Iceland’s unique geographical position in Europe mirrors its somewhat idiosyncratic approach to pension provision. The country has privatised its pension system more comprehensively than any other Nordic state, with a fully funded second pillar of private and public occupational pension schemes. The country currently spends only 2% of GDP on basic and supplementary state pensions, while private pension fund assets are expected to reach at least one and a half times GDP by the middle of the century.
More than half of the country’s leading private sector pension funds operate schemes that have at least some of the features of an Anglo-Saxon DC plan. However, the funds also incorporate principles of solidarity and inter-generational support that are absent from the Anglo-Saxon model. These principles were embedded in the industry-wide occupational schemes that were set up by the social partners in 1970, when labour unions traded wage increases for fully funded occupational pension funds.
Principles of solidarity continue in the pension funds established by the Pension Reform Act of 1997, which was enacted to impose some uniformity on private sector provision. This has produced a DC scheme that is unique to Iceland, where the risk is borne collectively rather than individually and where the benefits are usually (though not always) distributed equally rather than according to age.
There are 51 occupational pension funds in the Icelandic second pillar system. Of these 11 no longer receive premiums and 13 are so-called guaranteed funds. Only the government, municipalities and banks can guarantee pension funds. This exempts them from the requirement of full funding, so that the risk is borne by the guarantors. They are effectively DB schemes.
The remaining 27 pension schemes do not have a guarantee. Many of these operate much like defined contribution (DC) schemes, where the translation of units into benefits is adjusted according to investment returns. These are the closest to DC schemes within the second pillar system.
The system has been designed to encourage industry-wide schemes, which pool risk across members. It differs from the insurance arrangements found in other Nordic countries since top-ups are based on assured or notional rights rather than on accumulated assets.
Contributions to the funds must be at least 10% of gross salary. Of this 6% is paid by the employer and 4% by the employee.