The idea of introducing automatic enrolment for Iceland’s now 25-year-old additional pension savings scheme is gaining momentum in the North Atlantic country, with leaders at pension funds Frjálsi and Almenni among those advocating the change, following a study by the central bank on the topic.
Under the scheme, which was introduced in 1999, implementing legislation passed in 1997, wage earners and the self-employed are permitted to pay up to 4% of their total wages as contributions to additional pension savings.
Most wage agreements in Iceland contain a provision for employers to pay 2% of wages as a matching contribution to their additional pension savings, providing the employee contributes at least 2%.
Arnaldur Loftsson, chief executive officer of Frjalsi Pension Fund, penned an article in Icelandic daily Morgunblaðin last week, saying Már Wolfgang Mixa, associate professor at the University of Iceland and board member of the Almenni Pension Fund, had recently advocated that employers automatically enrol employees in additional pension savings.
Loftsson said: “I would like to take this point of view, because it is easy to argue that such a change would benefit individuals and society as a whole.”
“In the work that is taking place during the revision of the pension system, I would like to encourage the government and parties in the labour market to consider these changes,” the Frjalsi CEO said.
They could learn from the moves to auto-enrolment in the UK, and from those planned in Ireland, he said.
Mixa confirmed to IPE that he had advocated introducing auto-enrolment for additional pension savings, both at a recent event hosted by Almenni, and in written articles.
Arguing his case, Loftsson cited a September 2023 research paper from the Icelandic Central Bank, on participation in additional pension savings, which discussed the possible reasons not everyone took part, despite the fact that non-participation meant missing out on what was effectively a 2% wage increase.
In the paper, the central bank authors said that considering how many incentives there were to get people to participate, it was surprising that in 2017 only 77% of full-time Icelanders made additional pension savings, with that percentage lower for part-time workers and people of foreign origin.
Two reasons were often cited in economics for why people did not take advantage of cost-effective savings opportunities, they said — impatience and lack of liquidity.
The central bank study includes an example of a US company that aimed to increase employee participation in a pension scheme into which it paid a counter contribution by automatically enrolling staff in the scheme, while advising them that they could opt out.
According to the research paper, the employee participation rate increased to 86% from 57% with this change.
Loftsson said: “This example and the system in England indicate that if the system in this country were changed accordingly, the participation rate of individuals in additional savings would increase.”
He said additional pension savings in Iceland were one of the most advantageous forms of savings available, because wage earners received a counter contribution, and the tax treatment was favourable.
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