Icelandic pensions gain from market pressures
ICELAND - Icelandic pension funds have inadvertently enjoyed benefits from the recent financial turbulence as earlier moves by the government to force the sale of overseas assets have not been enforced, the sector has instead been given access to wider investment opportunities.
The Icelandic central bank had imposed strict currency controls on pension funds in December last year, which it was thought would result in an almost total ban on foreign investment by pension funds, a severe curb on investment diversification in such a small economy, and further financial losses in the aftermath of the Lehman Brothers collapse.
But pensions funds told IPE they have in fact benefited from sticking with their overseas investments, contrary to the wishes of the government.
"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," said Belinda Theriault, a spokeswoman for the Financial Supervisory Authority (FME).
Hrafn Magnusson, managing director of the Icelandic Pension Funds Association, also said whereas pension funds were sympathetic last October towards repatriating their assets - as the Icelandic government wished - 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 the transfer of foreign securities to Iceland," said Magnusson.
"On the contrary, pension funds hopefully can invest abroad as soon as possible, as a part of asset allocation and risk diversification."
One of the major benefits gained from a review of the Icelandic Pension Act is schemes are now allowed to invest more heavily in private equity.
A measure passed by the Icelandic Parliament last December now makes it possible 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."
In another government move to cut costs, however, some senior civil servants such as supreme count judges and ministers and members of parliament have seen their pension entitlement slashed.
Generous pension arrangements were introduced in 2003 allowing certain public officers who had built up long-term service to retire and make way for newcomers. But the terms of the agreement attracted widespread criticism as those people enjoying such a 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.
Legal changes abolished the preferential pensions regime in April this year and privileged public servants are now subject to the same pension regime as all other civil servants, though the 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.
More in-depth information on Icelandic pensions' regulatory developments will be published in September as part of IPE's annual Top 1000 Pensions Funds review.