Pension funds in Iceland have scaled back their foreign currency purchases this year, according to the country’s central bank, which said the development may indicate that some funds have almost reached their internal targets for foreign assets.

The Central Bank of Iceland (Seðlabanki Íslands) wrote in its financial stability report for the first quarter of 2021 that pension funds had reduced their foreign currency purchases in the first quarter 2021 and the end of last year, after a spike last autumn.

“The pension funds had suspended their foreign currency purchases from mid-March to mid-September but decided not to extend the hiatus further,” it said, referring to the six-month period last year when the krona was weak and funds had been requested by the bank to refrain from buying foreign currency.

They central bank said the funds resumed buying foreign currency in September and October, at a rate of roughly ISK10bn per month, which had been the 2019 average.

“From November 2020 through March 2021, however, they bought only about ISK2.5bn per month, on average,” it said.

On the whole, the bank said, the pension funds continued to be buyers of foreign currency, but their situation differed from one fund to another.

“The past few months’ reduction in net purchases is due to currency sales by a few funds, some of whose foreign assets may have been close to their internal benchmarks – at least temporarily – as foreign securities prices have risen steeply in the recent term,” the central bank wrote in the report.

Pension funds’ foreign assets increased by 29% year-on-year in 2020, according to the report, to a year-end total of ISK1,926bn (€12.96bn), or 65% of GDP.

The bank, which also incorporates the country’s financial supervisory authority, said the ratio of foreign assets to total assets was therefore 34% for pension funds overall – an increase of 3.6 percentage points during the year.

Icelandic pension funds’ have variously stated their long-term foreign asset allocation targets at between 30% and 50%.

Replenishing their portfolios with foreign assets has been a task most Icelandic pension funds have been engaged in since Iceland’s capital controls – imposed after the financial and economic collapse of 2008 – were finally relaxed in 2015.

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