Pension funds in Iceland

Hrafn MagnússonManaging Director

National Association of Pension Funds Reykjavík September 30th 2005

The pension system

The Icelandic pension system is developing according to the three pillar principle: A tax financed and means tested

public pension A mandatory membership in

occupational pension funds A free individual pension saving with

tax incentives

History

The foundations of the present day pension fund system in Iceland were laid by general wage settlements in the spring of 1969, where the labour unions traded wage increases for the setting up of fully funded mandatory occupational pension funds from the beginning of 1970.

Icelandic pension funds

At the beginning of 2005 there were 48 pension funds in Iceland. Of these, 10 were no longer receiving contributions.

10 had employer guarantees from the government and municipalities. There were 28 fully operational occupational pension funds that do not have an employer guarantee.

Occupational pension schemes

It has been estimated that according to present rules a typical general occupational pension fund will pay a pension amounting to 45-58% the earnings and that the basic public pension might add another 11%, giving a total replacement ratio of 60-70%.

The Pension ActPassed into law in 1997

Minimum pension rights and forms of pension are defined.

General requirements for operating pension funds regarding size, risk, internal auditing and funding are defined.

The Pension Act cont. Full funding

All pension funds shall be fully funded except those that are guaranteed by central or local government.

Full funding is defined in such a way that the divergence between the present value of assets and liabilities can not be more than 10% for a year or 5% over a period of five years.

Benefits

All pension funds on the general labour market in Iceland pay old age, disability and survivors' pensions.

The main rule is that members can begin to withdraw old-age pensions at the age of 67.

It is, however, possible to start withdrawing pension as early as 65, but then with a reduced benefit, or as late as 70 with additional benefits.

Benefits cont.

The accumulated pension rights in funds on the general labour market are price indexed and not linked to wages and salaries.

In 2004 60,2% of the pensions paid by these funds were for old age.

27,5% for disability 10,2% was for survivors’ And 2,1% for childrens’

Number of Icelandic Pension Funds in the end of the year 1991 to 2004

25

35

45

55

65

75

85

95

Sjóðir

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Ten largest Icelandic Pension Funds as a proportion of total assets.

50

55

60

65

70

75

% af heildareignum

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-4

-2

0

2

4

6

8

10

12

1991 1993 1995 1997 1999 2001 2003

Real return

Real return

5 years average

0

1

2

3

4

5

6

7

8

9

1995 1997 1999 2001 2003

Real return

Asset allocation of Icelandic Pension fund

Domestic bonds 92,0% 85,7% 79,9% 69,9% 66,8% 69,1% 73,3% 67,4% 62,6%

Domestic equities 4,6% 6,8% 7,5% 10,7% 10,0% 9,5% 11,0% 12,3% 14,3%

Foreign equities 3,4% 7,5% 12,6% 19,4% 23,2% 21,4% 15,7% 20,3% 23,1%

Total assets 100% 100% 100% 100% 100% 100% 100,0% 100,0% 100,0%

Assets

Assets of Icelandic pension funds amounted to 987 b.kr. at the end of 2004 or 110 % of GDP.

2004 the assets increased 20,1% or 15,4% over CPI.

The problem of ageing

Smaller than among most developed European countries:

The Icelandic nation is younger than many other European nations and the problem of ageing will thus be less during the first decades of this century.

High labour participation rates of the elderly

Mandatory membership of fully funded pension funds (at least 10% of wages)

Labour force participation

Labour force participation rates among 55-64 years old males in the Nordic countries, 1980-2010

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1,0

1980 1985 1990 1995 2000 2005 2010

Denmark Finland

Iceland Norw aySw eden OECD

Source: Bros et.al. (1994).

Old age dependency ratio:Over 64 years old as a percentage

of 15-64 years old

USA UK Denmark Netherl. Iceland Japan Norway Sweden Germany0

10

20

30

40

50%

1990 2030

The Icelandic nation is younger than among most developed European countries and will continue to be so well into this century

A free individual pension saving – the 3rd pillar

Employees are allowed to deduct from their taxable income a contribution to authorised individual pension schemes of up to 4 per cent of wages.

A free individual pension saving – the 3rd pillar – cont.

Employers have further accepted in wage settlements to contribute 2 per cent to voluntary pension saving.

The total contribution can therefore become 6.0 per cent for those that have decided to pay 4 per cent to voluntary pension schemes.

A free individual pension saving – the 3rd pillar – cont.

The schemes are in most cases defined contribution individual accounts. (DC plan)

Please visit our website

National Association of Icelandic Pension Funds:

www.ll.is