The latest automatic salary hike in Luxembourg landed on Workers’ Day. Cheers all around, but will rising costs hurt the fund industry?
On the 29th of April 2025, I and every single person receiving a salary or pension in Luxembourg received some fantastic news: on the 1st of May, we would receive a 2.5 percent increase, regardless of our performance or whether our employer thought we deserved it.
How to spend the windfall
So, how should we spend the increase?
We should already have some good ideas in mind; it’s the fourth time since 2023 that our salaries have been automatically increased, and the effects are compounding, meaning an actual increase of around 10 percent. Oh yeah, baby! We love inflation!
Depending on our salary, we might be able to pop down to the Mosel and buy a nice bottle of Crémant, or the lucky few will probably hop into their company car and spend a lovely weekend at a château in Champagne.
Absolutely amazing! Why should we work harder?
The origins of the policy
Let’s quickly dive into some history before answering that obvious, or maybe not so obvious, question.
Like all great economic policies, it was introduced by the government in 1921 to protect railway workers, part of a state-owned industry, from the effects of inflation triggered by the First World War, with the specific aim of ensuring social stability and political support.
A policy that was initially designed to protect manual laborers, often the most affected by inflation, gradually expanded to all sectors of the economy and has remained a central feature of Luxembourg’s labor and social policies ever since.
How convenient that it was triggered on the 1st of May, International Workers’ Day!
The cost to the fund industry
So, what’s the issue for the fund industry?
In theory, rising costs shouldn’t pose a major problem for Luxembourg’s fund industry, since our competitive advantages lie in tax structuring, distribution, and regulatory expertise. However, fund sponsors are facing tighter margins, and every cost needs to be justified.
When local branches inform their head offices, often based outside Luxembourg, that they need a 2.5 percent larger salary budget as of May 1st, 2025, it can feel arbitrary and undeserved. In many other markets, salary increases are typically tied to productivity.
Our competitive advantage may be eroded by steadily rising salaries and compliance costs.
Other negative effects that have been observed include:
- Stagnation in the creation of new roles in Luxembourg.
- Outsourcing of support functions to jurisdictions such as Poland and India.
- Fewer opportunities for entry-level positions.
How to fix it
Fortunately, there are solutions, though we workers may not like them. We could tie salary increases to overall industry productivity, place a salary cap on who receives the increase, or simply scrap the system altogether. Turkeys don’t vote for Christmas, though.
Luxembourg needs to be reminded that it does not live in another dimension, economies everywhere must ensure their workers are productive. If we want our industry to thrive, we need to provide fund sponsors with real value for their investment!
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear every other week. He also works as a business development manager at Finsoft Luxembourg.
