Iceland is dealing with the challenge that arrives with possessing a pension system that is so successful in the accretion of savings for future retirees that it was recently deemed as the best in the world by the Mercer CFA Institute Global Pension Index for 2021.
With assets now at around twice the size of Iceland’s economy, the government of Iceland is brainstorming to allow investment managers to expand by purchasing more securities abroad, motivating the central bank to instigate caution. The regulations presently limit the share of holdings abroad in pension assets at 50%.
Iceland’s Rapid Rise in Pension System
Finance Minister Bjarni Benediktsson stated in an interview that the system has become so humongous. He described the collective retirement savings to ISK 6.4 trillion (USD 0.049 trillion). He stated that it went without saying that Iceland could not restrict all investment opportunities to the domestic market alone.
Iceland is a tourism-dependent nation. It has long been susceptible to a boom-and-bust cycle. The perils that followed the bankruptcy of Lehman Brothers in the autumn of 2008 halted the outsized banking sector, almost dismantled the domestic stock market, and instigated the retirement system to misplace over 20%. With some financing aids nearing the plug on overseas holdings, indications to lift it have grown bolder as of late.
Governor Asgeir Jonsson stated that any surge in foreign investing via pension funds must be increasing and resonating with the expansions in the domestic economy. Humongous changes risk disrupting the Icelandic Krona, just as the nation deals with a pandemic-induced nose-dive in foreign visitors too.
Mounting Assets Overseas
The central bank in 2020 agreed with the pension funds to plug foreign investments for 6 months at the peak of the pandemic to support the exchange rate of the Icelandic Krona and diminish the fluxes associated with it.
Iceland’s retirement system surpasses all others in the Mercer CFA Institute Global Pension Index raking unveiled in October 2021, having ousted Denmark and the Netherlands as long-tenured leaders by conjoining the list for the foremost time.
A comparatively generous state pension and a well-governed and regulated private system safeguard all employees who contribute a high share of their incomes in an established forte of the government of Iceland.
Working Icelanders, inclusive of contractors and part-times, must reimburse at least 12% of their salary into a pension. Most employment contracts command a 15.5% contribution, of which the employer recompenses 11.5%.
Old Age Safekeeping
Whilst foreign assets of retirement funds have matured steeply during the predicament as global stock markets increased, net foreign currency purchases have relaxed, the central bank stated in November 2021. Few funds have reached internal limits for foreign holdings as a share of the total and have been obligated to cut back on new overseas investments.
With such perils on the surface, the Icelandic Pension Funds Association is suggesting an absolute removal of the investment plug, or as an alternative, establishing a range of 60-65%. Benediktsson is devising an assessment on the issue and expects the government to solve it within its foremost year in office, despite being aware of the associated risks.