Supplementary Pension Scheme (RCP) in Luxembourg

1. Legal framework and definition

The Law of 8 June 1999 on supplementary pension schemes (RCP Law) is the legislative cornerstone. It defines the RCP as any scheme set up by an employer (the promoter) for the benefit of its employees (the affiliates), enabling the payment of retirement benefits supplementing those from the statutory pension scheme managed by the Caisse Nationale d'Assurance Pension (CNAP).

Voluntary or mandatory nature

Setting up a RCP is in principle optional for the employer. It becomes mandatory where provided for by:

• a collective bargaining agreement at sector or company level;
• the employee's individual employment contract;
• a consistent, general and fixed practice within the company recognised by case law.

Distinction from the statutory scheme

2. Vehicles and types of scheme

The two types of scheme

Implementation vehicles

The RCP Law provides for four vehicles:

• SEPCAV (variable capital pension savings company): an open-ended pension fund supervised by the CAA; the most widely used vehicle for collective company schemes;
• ASSEP (pension savings association): a non-profit structure dedicated to managing RCPs;
• Group insurance contract: taken out with a Luxembourg CAA-authorised insurer; the most flexible option for smaller businesses;
• Internal fund: managed directly by the employer and subject to a mandatory bank guarantee covering all outstanding commitments.

3. Affiliates' rights: vesting and portability

Waiting period and progressive vesting

The pension rules may include a waiting period before an employee joins the scheme. Once affiliated, rights accrue progressively according to the schedule defined in the rules.

The RCP Law caps both the waiting period and the vesting schedule. Beyond these caps, rights are considered definitively vested (irrevocably accrued rights).

Portability on departure

On termination of the employment contract, the affiliate's accrued rights are protected. The options provided by law are:

• Transfer to the new employer's pension scheme (active portability);
• Maintenance as deferred rights in the original scheme until retirement age;
• Refund of the employee's own contributions (but not the employer's contributions) where the employee leaves before full vesting.

Death before retirement

If an affiliate dies before their pension is drawn, the accrued rights pass to the designated beneficiaries named in the pension rules (surviving spouse, children, or other named beneficiary). In the absence of a designation, the estate rules apply.

4. Tax and social security treatment

Employee contributions: tax deductibility (Art. 111bis LIR)

Contributions paid by the employee to a Luxembourg RCP are deductible from their taxable income as special expenses (dépenses spéciales), up to a ceiling of €1,200 per year (Art. 111bis LIR).

This deduction may be combined with other special-expense deductions available under Luxembourg tax law.

Employer contributions: social security exemption and solidarity contribution

Employer contributions benefit from a favourable social security treatment:

• They are exempt from ordinary CCSS social contributions (health, pension, dependency) for both employer and employee;
• They remain subject to a specific solidarity contribution, collected and remitted to the Centre commun de la sécurité sociale (CCSS) under the terms of the RCP Law;
• They are deductible as a business expense of the employer for corporate income tax purposes.

Benefits received at retirement

Benefits paid on retirement (annuity or lump sum, depending on the rules) are subject to income tax in Luxembourg under the ordinary rules applicable to pension income. This principle, known as EET (Exempt–Exempt–Taxed), means:

• Exempt on entry (contributions deductible);
• Exempt during accumulation (returns not taxed annually);
• Taxed at exit (benefits taxable).

5. Employer obligations

Before set-up: consultation and approval

An employer wishing to establish a RCP must:

• Consult the staff delegation (or trade union representatives) before any establishment or substantial modification of the scheme (Arts. L.161-2 et seq. of the Labour Code);
• Draft pension rules compliant with the RCP Law, covering affiliation conditions, calculation of rights, exit arrangements and beneficiaries;
• Choose the appropriate vehicle (SEPCAV, ASSEP, group insurance, internal fund) and obtain the required approvals from the CAA where applicable.

Affiliate information: notice and annual statement

The employer must:

• Provide an information notice to each employee on joining, describing the essential features of the scheme;
• Send each affiliate annually an individual statement showing contributions paid (employee and employer share), accumulated capital or rights, and projected benefits;
• Inform affiliates of any substantive change to the pension rules.

Actuarial report (defined-benefit schemes)

For defined-benefit schemes, an actuarial report must be produced periodically (at least every 3 years) to confirm that the scheme's assets cover projected liabilities. Where underfunding is identified, the employer must make up the actuarial deficit.

6. Special cases

Cross-border workers

Cross-border workers (French, Belgian or German residents working in Luxembourg) benefit from the tax deductibility of RCP contributions in Luxembourg under the applicable bilateral tax treaties. The tax treatment of benefits on receipt depends on the relevant convention and the country of residence at the time of payment — the applicable treaty must be checked.

Posted workers

For employees temporarily posted to Luxembourg, affiliation with the Luxembourg employer's RCP is possible but must be assessed in the light of the applicable social security coordination rules (EU Regulation 883/2004 for EU nationals, bilateral conventions for others).

Partial liquidation or dissolution of the scheme

In the event of the RCP being closed or significantly changed, affiliates' accrued rights cannot be extinguished. The employer must ensure portability or maintenance of those rights within a replacement vehicle. Dissolution of a SEPCAV or ASSEP requires CAA approval.

Early retirement

The pension rules may provide for liquidation arrangements in the event of early retirement. In the absence of such provision, payment is only triggered at the statutory retirement age or that specified by the scheme. Early liquidation without a contractual basis may result in the loss of the preferential tax treatment.