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Top 1000 Pension Funds: Reform on the cards under new government

Pension fund members will no longer be able to draw assets from their accounts from 2014, but capital controls remain in place. Nina Röhrbein reports

Iceland, one of the hardest hit countries during the financial meltdown of 2008, went to the polls in spring 2013 and the outcome surprised many. The public returned the centre-right opposition parties, which were widely blamed for the country’s economic collapse, turning their backs on the Social Democrat party, which oversaw so many of the austerity measures that put Iceland back on the road to recovery. A coalition government under prime minster Sigmundur Davíð Gunnlaugsson now governs.

Accession talks with the EU, which began in 2009, were recently suspended, putting a stop to discussions on whether Iceland would be better off with the euro. Membership of the single currency was seen as a way to lift the capital controls that were introduced in 2008.

Fear of further devaluation of the króna has meant capital controls have been in place ever since, despite a new capital account liberalisation strategy from March 2011. To stop outflows from government bonds on due maturity debt and indexation, the capital controls were further tightened in March 2012.

Although the new government has the dismantling of the controls on its agenda, there is no clear plan or timetable in place yet.

The capital controls prohibit Icelandic pension funds from increasing their foreign asset exposure and force them to look domestically for new investment opportunities. Pension funds have had to steer their sizeable contribution incomes into whatever assets they can find – mainly listed and unlisted stocks – subject to the limits set out in the law governing pensions.

New companies listing on the Icelandic stock exchange – which amounted to three in 2012 – are highly sought after. Pension funds have also started to buy new corporate bonds that were issued as a result of some companies’ restructuring.

The capital controls also discourage economic growth, although GDP growth has been positive in Iceland since mid-2010, largely attributed to the booming fisheries and tourism sectors – although the 1.6% growth figure for 2012 fell short of expectations, following 2.9% growth in 2011.

Under the guidance of the Ministry of Finance, talks have been going on between the social partners on structural changes in the pension system, including increased alignment between the pension rights of workers in the public and private sectors.

With a new government in place, there has been talk about increasing the retirement age. However, there has been no official announcement yet and no statements were made during the election campaigns. The official retirement age for private sector employees is 67 and 65 for public sector workers. But Icelanders can retire at 65 with reduced benefits or at 70 with additional benefits.

A review of the 1997 Pension Act is also scheduled, especially on the chapters relating to the investment policy of pension funds, which are said to be outdated and too complex. A government-appointed committee has already proposed more relaxed rules on investments in unlisted securities.

In December 2011, the Icelandic financial services regulator (FME) issued the first risk management guidelines for Icelandic pension funds to optimise the risk on their balance sheets. They were implemented throughout 2012 and are now in place and fully functioning.

The FME’s investigations of the banking collapse have also concluded, with 103 cases being referred to the police. The most extensive cases involve alleged market abuse and breach of fiduciary duty. Other violations concern large exposures and insider misconduct.

The period during which Icelanders were allowed to access their voluntary pension savings following the country’s banking crisis has been extended to the end of 2013, although the amount that could be withdrawn remained limited to ISK6.25m (€39,525).
Pension fund members used to be able to deduct a contribution from their taxable income to authorised individual pension schemes of up to 4% of salary. However, the maximum tax-free amount in employee contributions has now been reduced to 2%.

 

 

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