At the end of September, the distribution across key asset classes was as follows: domestic holdings in market bonds, 32% of total assets; holdings in domestic equities and UCITS share, just over 15%; loans to fund members, slightly more than 9%; and deposits and liquid assets, just over 2%. Foreign assets accounted for nearly 41% of the pension funds’ total assets.

Modest growth in foreign assets

The pension funds’ foreign assets consist primarily of direct and indirect holdings in equities. At the end of Q3, foreign assets amounted to ISK 3,443bn, or 70% of estimated year-2025 GDP. It can be said that these assets, together with the Central Bank’s (CBI) international reserves, are the backbone of Iceland’s positive net international investment position of nearly 44%, which represents Icelandic entities’ foreign assets net of foreign entities’ Icelandic assets.

Since the start of 2025, the pension funds’ foreign assets have grown by over ISK 87bn, or 2.6%. This is unusually small in comparison with recent years. Developments in foreign assets are affected by three competing factors:

• Price movements in foreign markets cause comparable developments in the asset portfolio, calculated in the assets’ home currencies. For example, the MSCI World Index increased by over 16% in 2025 through end-September. A large share of Icelandic pension funds’ foreign assets are invested in UCITS funds with an asset composition broadly similar to the MSCI index.
• Developments in the exchange rate of the ISK versus major currencies affect the ISK value of the asset portfolio. Because of the dominance of the US in global equity markets, the US dollar carries far greater weight in these funds than in, for instance, the CBI’s exchange rate indices, which are based on Iceland’s external trade. According to the CBI’s exchange rate index, the ISK appreciated by just over 4% in the first nine months of 2025, and by a full 14% against the US dollar. Because US dollar assets are (directly and indirectly) the mainstay of the pension funds’ foreign assets, this steep rise in the ISK versus the dollar strongly affects the ISK value of the pension funds’ assets.
• Foreign asset purchases (or asset sales, for that matter) affect how the portfolio develops at any given time. According to the CBI’s Economic Indicators, for instance, the pension funds’ net foreign currency purchases totalled just under ISK 24bn over the first eight months of this year. This is less than half of their purchases over the same period in the past three years. But it should be borne in mind that thus far in 2025, the funds have received large amounts of foreign currency from the merger of Marel and JBT at the start of the year and the settlement of Housing Financing Fund bonds shortly thereafter. According to the CBI’s Financial Stability report, the pension funds’ foreign assets and foreign currency deposits increased by a total of ISK 80-105bn as a result of these two transactions. The stockpile of foreign currency that the funds can use to buy foreign assets has far exceeded the amount of currency they have bought in the market.

As the chart indicates, the pension funds’ foreign portfolio was hit hard late last winter by the market turmoil associated with the US government’s erratic tariff regime. Unlike the Icelandic market, though, foreign markets have long since adjusted to that unrest, as can be seen in the MSCI World Index.

CBI data include a breakdown of pension fund liabilities into domestic and foreign liabilities. In the past decade, foreign liabilities have nearly trebled, from just under ISK 120bn to over ISK 336bn. Their share in total liabilities has held stable over the period, however, as the chart indicates.

Headwinds after a favourable 2024

Last year was a benevolent one for the pension funds, following two meagre years in 2022 and 2023. The funds’ assets grew by over 13% in ISK terms in 2024, and real returns on their portfolio averaged 6.7%, nearly twice the actuarial benchmark real return of 3.5%. Whether or not the funds reach this benchmark has varied greatly from year to year, as securities markets have blown hot and cold and the exchange rate’s impact on the ISK value of the portfolio has been variable as well.

Given that the pension funds are long-term investors whose obligations stretch decades into the future, however, it is their long-term average return that is of greatest importance in determining their ability to guarantee fund members an acceptable standard of living during retirement. In the past decade, the real return on the pension funds’ assets has averaged 4%, thereby exceeding the 3.5% benchmark.

Based on developments in the first nine months of this year, however, 2025 could prove less bountiful. As is noted above, the pension funds’ asset portfolio has grown by just under 3%, or 3.7% on an annualised basis. After adjusting for price developments and the fact that contributions paid to the pension funds have exceeded paid-out benefits and expenses, the real return on their assets will probably be negative for the first three quarters of the year.

There is some comfort to be had, though: foreign share prices have continued to rise overall since the start of October, and the recent slide in the exchange rate has boosted the value of foreign assets in ISK terms. In this context, it is worth noting that as of today, the MSCI World Index is up nearly 7% in ISK terms.

Bond prices, too, have generally risen since the beginning of October, and the portion of the funds’ bond portfolio that is entered at market value has appreciated commensurably in their books. That said, most of the funds’ bond portfolio is recognised at cost price, and short-term market fluctuations do not affect that portion.

Domestic share prices have sagged thus far in Q4/2025, though. The OMXIPI index is down a full 5% since the beginning of October.

It is therefore quite likely that Icelandic pension funds’ real returns will be weak this year, as they were in 2022 and 2023. According to the CBI summary, the overall performance of 19 of 25 Icelandic pension fund departments – i.e., assets less current and estimated future obligations – was negative at the end of 2024. Excluding employer-guaranteed funds, the pension funds’ position was negative by just over 1%, on average, by this measure. The position of employer-guaranteed funds – those backed by a public sector pledge to bridge any shortfalls between assets and liabilities – was negative by 74%, however. Most indicators imply that the situation will deteriorate further this year, if the current pattern holds. Thus there are genuine challenges ahead for the Icelandic pension system, even though Icelanders are in an enviable position compared with many neighbouring countries.