ICELAND - The Icelandic government plans to introduce legislation allowing holders of individual pension accounts to access their savings early to meet “dire financial difficulties”.

In a statement to Althingi, the Icelandic parliament, the newly-appointed prime minister Jóhanna Sigurðardóttir outlined the new government’s plan of action for combatting the current economic crisis.

She acknowledged many people had lost their jobs and assets, while some businesses had gone bankrupt, and said the government would “take concerted action in response to the financial difficulties facing households in the country, in close consultation with stakeholders”.

As part of this initiative, the prime minister confirmed: “Laws will be adopted on private pension savings granting fund members a temporary authorisation to withdraw their private pension savings to meet pressing financial needs.”

In addition, Sigurðardóttir revealed a bill on debt restructuring has already been introduced, while additional bills to improve the legal situation of individuals facing temporary payment difficulties, and an amendment to the Insolvency Act to improve debtors’ legal position will all be introduced.

The details of the bill - allowing early access to pension saving - are expected to be released towards the end of next week, however the government has stated the legislation would only relate to individual pension accounts, the voluntary ‘third pillar’ of pension saving.

A newsletter from the Ministry of Finance confirmed: “One of the tasks on the list of the new government is to pass legislation on indvidual pension accounts that provide pension account holders with a temporary authorisation to draw on their accounts in order to meet dire financial difficulties.”

The 1998 Icelandic Pensions Act requires all workers and the self-employed aged between 16 and 70 to pay a minimum contribution of 12% of the “pension calculation base” - which is defined as all types of wages and payment for taxable work.

These compulsory contributions are paid into a ‘common pension account’ and these funds must pay a minimum pension of no less than 56% of monthly pay at the time of retirement - the minimum common pension protection - based on 12% minimum contributions paid over a 40-year period.

However, if the minimum compulsory contributions “more than suffice” to pay for the minimum protection, then after an actuarial evaluation workers can place part of the excess contribution into a third-pillar individual pension account.

The government also allows workers to pay in up to an extra 4% of total pay into these accounts as supplementary pension provision, and in return these members “generally receive a counter-contribution from the employer of up to 2%”.

Figures from the Ministry of Finance revealed around ISK300bn (€2.02bn) are held in individual pension accounts, and the funds are invested in a range of portfolios with varying risk depending on the choice of the account holder. Of this ISK300bn, it is estimated aapproximately one-quarter, or ISK 75bn, originates from compulsory contributions and older individual pension savings which existed prior to 1998.

Workers can receive a pension from individual accounts at the age of 60, although at the end of 2008 the law was amended so “the balance on an individual pension account may be paid to the account holder in one lump sum at the age of 60”. Previous rules meant the payment was to be distributed from the beginning of taking a pension until the account holder turned 67.

The balance on an individual pension account can also be inherited and qualifies for payment at the time of the account holder’s death, unlike the pension rights under the common pension scheme where the survivors only qualify for spouse’s and children’s benefits, “often temporary, and subject to specific conditions”.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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