ICELAND - The real rate of return for Icelandic pension funds was -21.78% in 2008, while the value of net assets dropped by 6% to ISK1.6trn (€8.8bn), the Icelandic Financial Supervisory Authority (FME) has revealed.

Figures from the FME's annual pension report, which collates financial information from 37 pension funds, showed the value of premiums paid to the pension funds dropped by 26% over the year from ISK 146bn to ISK 116bn.

The FME highlighted the fall in asset values and poor investment return followed a year of unusual events in the Icelandic economy. It claimed that the fall of commercial banks in October meant pension funds not only lost their investments in the banks but they also had to depreciate many of the banks' bonds.

In addition to this the overall economic situation saw the value of the Icelandic króna drop by 80.24% and average inflation reach 16.36%, which adversely impacted companies that pension funds were invested in.

That said, the FME noted the depreciation of the ISK had led to an increase in the value of foreign investments by pension funds, and at the end of 2008 the ratio of assets in foreign investments was "unusually high", while foreign currency exposure was 29%.

The asset allocation at the end of 2008 showed investments in equities had dropped from 34.9% to 18% over the year, while the percentage in treasury notes and bonds increased from 22.6% to 29.6%, and bank and savings deposits almost trebled from 3.4% in 2007 to 10.4% 12 months later.

The FME suggested the main reason for the move from shares into deposits is the collapse of the banking system and difficulties in domestic and foreign markets, as well as the decision to write off part of their share holdings and investments in credit institutions and corporate notes and bonds.

Other areas that saw increased investment included mortgage loans, which ended 2008 at 11% against 8.6% in 2007, while the allocation to unit shares and investment funds rose from 6% to 9.8% over the year.

The net assets of the pension funds dropped from ISK 1.7trn to ISK1.6trn over the year, a fall of 5.9%, while disposable funds within the schemes, measured by cash flows, also declined from ISK 686.1bn to ISK 674.9bn. However despite these falls the value of pension benefits paid in 2008 continued to increase, rising from ISK 46.1bn to ISK 52.9bn.

Meanwhile the FME revealed private pension savings - those held in banks, private pension schemes and life insurance companies as supplementary provision - increased to ISK 255.6bn from ISK 237.8bn, which is equivalent to 16% of the entire pension system against 14% at the end of 2007.

Figures from the report also highlighted a decline in the actuarial position of 26 of the 29 mutual pension funds - those not guaranteed by the Treasury, municipal authorities or a bank - of which 12 had a deficit in excess of 10%.

Regulations state that all pension funds showing a deficit of 10% or higher must amend their articles of association to achieve a balance, however in December 2008 the government introduced a transitional provision so no amendments would need to be made unless the deficit was more than 15%.

However of the 12 pension funds exceeding the 10% level, four of these showed a deficit higher than 15%, resulting in a need for them to amend their articles of association.

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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