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Icelandic pensions to set up specialist fund

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  • Icelandic pensions to set up specialist fund

[16:30 CEST 15-09] ICELAND - Icelandic pension funds are in the process of finalising details of the Icelandic Investment Fund (IIF), which will invest in domestic businesses that have suffered in the economic crisis.

Hrafn Magnússon, managing director of the Icelandic Pension Funds Association (IPFA), an umbrella organisation for 33 pension funds, revealed that the IIF is expected to have funds of between ISK 50-75bn (€275-413m) to invest in companies in all economic sectors.

A document from the IPFA outlining the initial investment policy and investment process of the IIF noted that firms which "bring in foreign currency, or reduce the need for foreign currency, by their business are especially interesting".

The exact number of pension schemes expected to contribute to the fund - and the size of the contributions - is still being debated on an individual basis, but the IIF aims to be a socially-responsible investor and will work within international guidelines set out by the OECD and UN Principles of Responsible Investment (UN PRI).

However Magnússon is hopeful that all the largest pension funds in Iceland will join the fund. The IPFA has contacted all its members, and they have until 15 October to make a decision. It is then planned that the IIF will be established in October, or by November at the latest.

According to the IPFA, the main objective of the IIF is "to attain a good return on the pension funds' financial contributions". The primary target for investments are Icelandic businesses that are in financial or operational difficulties because of the collapse of the financial system, but are deemed to have "interesting investment prospects".

Details of the investment policy will be set by the fund's advisory board, which will include criteria setting out the minimum size of business that can receive investment. However it is currently envisaged that the required rate of return for individual investments by the fund is "on average at least 25%".

It is also suggested that there will be no "cap" on the IIF's maximum possible investment in a company, although the aim would be a stake of between 35-55%, as this would give the IIF "sufficient and appropriate influence on the management of the relevant corporation".

Investments by the IIF into target companies are expected to take the form of increases in share capital and the purchase of shares in a company. But other options could include loans with the right to convert it into share capital, conventional loans with collateral or the takeover of loans for restructuring purposes.

The IPFA is to play a leading role in establishing the IIF, as Magnússon noted: "We started discussing this matter at the beginning of the year, but for many reasons the preparations have unfortunately taken too long."

That said, the IIF is not perceived to be a permanent tool, as the "period of operation of the fund is foreseen as being up to 10 years, with the possibility of extension for another two years; after that time the IIF will be dissolved".
 
The move to use pension fund money to stabilise the economy was suggested in November 2008 by the International Monetary Fund (IMF), who suggested the pension funds should buy more local government bonds. (See earlier IPE article: Pension funds could be key to Iceland rescue - IMF)

The IPFA noted, however, that the current situation in Iceland requires new finance to help support businesses which have suffered because of high inflation and interest rates and a falling Icelandic Króna (ISK), but which have the potential to survive the current problems.

It pointed out this puts pressure on pension funds "to participate in the resurrection of businesses, which by their activities yield pension fund contributions; and on the other hand offers an opportunity for pension funds to gain a share in the operational successes of many excellent businesses, which could yield a satisfactory return in the long-term, if the right decisions are made".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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