Perched at the top of the Atlantic, Iceland has long been accustomed to a global visibility that belies its tiny population.

With just 300,000 people, Europe’s most remote country is enjoying unprecedented prominence in the global finance markets. With per capita GDP of over €25,000, the country boasts liquid capital markets, a well-capitalised funded pension system and, in the guise of Kaupthing, its largest bank, an ambitious and expanding international financial services player.

Iceland has several large funds, some of them extremely large by comparison with the size of the population concerned. The largest fund, Lifeyrissjodur Starfsmanna Rikisins (LSR), the pension fund for state employees, has some €3.6bn in assets under management and 27,000 members. Other large funds include the €2.1bn Gildi Lifeyrissjodur, or Seaman’s Pension Fund, with 32,000 members.

The occasional corporate

Most of the country’s pension funds are industry-wide funds, though some major companies, like Kaupthing do run their own corporate schemes. Arnaldur Loftsson, manager of the company’s staff pension fund, says: “We do run a third-pillar scheme, but they are not very common in Iceland.” By way of example, Kaupthing matches employees’ 2 per cent contribution, and will also match employee contributions of up to 2 per cent of salary to other private pension vehicles. Employees’ pension contributions are tax deductible.

Corporate matching contributions are broadly sufficient, Mr Loftsson believes. Employees are legally obliged to pay 12 per cent of their salary into their pension. Employers top that up with a further 8 per cent contribution – the minimum was recently raised from 6 per cent to 8 per cent. Employees can exercise an option to pay in a further 4 per cent of their salary, in which case the employer is obliged to offer up a further 2 per cent in matching contributions. Third-pillar contributions allow employees to pay in an additional 6 per cent with employer assistance. “Paying this amount of contribution for an entire career will result in a sufficient replacement rate,” Mr Loftsson says.

Most of the country’s funds have a degree of in-house asset management capacity, though outsourcing is widely used, especially for global exposure. Mr Loftsson says: “It is common for pension funds to outsource some part of their portfolio, but in general, they also have their own fund managers. The banks and asset management companies in Iceland manage the portfolios along with foreign asset management companies.”

At LSR, for example, the in-house asset management team, led by Pirgir Stefansson, is in charge of the fund’s substantial domestic and local-currency holdings.

“We have quite a good allocation to domestic assets at the moment,” says Mr Stefansson. A good 50 per cent of the portfolio is invested in krona-denominated bonds, with a further 15 to 20 per cent in domestic equities. There is enough liquidity in the Icelandic capital markets to go around, he maintains. “Our liabilities are all in Icelandic currency, after all,” he says.

This would appear to be a slightly more aggressively diversified allocation than other funds’. Kaupthing’s Mr Loftsson describes a typical portfolio as having a 65 per cent allocation to domestic bonds and 20 per cent to domestic equities. Foreign equities would make up a further 20 per cent of a typical portfolio, with alternatives making up another 5 per cent.

There is a fledgling market in alternative investments. He says: “Alternatives are a relatively new asset class in Iceland. Investments are mainly in hedge funds and private equity.”

Strict guidelines

The regulator sets fairly strict guidelines for funds, nonetheless.

Pension funds can go no higher than a 60 per cent allocation to equities, and they can hold up to 50 per cent in foreign currency-denominated assets. A degree of institutional diversification is also required. Funds can put a maximum of 25 per cent into savings deposits within a single bank, and no more than 10 per cent of a fund’s portfolio can be invested in shares and bonds issued by the same company.

Derivative holdings of up to 10 per cent of the portfolio are permitted, though the purpose of any derivatives must be to hedge risk.

There are signs of liberalisation, however, with the regulator developing a more tolerant attitude towards risk. The equity ceiling, for example, was recently raised to 60 per cent from an earlier 50 per cent limit.

Mr Loftsson suspects the regulator’s next move will be to take a more relaxed stance on derivatives. “I assume the next reform will be related to derivatives, since that asset class is evolving rapidly and suits pension funds in many ways,” he says.

For LSR, the focus is much more on building up its alternatives portfolio, which Mr Stefansson construes as private equity, hedge funds and real estate.

Running a large fund, he is keen to achieve genuine global diversification. “We have opinions on different markets,” he says, “and we try to focus more on global objectives and global managers. But that does not exclude regional-specific managers from our portfolio.”

Printer friendly version

Email this article to a friend