Icelandic pension funds see strong real returns in 2013 Featured

Icelandic pension funds see strong real returns in 2013

For the second year in a row, the pension funds’ real returns appear to have been well above the 3.5% actuarial threshold. Net assets for payment of pension benefits rose by 11.1% in 2013. Although inflows from premiums somewhat exceed the outflows stemming from benefit payments and third-pillar pension savings withdrawals, it appears that the funds’ real returns were quite strong, on average. 

Domestic securities holdings increased by 12.5% and foreign securities holdings by 7.9%, according to newly published figures from the Central Bank. Because the pension funds are prohibited from investing new capital abroad, it is clear that their foreign holdings generated handsome returns last year, particularly in view of the appreciation of the ISK during the period.

The Treasury’s largest creditors

The pension funds own about 243 worth of outstanding Treasury bonds, according to Government Debt Management (GDM), and thereby represent the Treasury’s largest single creditor group. As of December, their Treasury bonds accounted for 11.9% of their net assets for payment of benefits, and municipal bonds accounted for another 2.9%. But these two pale in comparison with Housing Financing Fund (HFF) bonds, which totalled 23% of net assets for payment of benefits. Housing-related bonds of all types – Housing Bonds, Housing Authority Bonds, and HFF bonds – accounted for nearly a fourth of net assets. As a result, the pension funds have a large stake in seeing the HFF’s problems resolved satisfactorily.

In comparison with other bond categories, the share of bank bonds has risen most, nearly doubling, although bank bonds still account for only 1.2% of net assets for payment of pension benefits. But the bonds issued by the banks constitute only a portion of their borrowing, as deposits are included with total borrowings.

Sharp rise in domestic equity securities holdings

In ISK terms, the pension funds’ equity securities holdings grew 60% year-on-year, whereas ISB Research’s K-90 index has risen 37% in the past year. The pension funds surely realised some profits upon the listing of TM and N1, as they were large owners before the two companies joined the exchange and their purchases much smaller than the above-mentioned increase suggests. According to our most recent estimate, the pension funds now hold 36.8% of listed equities.

Domestic shares and mutual funds now account for 11.5% of their net assets for payment of pension benefits, while foreign equities and mutual funds account for 20%. Fixed-income securities (bonds and related assets) account for 56.8%.


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