The financing of the CNAP

In order to meet the overall costs of the general pension scheme, the National Pension Insurance Office applies the system of apportioning costs by ten-year periods of cover, with the creation of a compensation reserve which must be more than 1.5 times the amount of the annual benefits.

Apart from investment income and other miscellaneous resources, the costs of the general pension scheme are covered by contributions.

Contributions

a) Contribution base

The contribution base for compulsory pension insurance is the professional income of insured persons. For periods corresponding to employed activity, professional income consists of the gross remuneration earned, including all salaries and benefits, even if not expressed in cash, enjoyed by the insured person by virtue of their occupation subject to insurance, with the exception of remuneration for overtime.

In the event of replacement income being substituted for professional income under sickness and maternity insurance, accident insurance or unemployment benefit, this income is taken into account for the contribution base.

For periods corresponding to a self-employed activity other than farming, the professional income consists of the net income within the meaning of the tax law. Pending the establishment of the professional income for the financial year in question by the Luxembourg tax office, contributions are calculated provisionally on the basis of the last known income or, for a newly insured person, on the basis of the minimum contribution, unless the insured person can justify the inclusion of a different income, in particular via a declaration submitted to this office.

For periods corresponding to self-employed agricultural activity, the professional income is set at a flat rate based on the farm's crop and livestock production during the year preceding the contribution year.

An insured person who has taken out continuous pension insurance is free to determine the contribution base, which may not be less than the minimum contribution or exceed a ceiling set at the average of the highest five pensionable annual salaries or incomes during the insurance record.

b) Minimum and maximum contributions

The minimum monthly contribution is the minimum social wage. The maximum monthly contribution is five times the minimum social wage.

c) Cost of contributions

With regard to the cost of contributions, it should be noted that the state pays one third of the contributions.

Apart from this state intervention, the cost of contributions is shared as follows:

• in equal shares between insured persons and employers, provided that the periods correspond to employed activity,
• entirely at the insured person's expense, provided that these are either periods corresponding to self-employed activity or continued or optional insurance periods,
• in equal shares between the insured persons and the competent social security institutions, provided that these are periods during which the insured person is in receipt of benefits paid under sickness and maternity insurance, accident insurance or full unemployment benefit,
• insured persons in self-employed activity, on behalf of their assistants,
• the state for parental leave and voluntary work,
• long-term care insurance, provided that the insured person provided assistance and care to a dependent person during these periods,
• approved bodies, provided that the periods concerned were periods during which the person concerned provided foster care for a child during the day and at night or during the day,
• entirely at the expense of employers for periods worked by members of religious associations and persons comparable to them, in the interests of the sick and the general public, provided that the persons in question are employed in an establishment belonging to their congregation,
• in equal shares between the state and persons employed by a Luxembourg diplomatic, economic or tourist representation abroad for whom optional insurance has been taken out because they are not subject to a pension scheme in their country of employment,
• fully paid by the state for periods during which the insured person was a volunteer in the armed forces,
• in equal shares between the state or the sheltered workshop and the insured persons with disabilities employed in sheltered workshops,
• the state provided that the periods in question are periods of elite sporting activity.
  

d) Contribution rates

The overall contribution rate is set at the beginning of each seven-year period of cover and remains applicable for the entire period. Since the first period of cover began on 1 January 1985, the overall contribution rate has been set at 24%.

e) Breakdown of contribution income

Contribution income is divided monthly by the Joint Social Security Centre between the National Pension Insurance Office and the Compensation Fund. The CNAP receives an amount enabling it to cover its expenses and, if necessary, to top up its cash resources to a maximum of 15% of the amount of annual benefits for the previous financial year. The surplus reverts to the Compensation Fund.

If the contribution income is insufficient to cover the amount to be distributed, the Compensation Fund is responsible for making the necessary resources available to the National Pension Insurance Office from the compensation reserve.

Public authorities' contribution

a) Payment of contributions

The state pays a third of the contributions.

b) Additional intervention under the agricultural scheme

The state contributes up to a quarter of the pension insurance contributions payable by insured persons engaged in farming and their assistants, calculated on the basis of the minimum contribution base. For insured persons whose professional income does not reach the minimum pensionable income, from 1993 onwards, the state has also helped to make up the minimum, without this contribution exceeding half of the contribution calculated on the basis of the said minimum.

c) Payment of certain contributions

The state will pay for the supplementary contributions and the purchase of insurance periods relating to periods of war, as well as supplementary contributions for periods of compulsory military service.

Income from assets

In 2004, the law introduced a new policy for investing the compensation reserve of the general pension scheme. The compensation reserve is invested with the aim of guaranteeing the long-term future of the general pension scheme. To ensure the security of investments, account is taken of all assets and liabilities, the financial situation, and the structure and foreseeable development of the scheme. Investments, the management of which is entrusted to professionals in the financial sector, must respect the principles of appropriate risk diversification. To this end, the funds must be spread between different investment categories in different currencies and between several economic and geographical sectors. To implement this policy, the law created a Compensation Fund, which is responsible for managing the compensation reserve. The Compensation Fund is a public establishment acting as a legal person. It is authorised to create one or more collective investment undertakings relating to specialised investment funds. A grand-ducal regulation determines the values of the reserve invested through these Undertakings for Collective Investment (UCIs).

In addition to investments through UCIs, the Compensation Fund may invest in loans secured by a mortgage or guarantee and, subject to authorisation by the Minister of Health and Social Security, on the advice of the General Inspectorate of Social Security, in loans to municipalities and companies, real estate acquisitions and acquisitions of securities.

Investments made by the National Pension Insurance Office are limited to short-term investments in euros. The National Pension Insurance Office and the Compensation Fund may only make investments within the limits of their cash resources.

Financial situation of the general pension scheme

The system for financing pension insurance in Luxembourg is a system in which the costs are shared over periods of cover of seven years, with the constitution of a reserve which, by law, must correspond to at least 1.5 times the annual benefits.