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In July, Iceland’s largest pension fund LSR appointed MFS Investment Management to run a segregated global equity mandate that will eventually be worth $100m. The e1.3bn pension fund for Icelandic civil servants, which invests around 20% of its assets overseas, has shown with this appointment its intentions to increase exposure to foreign investments, expected to double by 2007. This interest in allocating more assets outside the domestic market is not unique among Iceland’s pension funds.
Recent reforms in investment restrictions, under which pension funds in Iceland are allowed to invest up to half of their assets outside the country, have resulted in the total exposure to foreign investment among Icelandic investors growing more than ten-fold to 21% between 1995 and the end of 2001.
Iceland has 43 fully operational pension funds, of which 13 are defined benefit (DB) plans with employers’ guarantees.
Although disappointing investment returns in the equity markets have aroused concerns among investors about strategies in the future, the truth is that the Icelandic industry has not suffered as badly as some of its European counterparts.
In general, the pensions system in Iceland – characterised by an extensive accumulation of funds, mutual insurance and the compulsory membership of all salary earners and independent contractors – has proved efficient in meeting the requirements of this small but wealthy nation. According to the Reykjavik-based National Association of Pension Funds, increased freedom of investments, favourable real returns in recent years and changes in the acquisition of pension rights have significantly helped the funds to improve their positions. The growth of the pensions market has also contributed to the development of the country’s stock exchange, ensuring widespread ownership of Iceland’s largest companies.
Although no major changes affecting the structure of the industry are expected in the near future, there is a current trend towards the consolidation of the pension fund market through mergers between funds. For the association, which represents around 98% of the total pension fund market in Iceland, the driver behind this trend has been the need for improved efficiency among the schemes operating in the market.
These mergers and the continue diversification of pension fund portfolios into foreign investment vehicles will be some of the most discussed issues among the country’s pension professionals during the months to come.
In terms of possible changes in the legal framework of the pensions industry, these are not likely to materialise since the reforms undertaken at the end of the last decade satisfied the need for a comprehensive legislation on pensions, the reorganisation of the public sector pension funds and the introduction of tax incentives for private pensions savings. The challenge for the future is now to define the right investment strategies to achieve satisfactory investment returns.

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