ICELAND – Pension funds in Iceland have shrugged off the turbulence affecting domestic financial markets, with one industry commentator calling the situation a “blip on the screen”.

The central bank raised interest rates by 0.75 percentage points to 11.5% yesterday amid a deteriorating macroeconomic and currency outlook. The current situation was sparked by negative reports from Fitch Ratings and Merrill Lynch.

“This turbulence doesn’t affect our view very much,” said Tryggvi Tryggvason, chief investment officer of the ISK214bn (€2.5bn) Gildi pension fund. “We have a long-term strategy at the pension fund that we are working on.”

However, he added that the scheme is increasing its exposure to overseas assets. It currently has 25% exposure abroad, but it could increase to as much as 30%.

“Many funds have even more,” said Tryggvason.

Tryggvi Thor Herbertsson, an economics professor and director of the Institute for Economic Studies, told IPE that a “large chunk” of pension fund assets – between 30% and 40% – is already invested abroad.

Herbertsson is also a member of the board of Frajalsi, the pension fund of KB Bank.

Furthermore, he stated that many schemes own a large amount of guaranteed government and housing bonds.

“In general I would say the turmoil we’ve been seeing in Iceland does not affect the pension schemes to a great extent,” said Herbertsson.

“Stocks are a bit down, and foreign assets are up. So, it doesn’t really affect the total assets of the fund.”

He added that there have been mixed reports about the Icelandic markets. “There have been a lot of reports: some are negative, some are indifferent and some are positive.”

According to Herbertsson, the turmoil is temporary. “The foundation of the economy is very strong and the Central Bank seems to be reacting aggressively with its monetary policy.

“I would say this is just a blip, just a blip on the screen, and we would have forgotten about this at around the end of the year.”

Kristjana Sigurdardóttir, fund manager of the ISK70bn Almenni, pension fund agrees the market tremor will be short-lived.

“I would say that pension funds are not suffering from what is happening in the market, absolutely not,” she told IPE. However, she stated that pension funds that have invested heavily in local equities would be affected.

She also warned that increasing inflation could impact the liabilities of schemes. Inflation over the last 12 months is pegged at 4.5%.

“I think we are going to have more inflation this year and next year than the last years,” said Sigurdardóttir. “I’m not talking about ‘dramatically’, but maybe 6% or 7%.”

A report released by the Icelandic Central Bank earlier this month stated that pension funds are “prominent players” in heavy foreign portfolio investment owing to “large amounts of disposable funds that have problems in establishing a suitable portfolio composition in the domestic market”.

The Icelandic stock exchange has been Europe’s best performer for some years and the kronur had been strengthening for a considerable time, bolstered to some extent by hot money attracted into Iceland by high interest rates predicated on local housing market funds.

Pension funds have seen a market correction as being likely and expected the kronur to soften so have already diversified abroad.