ICELAND - The total value of Icelandic pension assets rose by 7% in real terms to ISK1.7trn (€14bn) in 2007, the Financial Supervisory Authority (FME) has revealed.

Figures from the FME report, which collates financial information from pension funds, showed the real rate of return on investments was 0.5% above the consumer price index, compared to 10% in 2006 and the 10-year average of 5.9%.

However, the report showed net assets for the 37 pension funds increased from ISK1.499trn to ISK1.697trn over the year, while disposable funds, measured by cash flow, increased by more than ISK200bn to total ISK 686.1bn.

The FME also said premiums paid to the pension funds increased by 52% from ISK96.1bn to ISK145.8bn, which it attributed to the required rise in pension contributions from 10% to 12% of wages. 

However, the report revealed private pension savings in Iceland increased by 20% to ISK237.8bn at the end of 2007, which means private savings now account for 14% of the total assets in the entire pension system.

Of these, the largest share of private savings - ISK135.8bn - is held in pension funds that had operated as private schemes before the changes to the law caused them to set up mutual insurance divisions for premiums for minimum insurance coverage.

Iceland authorised pension funds, banks, savings banks, securities firms and life insurance companies to receive pension savings in 1998 on the basis that a pension savings and supplementary insurance benefit contracts would allow individuals to build up additional savings to the statutory minimum coverage provided by the mutual pension schemes.

The 2007 report revealed there were 43 parties providing supplementary pension saving, of which 16 were pension funds, three were banks, 21 savings banks, one securities firm and two life insurance companies, with ISK73.3bn of savings held in non-pension fund institutions.

However, while overall pension premiums increased by 52%, and private pension premiums rose by 27% to ISK32.6bn, the FME suggested the loss of five funds through mergers in 2007 is the start of a continuing trend.

The number of pension funds fell from 41 to 37 in 2007 as Lífeyrissjóður Norðurlands and Lífeyrissjóður Austurlands merged into Stapi lífeyrissjóður, while Lífeyrissjóður Mjólkursamsölunnar; Eftirlaunasjóður starfsmanna Olíuverzlunar Íslands; Lífeyrissjóður
Flugvirkjafélags Íslands; Lífeyrissjóður starfsmanna Áburðaverksmiðju ríkisins and
Lífeyrissjóður Hf. Eimskipafélags Íslands (deild I) merged into Kjöl lífeyrissjóður.

The FME said "it is believed this development will continue" but at the same time warned the funds have also been growing with the 10 largest funds now holding 80% of total assets of the whole pension system, with the largest fund - Lífeyrissjóður starfsmanna ríkisins - increasing its assets by 12.3% over the year to ISK316.8bn.

However, while most of the 37 pension funds all appeared to increase their assets in 2007, the report showed the actuarial position of seven out of 29 mutual funds - not guaranteed by the Treasury, municipal authorities or a bank - reported a deficit.

None of these seven schemes recorded a deficit in excess of 10% - at which point a scheme must amend its articles of association to achieve a balance - however four schemes posted a deficit of between 0.1%-5%, and the remaining three had a deficit of between 5.1%-10% of the present value of pension payments.

Although the FME said "nearly all the funds that are guaranteed by the Treasury and municipal authorities show operational losses", and of the 14 guaranteed pensions that operate mutual insurance divisions, only two maintained a balance with the remainder posting deficits of between 29.9%-99.9%.

The FME also suggested the recent market volatility may have had an impact on the average pension fund portfolio, with the allocation to equities falling from 39.7% in 2006 to 34.9%, while deposits with banks and savings was 3.4%, compared to 1.3% the previous year.

Investments in treasury notes and bonds, municipalities' bonds, and credit institutions' notes and bonds totalled 33.6% against a total of 32.8% in 2006, while investment in mortgage loans rose slightly from 8.2% to 8.6% and the allocation to other securities was 13.5% compared to 12.3% the previous year, while the remaining 6% was placed into unit shares and investment funds.

The report also showed the amount invested in non-listed securities increased over the year to 6.1%, against 5% in 2006, while foreign currency exposures fell slightly from 29% to 27%.

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