covers only 4.4 years

Strong equity markets pushed the reserve of Luxembourg’s general pension scheme to €30.67 billion at the end of 2024, but the fund could still pay pensions for only 4.39 years if contributions stopped now, the fund’s annual report shows.

The pot is split between €29.38 billion run by the so-called Fonds de Compensation (FDC) and about €1.29 billion held by the National Pension Insurance Fund (CNAP).

Despite a €3.28 billion gain over the year, the coverage ratio nudged up by just 0.14 years. This means that the fund could keep paying pensions for 4.39 years if no more contributions were paid into the system. That is up from 4.25 years in 2023. The ratio is calculated based on the annual payments made by the pension scheme, which stand at about €7 billion.

The pension fund’s portfolio returned 11.24 % last year. Within it, the FDC’s Sicav investment vehicle gained +12 %, beating its benchmark by 77 basis points. Global equities and emerging market equities were the main driver, advancing 26.30 %.

“The ‘magnificent seven’ similarly continued their strong influence on stock indices, which exhibited phenomenal performance despite political developments and uncertainties,” the report noted.

The magnificent seven refers to a group of US tech firms – Apple, Microsoft, Google parent Alphabet, Amazon, Meta, Nvidia and Tesla – whose stock performance has outpaced the broader market over the last few years.

Investment income reached €2.98 billion. After operating costs of €19.7 million – equal to about 0.10 % of assets – the fund recorded net income of €2.96 billion.

Despite the good performance in 2024, the report advised circumspection for the future given the rising pension payments. The performance does not “offer prospects in the medium term, particularly when pension expenditure exceeds the contributions collected within the general pension scheme,” noted FDC president Alain Reuter.

The sombre analysis comes just as the government and labour unions struggle to reach a consensus on how to move forward with pension reform to enable the system to be more sustainable.

Starting next year, Luxembourg’s pension system is expected to pay out more in pensions than workers pay in contributions. Running at a deficit, the pension pot is expected to run dry by 2045 as population ageing progresses and more people enter retirement than join the workforce.

An initial proposal by Prime Minister Luc Frieden to gradually increase the number of years employees must work to be eligible for full retirement benefits – from 40 years to 43 – would push that deadline back by five years to 2050, the IGSS said in an analysis.