Iceland: After the meltdown
Icelandic pension funds may no longer invest abroad, but hope that this restriction will be lifted as soon as possible, finds Christine Senior
Iceland's economic collapse last autumn and its consequent financial ills have been well documented. Inevitably its pensions and investments have suffered a knock-on effect.
One of the major blows to the pensions regime has been limitations on foreign investments. In December 2008 the central bank introduced new regulation to increase currency controls. This has resulted in an almost total ban on foreign investment by pension funds, a severe curb on investment diversification in such a small economy.
The pension system is a conditional defined benefit, where pension funds need to earn a 3.5% real interest rate, but the ban on investing abroad is an obstacle to achieving this. Funding levels are allowed to fall to 90%; beyond this benefits have to be reduced.
But going even further than the ban on new investment overseas the Icelandic government has been keen for pension funds to bring up to 50% of their foreign investments back home to support the local economy. A series of meetings were held to discuss the matter last October without any significant outcome being achieved.
The feeling among pension funds now is that they have benefited from sticking with their overseas investments:
"After this year's positive development in foreign stock markets plus a weaker krona the pension funds feel confident that they did not transfer their foreign assets in to domestic ones," says Belinda Theriault, a spokeswoman for the Financial Supervisory Authority (FME).
But according to Hrafn Magnusson, managing director of the Icelandic Pension Funds Association, last October pension funds were sympathetic towards repatriating their assets, even though no agreement came out of it.
The situation is different now: "Today Icelandic pension funds are not under any pressure from the government to sell foreign assets and they are not eager or sympathetic to transfer foreign securities to Iceland," says Magnusson. "On the contrary pension funds hopefully can invest abroad as soon as possible, as a part of asset allocation and risk diversification."
Other changes to the pensions regime have relaxed the rules for permitted investments for pension funds under the Pension Act. A measure passed by the Icelandic Parliament last December makes it possible now for pension funds to invest up to 20% of their portfolio in unlisted securities, a rise from the previous limit of 10%.
"To increase investment in unlisted securities up to 20% of total assets was the most important change for the pension funds," says Magnusson. "Today there are very few domestic listed companies on the Icelandic Stock Exchange. Therefore it was necessary for Icelandic pension funds as investors to lift the ceiling up to 20% by changing the Pension Act."
Other modifications under the pension law 129/1997 have tightened up rules for mutual insurance divisions and private pension schemes. The main provisions of the changes are to limit total assets of pension funds invested in different securities run by the same management company to 25% of the fund´s net assets, and for certain types of securities issued by a single group or related parties the limits are 10% of the net assets of the fund.
Another consequence of Iceland's financial ills has been a relaxation of the rules applying to access to voluntary pension savings. This is designed to help pension fund members survive the worst effects of the recession. For a limited period between 1 March 2009 and 1 October 2010 members can withdraw up to ISK1m (€5,500) from their voluntary pension savings in payments spread over nine months. Those over the age of 60 are permitted to withdraw all their savings.
"My personal view on this is that this is really a bad idea, this really does not help anyone in a dire financial crisis," says Vigfus Asgeirsson, a consultant with Talnakonnun. "If there is any hope of avoiding personal bankruptcy one should be able to renegotiate with the creditors. Money in pension funds is protected in personal bankruptcy so if one goes bankrupt after having spent up to this ISK1m it means that this million krona is lost."
A further change to the voluntary pension system has been some relaxing of the rules surrounding payment of pensions. Previously these were only payable from the age of 60 and had to be paid over a minimum of seven years, a rule that also applied to invalid and spouses' pensions. From 1 January this year the seven-year restriction was abolished for those over the age of 60.
"Personally I think this is good," said Asgeirsson. "You should have the freedom to do what you want with voluntary pension funds once you have reached a certain minimum age. One could debate whether that age should be 60 or not. It would maybe be sensible to have it a little bit higher as we live longer and longer."
In another move by the government to cut costs, some senior civil servants such as supreme count judges and ministers and members of parliament have seen their pension entitlement slashed. Generous pension arrangements had been introduced in 2003 to allow certain public officers who had built up long-term service to retire to make way for newcomers.
But the terms of the agreement had attracted widespread criticism. Those enjoying this privileged position were able to earn full pension benefits in a relatively short time and take their pension as early as the age of 56. Some 633 scheme members had accrued pension rights under this rule at the end of 2007, costing the Treasury an estimated ISK12bn.
In April legal changes abolished the preferential pensions regime. Now privileged public servants are subject to the same pension regime as all other civil servants, though those rights to higher pensions already accrued will remain, and the old rules continue to apply to the president of Iceland and those justices of the Supreme Court appointed before the act came into force for as long as they remain on the bench.
The Treasury has calculated the change will save the exchequer ISK1.69bn over four years or 14% of the cost in 2007.