While Iceland’s young population means the problem of ageing will be less than elsewhere, the government has still put adequate provision in place, says Landssamtök Lífeyrissjoda
The Icelandic old age pension system is composed of a tax- financed public pension scheme and mandatory funded occupational pension schemes, that are mostly run by private pension funds. These are governed jointly by the partners on the labour market. The public pension scheme pays a basic pension from the age of 67 and a means-tested supplementary pension from the age of retirement (usually 65-70). The public pension would guarantee a single old age pensioner a minimum pension roughly equivalent to 44% of the average before tax salary of a male industrial worker, 1998 figures.
The occupational pension funds pay different old age pensions – depending on their financial position and the relative weights of other forms of pensions. It has been estimated that, according to present rules, a typical general occupational pension fund will pay a pension amounting to 45-58% – the earnings of 40-60 year olds – and that the basic public pension might add another 11%, giving a total replacement ratio of 60-70%. The over-funding of many of the funds and the prospects of high returns in the years ahead make it very likely that the replacement ratio will turn out to be higher than this. On present trends, the provision of retirement income will, in the next century, be based on three pillars that are a relatively small public pension, dominant mandatory funded pension schemes and voluntary private saving.
Mandatory system
According to Icelandic law, all wage earners and self-employed persons are obliged to belong to a pension fund, which operates either according to law or has been approved by the Ministry of Finance. Contributions must be at least 10% of total earnings, but in most cases 4% is deducted from wages and the employer pays 6%.
Membership in occupational pension funds became compulsory for wage earners by law in 1974. In 1980 this compulsion was extended to the self-employed. In 1991 a law was adopted on the annual accounts and auditing of pension funds, giving the Bank Inspectorate of the Central Bank of Iceland some supervisory role over pension funds. Certain pension funds operated according to specific legislation, such as the pension funds for public employees, mariners, farmers and nurses.
New pension fund legislation
A bill was adopted by the Icelandic parliament on mandatory pension contributions and the operations of pension funds in December 1997. The legislation is the first comprehensive one on the operation of pension funds in Iceland.
The law incorporates the existing legislation mentioned above, but adds significant definitions:
l Minimum pension rights and forms of pension.
l General requirements for operating pension funds regarding size, risk, internal auditing and funding.
l Guidelines and limits for the investment policies of the funds based on the risk diversification principle.
The law codifies the principle of a mandatory payment of at least 10% of wages and salaries in order to acquire pension rights. The form of the payment, including how it will be split between the employer and the employee, will be decided according to special legislation.
The contribution can be split into two parts: the first part shall go towards acquiring pension rights that should, for a 40 year period of contributions, give a lifelong pension amounting to at least to 56% of wages during the contributions period. Similar conditions apply to minimum disability and survivors pensions. The second part can go towards acquiring additional pension rights also in defined contribution schemes with individual accounts. Banks, insurance companies, securities firms and pension funds can receive contributions for additional pension rights. Married couples will be allowed to split their contributions in order to generate rights for both. The State Tax Authority will be entrusted with supervising the mandatory payment of contributions.
The law defines the minimum size of a pension fund to be 800 contributing members, provided that the fund does not guarantee a satisfactory risk profile of its liabilities through other means (such as by buying insurance). All pension funds shall be fully funded except those that are guaranteed by central or local government or a bank. Full funding is defined in such a way that the divergence between the present value of assets and liabilities cannot be more than 10% for a year or 5% over a period of five years.
The law includes certain ceilings on the asset composition of the funds that are based on the principle of diversification of risk. But it does not put any minimum investment requirement in government bonds. The funds can take foreign exchange risks up to 40% of their assets. That means that if they invest more than 40% of their assets abroad they will have to hedge the position that is in excess. The ceiling for equity is 35% of assets; thereof 10% of assets can be in unlisted domestic equities. The ceilings on foreign assets and equity are very far from being binding at present. The funds cannot take more risk towards a single firm or a borrower than 10% of assets, not own more than 15% of the stock of a single firm and not more than 25% of the shares in any mutual or equity fund.
Tax treatment
The investment returns of pension funds are tax-free. The 6% contribution paid directly by the employer is charged at cost by the firm and is thus not taxed. The 4% contribution deducted from wages is deductible for tax purposes. Pension benefits are taxed in the same way as income from employment.
The Althingi recently passed a bill which increased the tax deductability of contributions of employees from 4% to 6% of wages from January 1, 1999. If the employee decides to increase his contributions (which is voluntary) his employer is obliged to add up to 10% against this additional saving – increasing the savings up to 2.2%. Banks, insurance companies, securities firms and pension funds can receive contributions for additional pension rights at the discretion of the employee.

Landssamtök Lífeyrissjoda
Managing Director: Hrafn Magnusson
Address: Sudurlandsbraut 30, 108 – Reykjavik, ICELAND
Telephone: 354 581 4977
Facsimile: 354 581 4332
Email: hrafn@ll.is
Date formed: 18.12.1998
Number of Members: 50

EFRP Representative Managing Director: Thorgeir Eyjolfsson
Company: Lifeyrissjodur Verzlunarmanna
Address: Kringlan 7, 103 - Reykjavik, ICELAND
Telephone: +354 580 4000
Facsimile: +354 580 4099
Email: thorgeir@live.is
Date formed: 1998
Number of Members: 50

Iceland
Population: 275,277 December 1, 1998
Life expectancy: Female: 81 years, Male: 76 years
GDP 586 billion krónur ($ 8.4bn) in 1998
Per capita GDP: 2.1m krónur ($ 31,000) in 1998
Funded retirement assets: 450 billion krónur ($6.5bn)
June 30, 1999
On December 18, 1998, the two pension fund associations in Iceland merged to form Landssamtök Lifeyrissjoda (the National Association of Pension Funds in Iceland).
The main objective of the association is to safeguard the interests of the fund members as well as to act as the representative of the pension funds in matters regarding their common interests. This would result in presenting their views to the authorities and other bodies in all major matters which could affect the common interests of the associated funds.
Its objectives are:
l to take the initiative in the general debate on matters concerning the funds and pensions and promote their positive image
l to be active in matters of publishing and education on behalf of pension funds, by holding seminars and courses, publishing reports and offering other services to the pension funds and their members
l to promote rationalisation and development in the activities of the member funds
l to observe the development of matters of pensions abroad and take part in the international co-operation of associations of pension funds.

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