Icelandic pension funds offered exemption from capital controls

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Icelandic pension funds will soon be able to invest up to ISK10bn (€67.5m) overseas, signalling a gradual relaxation of the capital controls in place since 2008.

The Central Bank of Iceland has invited the country’s ISK2.9trn occupational pension sector to request exemptions from the capital controls, although any funds granted an exemption would only have until the end of the year to use up their allocated quota.

In a statement, it said the ISK10bn would be divided among the pension investors based on their overall size and annual inflows.

The central bank said the asset owner’s total size would be regarded as more important, and be given a weighting of 70%, while annual inflows will be given a weighting of 30% when deciding how much of the quota to allocate to individual funds.

Explaining its decision for the time-limited quota, the central bank said: “Such [overseas] investments represent a benefit to the national economy in that they will enable the pension funds to achieve a better spread of risk in their asset portfolios while reducing the build-up in pension funds’ foreign investment requirements once capital controls are lifted.

“By this, the risk of instability in the wake of the lifting of capital controls will be reduced.”

The Icelandic pension sector has been limited to investing in the domestic economy since the introduction of capital controls, put in place in the wake of the 2008 banking collapse.

While domestic investment opportunities are available, such as the recent financing of a silicon metal plant in the country’s North, pension investors have previously lamented the increased risk caused by such a geographically concentrated portfolio – with pension assets standing at 146% of Icelandic GDP, according to the OECD.

The funds have channelled inflows into the mandatory system towards private equity and real estate but were also able to gain exposure to overseas currency through domestic bond issuances denominated in other currencies.

The Icelandic Pension Fund Association could not be reached for comment.

But the association noted in a statement that the ISK10bn quota had been alluded to as the “first step” to relaxing capital controls by the central bank, ahead of potentially greater liberalisation in 2016.