Gildi, Iceland’s third-largest pension scheme with €2.18bn under management, believes it deserves the IPE award for Iceland thanks to its successful portfolio management and performance.

Representing mainly seamen and blue-collar workers, Gildi claims it has both the highest five-year and 10-year rolling performance rates among Iceland’s pension funds at 16% and 12.2% respectively. “In addition, our performance for 2006 reached 17.1% and thus far this year, we have achieved 23% an annual basis,” the scheme says.
“We believe a carefully planned investment strategy, portfolio construction, implementing the results of asset liability modelling and currency overlay are the main reasons why we have outperformed other pension funds in Iceland last five years,” it adds. 

Gildi says it has put a lot of work into its portfolio construction and drafting its investment policy carefully to fit its risk budgets. The members have been the main beneficiaries. “In five years, we have outperformed our benchmark by 7.1% in real terms and by 3.9% annually. Thanks to this high level of out-performance, the board of the scheme decided to increase benefits to members by 10% in 2007, having already increasing them by 7% in 2006. A 17% increase in just two years is not bad going at all,” Gildi boasts.

Gildi says it was one of the first schemes in Iceland to implement an investment and portfolio strategy on the basis of the results of an asset/liability modelling exercise and to adopt a currency overlay programme. “The ALM study is an important tool for selecting the right investment strategy for the fund. The objective is to have an investment strategy that adds value to the asset/liability ratio over the full investment cycle of the assets portfolio,” it explains.


Gildi understands the concept of matching the assets to the liabilities rather than relying on investment returns alone to cover its obligations. “The investment strategy takes into account the returns and potential volatility of the asset classes we favour in conjunction with the growth of liabilities,” it points out.

Determining the growth of the liabilities is linked to the assumptions a scheme needs to make to produce as accurate a picture as possible of the scheme at given points in the future. “We consider a range of assumptions such as changes to the law, the age of our members and pensions, future cash flow, fund ratio and the relationship between contributions and benefits,” says Gildi.

Once the assumptions are made, Gildi can calculate their impact on in its risk budgets while it determines its long-term strategic asset allocation. “We estimate how different strategies affect the asset liability ratio, the maximum drawdown of income and risk for each investment class. We estimate the fund ratio for a given portfolio by running simulations and calculate the possibilities of cutting benefits.”


Unlike many other schemes across Europe, Gildi is in somewhat of an envious financial position. “We are fully funded with strong cash flow and young members,” it boasts. “This gives us flexibility regarding many different investment strategies,” it adds. Nonetheless, Gildi is not about to rest on its laurels. The final investment strategy it selects takes full account of volatility in the markets and the maximum it expects to have to pay out. “The importance of asset/liability modelling management is huge in managing both the liabilities and risk.”

So what form does the investment strategy take and what constitutes the portfolio? Following Gildi’s ALM, it came to the conclusion that the optimal strategy for its young, well-funded scheme was 50% domestic and foreign bonds, 40% domestic and overseas equities and 10% alternatives. This is not overly adventurous but Gildi says it favours a tight, disciplined approach to its investment strategy and it is confident it will deliver. “We believe this strategy will return 7.1% in real terms with a 6% standard deviation in relation to the portfolio risk over the full investment cycle,” it says. 

The investments are monitored and tweaked, if necessary, every month. Gildi says its research suggests its approach is more likely to lead to an increase in benefits than to a reduction. “We expects benefits to increase by 30% over 10 years with only a 2% probability of a reduction. Over a 20-year period, the increase is 70% with a 13% likelihood of having to cut.”

But it is not just Gildi’s commitment to ensuring it retains a disciplined investment policy reflecting its asset/liability ratio that has kept it ahead of the pack in Iceland. It has also developed a currency overlay programme that has returned some 5.5% in the past five years, which it claims gives it an edge over other schemes. “Currency overlay has lowered the risk in our portfolio and given us excess returns compared to our peers. We hedge a big part of our foreign currency into Icelandic krona - a process that is managed daily. Currency overlay is about selecting a benchmark, a hedge ratio and a clear management style.”

Showing an overall outstanding performance through both the bear and bull markets of recent years, Gildi has fared better than all other pension schemes in Iceland. Compared to its peers in the past five years, Gildi’s accumulative average excess return reached 14%.

But who are the winners? Comparisons with other schemes apart, the scheme’s consistently good performance has paid high dividends for its members. Literally: as their benefits have increased by 17% in two years. And, if Gildi’s assumptions and calculations prove accurate, they could be looking at a whopping 70% increase over 20 years with just a 13% chance they will be cut in the same period.