With a higher life expectancy than most European countries, Iceland has to make its pensions savings work harder. Rachel Fixsen reports.
Iceland's pension funds, like many of their European counterparts, are slowly but surely becoming more heavily invested in equities. The change has been driven by a need to spread their risk and maximise returns, the funds say, though investment restrictions limit by law the proportion of assets Icelandic pension funds can hold in shares.
Until eight years ago, there were no domestic shares officially listed. The Iceland Stock Exchange was established in 1985, but only bonds were traded until 1990 when the first share was listed. Before this, company shares that did exist were unregulated.
Now 56 shares are listed, and bourse turnover is growing. Five or six years ago pension funds here were not allowed to invest abroad, and eight to 10 years ago, they were not allowed to have domestic equities - only bonds... you can say there has been quite a dramatic change," says Johannes Siggeirsson of United Pension Fund, one of the largest pension funds in Iceland.
Average equity weightings may have more than doubled in a year. Pension funds in Iceland held KR29.19bn ($400m) in direct share investments at the end of 1997, up from KR14.3bn the year before. These figures come from the Ministry of Finance which warns that this increase may reflect different assessment methods. Holdings in equity funds, not included in the previous figure, stood at KR8.7bn at the end of last year.
Traditionally, Iceland's pension funds have tended to invest in government bonds and State Housing Fund bonds, which are the Icelandic equivalent to building society investments. Holdings of both types of investment have fallen between 1996 and 1997, casualties to the surging popularity of equities. Equity prices are still showing strong growth in Iceland, though this has been slower in the last two years. So far this year, the official stock market index has expanded 12%, after 13% growth last year. In 1996, the index rose 60% after 35% in 1995.
The population in Iceland may be small, at around 270,000, but pensions on the North Atlantic island have to work harder than elsewhere. Life expectancy in Iceland is higher than most European countries, with men on average expected to reach 77 and women seen living to the age of 81.
Iceland's system of pension funds was set up in 1969. Most of the funds were established by the trade unions and the employers' associations and are governed jointly by them. Unemployment in Iceland is very low and according to Icelandic law, everybody is obliged to pay into a pension fund. Rights to pensions depends how long the individual concerned has paid into the fund. In general, employers pay six percent of gross salary and employees contribute four% into the fund.
There are now 56 fully operational pension funds in Iceland. Ten of these are classed as defined contribution and 16 are defined benefit schemes with an employers' guarantee.
The rest - and this includes some of the largest pension funds in Iceland - do not fit easily into either category. They are not made up of individual accounts but investment risk is borne collectively by members of the fund.
The Ministry of Finance says there is a high degree of solidarity and coinsurance in these pension funds. The relation between contributions and rights to benefits in usually the same for young and old, men and women, those with spouses and children and those without.
Some funds are operated by financial institutions, though in these cases the fund must remain a separate legal entity. The institution charges a fee for running the fund but it does not own it and the investment risk is carried by members of the fund. Under the Act 129/1997 pension funds are restricted in the following ways. The rule in Chapter VII article 3 is based on a prudence principle. The main limit is on equity holdings which must not exceed 35% of overall assets and foreign currency holdings must not be more than 40%. If the fund invests in any unlisted equities, they must be domestic. Deposits in foreign banks are allowed, as are foreign securities as long as they are traded in a regulated market.
"Pension funds are increasing their foreign equities and domestic equities also, but the acceleration is happening in foreign equities," says Gudmundur Tholhallsson of the Pension Fund of Commerce. This fund, which largely belongs to white-collar workers, holds 48% of assets in government bonds, with 7.2% in domestic equities and 7.5% in foreign equities, at the end of last year.
Icelandic pensions funds rarely invest in property, says Tholhallsson. Most foreign equities investment takes place through global mutual funds, such as investment trusts, he says, via investment houses in London and the US. "Now some are trying to invest more directly, by having their own segregated portfolio," says Siggeirsson.
Investment culture in Iceland has tended to favour government bonds over equities, he says. "Ten years ago there was no real stock market in Iceland, but this is changing now," he says. "Also individuals are tending to invest more of their money in equities, so we are going in this direction," he adds.
At the moment, life insurance companies do not provide pensions services. But new legislation passed on July 1, 1998 will eventually open the way for life insurers and banks to offer some sort of pensions provision, says Ejnar Sveinsson, board member of Iceland's biggest life insurer Samlif. Foreign life insurers will also be able to provide this service, as long as they have an establishment in Iceland."