Pension funds: how the system works
Along with insurers, pension funds are the largest investors in investment funds in the EU and worldwide. At the end of 2024, according to data provided by the EFAMA Factbook 2025, pension funds and insurers were the largest holders of UCITS and AIFs by net assets in the EU, with around EUR 4,800 billion, accounting for 30.6% of total fund assets under management.
Investments in alternative investment funds are part of pension solutions, which explains that pension funds and also insurers are large allocators to these asset classes.
The three-pillar pension system in the EU
Pension systems are traditionally structured around three pillars. For savers, understanding how each of these pillars function, is essential to anticipate the level of income they can expect in retirement.
Pillar 1: State pension
The state pension is a statutory, publicly managed scheme. The amount received depends on factors such as the number of contribution years, employment status, and wage levels over time.
Right now, the state pension is applied on a pay-as-you-go (PAYG) basis. However, this financing method presents a number of inconvenients and is nowadays becoming less and less viable, especially compared to funded pension systems.
In Luxembourg, the general pension scheme is managed by the CNAP (Caisse nationale d’assurance pension, the National Pension Insurance Fund), funded essentially through monthly social security contributions divided between the employee, the employer and the state at 8% each. Civil servants benefit from a special pension fund specific to their status.
Pillar 2: Occupational pension (Employer)
Supplementary pensions can be paid by the employer to provide benefits in case of retirement, death or disability. Up to 100€ per month of employee contribution is income-tax deductive.
Luxembourg has three pension funding vehicles complementing state pensions: SEPCAV, ASSEP and CAA pension funds.
On an EU level, IORPs (Institutions for Occupational Retirement Provision) refer to pension schemes established by employers for their employees. They are governed by the Directive (EU) 2016/2341 on the activities and supervision of institutions for occupational retirement provision (IORPs), also called the IORP II Directive, which sets standards for the development of occupational pensions and savings in the European Union.
ALFI’s member associations cumulate total assets equivalent to EUR 1.5220 bn in second pillar pension plans, representing under 13,000 members.
Pillar 3: Personal pension
Individuals can choose to set up their own individual retirement savings plans, using various investment fund products. One example is the pan-European Personal Pension Product (PEPP), a voluntary, EU-wide plan supervised by national authorities and the EIOPA. Designed to complement existing retirement provisions, the PEPP allows citizens to save for retirement regardless of their employment status or country of residence within the EU.
In Luxembourg, private pension schemes are regulated by the Commissariat aux Assurances (CAA. Article 111bis of the Luxembourg Income Tax Law (L.I.R.), enacted in 1991, establishes the rules for tax benefits related to retirement savings. This provision allows taxpayers to deduct up to €3,200 annually from their taxable income.
134,000 people are covered by personal pension plans in the country, with total assets making EUR 1.5 bn.
Overview of EU systems
Pensions fall under national competence, which means each EU member state designs its own system. While these systems vary, they all face the challenge of keeping pensions financially sustainable in the long run.
Across the EU, state pensions currently share one key feature: they operate on a pay-as-you-go (PAYG) basis. But as populations age and the ratio of pensioners to workers rises, this model is coming under serious pressure. In Luxembourg, for example, the number of pensioners is expected to more than triple by 2070. On top of that, PAYG systems offer limited investment opportunities, which means lower potential returns—and ultimately, fewer benefits for future retirees.
Member states aim to provide adequate retirement income for the elderly in a context of uncertain wage and price developments. While the EU cannot legislate directly on pension systems, it supports this goal by acting in areas that impact the functioning of the internal market such as cross-border mobility, financial services, and consumer protection.
ALFI’s engagement
European households tend to hold on to their private savings, making funded pensions an underdeveloped field of investment. To tackle this issue, the European Commission launched the Savings and Investment Union (SIU), an effort that ALFI supports.
At the end of 2022, households across the EU held approximately €14 trillion in cash and savings deposits, equating to about 41 % of their total financial assets. In contrast, households in the US held far less in similar liquid savings, representing roughly 10 % of their financial wealth, significantly below the EU level
These numbers reveal a big gap, especially given the fact that the US population is smaller than the EU’s.
