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Iceland’s pension funds free to invest abroad as restrictions lifted

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Pension funds in Iceland will finally be free to invest as much as they like in foreign markets as the Nordic country’s central bank sweeps aside nearly nine years of restrictions imposed in the wake of the 2008 crisis.

The move by the Central Bank of Iceland came earlier than the funds expected. The bank published a set of new rules on foreign exchange on 12 March to take effect today (14 March).

It said restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency had “largely been lifted”.

The bank said: “With the amendments, foreign investment by pension funds, funds for collective investment (UCITS), and other investors… which until now have been subject to explicit exemptions by the Central Bank, will now be authorised.”

Marinó Örn Tryggvason, the CIO of Frjálsi pension fund, told IPE: “This was earlier than we expected, but we did expect to get increased permission to invest abroad in next few months.”

He said the long-term difference brought about by the central bank’s move could be significant for Frjálsi, even though it would not change much in the short run because the pension fund already had considerable allowances for foreign investment.

Meanwhile Kristjana Sigurðardóttir, CIO of Almenni pension fund, said it had already made some foreign investments this year following a limited allowance granted by the central bank at the beginning of the year.

“We are expecting to be on track with our investment strategy in four to seven years,” she said.

Almenni’s foreign exposure varies according to portfolio, but averages around 25%, Sigurðardóttir said.

Frjálsi also has about 25% of its assets invested abroad, Örn Tryggvason said.

“In my opinion Icelandic pension funds should invest more than 50% of assets abroad in the long run,” he said. “In the shorter term, I think funds should increase foreign exposure by at least 2-3% of assets every year.”

The central bank’s new rules also mean households and businesses will generally no longer be subject to the legislative limits on foreign exchange transactions, foreign investment, hedging, and lending activity, the bank said. The requirement that residents repatriate foreign currency has also been lifted.

The bank said these were the elements of the capital controls introduced in autumn 2008 that had the biggest effect on households and businesses.

Last October, the Icelandic parliament voted to lift some of the capital controls that were put in place after the 2008 crisis, liberalising controls on capital movements by individuals and firms. The legislation allowed for people and companies to invest a certain amount abroad by the end of 2016, rising to a higher level thereafter.

However, the bill did not change things for pension funds, which have been permitted over the last few years to increase their foreign investment only in a series of time-limited allowances granted by the central bank.

The bank said it had been able to change the rules on foreign exchange because, in the past year, there had been a big fall in the risk of monetary, exchange rate, or financial instability.

Since the beginning of this year, individuals and companies had been effectively unrestricted in the level of capital transfers they could do, and there had been no noticeable effect on the foreign exchange market or on the cross-border capital movement, the bank said.

In addition, the central bank has built up its foreign exchange reserves markedly in the past 12 months.

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