ICELAND - The head of Iceland's financial regulator says he expects more pension fund mergers - although they result in a greater concentration of risk.

Jonas Jonsson, director general of the Financial Supervisory Authority (FME), said three fund mergers occurred in 2005, with two currently under review by the FME.

"Taking this into account, the [number of] pension funds will be 40 and the 10 largest funds will have 80% of total net assets of pension funds," Jonsson told around 250 delegates to the FME's annual general meeting. "Considering the trend during recent years, further mergers can be expected."

He said: "Mergers cause rationalisation in management and improved diversification of assets. On the other hand, mergers result in more systemic concentration of risks and consequently stricter requirements on risk management."

The net assets of pension funds increased by 23% in 2005, with a net real return on assets of 12.3%. The average real return over the past 10 years of 6.3% compares with the 3.5% return used in actuarial assumptions, Jonsson added.

Only four schemes had deficits greater than 5%, although funds were encouraged to be cautious in raising benefits because of better funding because recent returns have been unusually high.