Icelandic pension funds have been granted more asset allocation freedom under a raft of changes to their investment rules, which took effect this month.
The Icelandic parliament (Althingi) passed amendments to the 1997 Pensions Act on 24 June, which the Ministry of Finance and Economic Affairs said reduced various obstacles that had reduced the funds’ potential returns, and included increased scope for investments in unlisted assets.
“The aim of the Act is to better enable pension funds to apply the rule of prudence when managing fund members’ assets so that the circumstances and composition of each pension fund can be taken into account in the best possible way,” the Ministry said, adding that this was considered to increase the likelihood that a pension fund’s assets would be better able to cover pension payments.
Arne Vagn Olsen, chief investment officer at the Pension Fund of Commerce (Lífeyrissjóður verzlunarmanna, LV), said in an article in Icelandic daily Morgunblaðið that investment restrictions on Icelandic pension funds had previously been somewhat at odds with those in force in many other places.
“In other countries, the general rule is that pension fund investments follow the so-called prudent person principle, which means that the funds have more freedom to manage assets but bear greater responsibility and have to account for their investment decisions more clearly,” he told the paper.
Quantitative restrictions on certain asset classes had now been greatly expanded, the CIO said, such as the lifting of the 20% ceiling on unlisted assets.
“With the amendment, this is no longer an obstacle for the funds’ involvement in, for example, infrastructure projects,” Vagn Olsen added.
“The rule that previously stipulated that a pension fund could not own more than 20% of a single company has also been abolished, and this rule applied regardless of whether the company was valued at 10m or 10bn,” the LV CIO said in the Morgunblaðið report.
By expanding the quantitative restrictions, Vagn Olsen said pension funds were being given more scope to adapt their portfolios to the composition of their own fund member group, according to the report.
“The changes give the pension funds more opportunities to manage their assets more efficiently and more in line with what fund members need at any given time,” he noted.
Speaking at the Icelandic Pension Funds Association’s (LL) annual general meeting at the end of May, Jón Ólafur Halldórsson, chair of the lobby group, said the legislative amendments represented a “significant legal improvement for pension funds, fund members and the economy as a whole”.
“By increasingly relying on the so-called prudential principle in investments, it promotes better risk awareness and opportunities to adjust fund portfolios to a risk profile with the long-term interests of fund members as a guide,” he said of the package, which was a bill at the time.
Urging the Icelandic parliament to pass the bill before the summer recess, Ólafur Halldórsson said at the time it was important for Iceland’s economy that the “strong and powerful pension system has the opportunity to make a difference by helping the wheels of employment and the economy turn decisively and surely, for example by involving pension funds in new infrastructure projects”.
