Iceland’s pension fund sector has undergone considerable consolidation over recent years. “The funds were formed at the insistence of the trade unions and initially there were nearly 100 of them as each union wanted to have its own fund,” says Hrafn Magnusson, (pictured right) managing director of National Association of Pension Funds. “There are 37 now. And the mergers made the funds more robust and able to withstand the unprecedented pressures now afflicting the Icelandic economy.”

One of the key mergers was that of the unskilled workers’ pension fund Framsyn and seamen’s fund Sjomanna in June 2005 to form Gildi, which at the end of 20007 had assets under management of €2.4bn, up from €2.1bn the year before.

“In the future we will certainly see more mergers,” says Tryggvi Tryggvason, CIO at Gildi. “It gives economies of scale.”

What has been the impact of the current crisis on pension funds? “The pension system will continue, of course,” says Tryggvason. But it will have an effect on Gildi’s asset allocation. “There is such a turmoil here now that it’s hard to decide anything, but probably in the future we will expand our investments abroad because there is a lack of opportunities in Iceland.”

And have developments like Standard &Poor’s downgrade in September had an influence on the market? “The S&P downgrade had some effect,” Tryggvason says. “But the major impact followed the ‘anti-terroprism’ action of the British government. Our currency market and banking system collapsed after that. The action was very brutal and it is unbelievable how the so-called friends from the UK have acted against the Icelandic nation”

But Gildi, like all other Icelandic pension plans, will have to make some decisions very soon. By 1 December all pension funds will have to send to their investment policies for next year to the Financial Supervisory Authority (FME).

One pension fund that might be expected to feel the cold wind of the economic crisis is Frjalsi pension, which was managed by Kaupthing Bank, which was nationalised last month. The pension fund has separated from Kaupthing Bank so the only impact of the crisis is through the securities issued by the banks that are in Frjalsi’s portfolio,” says Arnaldur Loftsson, (pictured left)managing director at Frjalsi. “But throughout this year we had been systematically decreasing risk, selling equities and buying government bonds, for example. So when everything went down our largest investment ‘path’, Frjalsi 1, had only 5% of its portfolio in domestic equities.”

Frjalsi too has not yet decided on whether it will make substantial changes to its asset allocation for next year. “There is not so much of an Icelandic stockmaket now so instead of having a category called domestic stocks, we will maybe call it Nordic stocks,” says Loftsson. “We will have to make up our mind before 1 December.”