Iceland's gigantic pension fund is creating a headache at home

Reykjavik

ICELAND is confronting the trouble that comes with having a pension system so successful in amassing savings for future retirees that it was recently rated the best in the world in the Mercer CFA Institute Global Pension Index ranking published in October.

With assets now double the size of the north Atlantic island's economy, the government is considering allowing investment managers to diversify by buying up more securities abroad, prompting the central bank to urge caution.

The rules currently limit the share of overseas holdings in pension assets at 50 per cent. "The system has become so big," Finance Minister Bjarni Benediktsson said, describing collective retirement savings of 6.4 trillion kronur (S$67.5 billion). "It goes without saying that we cannot limit all investment opportunities to the domestic market."

The tourism-dependent nation has long been vulnerable to boom-bust cycles. The turmoil that followed the bankruptcy of Lehman Brothers in the autumn of 2008 crippled its outsized banking sector, almost wiped out the domestic stock market and caused the retirement system to lose more than 20 per cent. With some funds nearing the cap on foreign holdings, calls to raise it have grown louder.

Even so, Governor Asgeir Jonsson said any increase in overseas investing by pension funds must be incremental and in line with the developments in domestic economy. Too drastic a change risks destabilising the krona, just as the country deals with a pandemic-induced slump in overseas visitors too.

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The central bank last year made a pact with the pension funds to halt foreign investments for six months at the height of the pandemic to protect the exchange rate of the krona and reduce its fluctuations.

While foreign assets of retirement funds have grown steeply during the crisis as global stock markets surged, net foreign currency purchases have eased, the central bank said last month. Some funds have approached internal limits for overseas holdings as a share of the total and have been forced to pull back on new investments abroad.

With such strains showing, the Icelandic Pension Funds Association is proposing an outright removal of the investment cap, or as an alternative, setting a range of 60 to 65 per cent. BLOOMBERG