At the end of 2025, the pension funds’ assets specified broadly as follows: domestic market bonds, just over 31% of total assets; domestic equities and unit shares, just under 16%; loans to fund members, 9%; and deposits and liquid assets, just over 2%. Foreign assets accounted for 41.5% of their total assets.

Foreign assets performed well …

The pension funds’ foreign assets constitute a large share of Iceland’s total foreign assets, and most of them are in the form of direct and indirect shareholdings. At the end of 2025, their foreign assets amounted to ISK 3,681bn, or 75% of estimated GDP for the year. The funds bought relatively little foreign currency in 2025. The CBI’s report entitled Foreign exchange market, exchange rate developments, and international reserves 2025 states that their net currency purchases totalled ISK 54bn during the year, as compared with ISK 84.5bn in 2024. On the other hand, they received significantly more currency than this in 2025, as the settlement of ÍL Fund channelled ISK 55bn in foreign currency from the Treasury’s coffers to theirs at mid-year.

The funds’ foreign assets grew by ISK 325bn, or nearly 10%, in 2025. In general, developments in this portion of the pension funds’ asset portfolio depend on three factors:

• Price movements in foreign asset markets: In general, global share prices developed favourably in 2025. A good example is the nearly 20% rise in the MSCI World index, which provides a solid indication of likely developments in the pension funds’ asset portfolios in US dollar terms.
• Developments in the ISK exchange rate: Because US dollar assets carry so much weight in the pension funds’ foreign portfolios, the USDISK exchange rate affects asset values far more than might be indicated by the CBI’s trade-weighted exchange rate index. In 2025, the dollar weakened by nearly 10% against the ISK and the GBP by nearly 3%. On the other hand, the ISK depreciated slightly versus the euro during the year.
• Shift of assets from ISK to foreign currency: As is noted above, the pension funds’ disposable foreign-denominated funds due to net FX transactions and the settlement of ÍL Fund came to about ISK 109bn last year.

The depreciation of the dollar against the króna eroded returns on the funds’ foreign assets in ISK terms, owing to the predominance of the dollar in the foreign asset portfolio. Even so, not all of the chickens have come home to roost just yet, as the ISK will probably weaken against the dollar in the end, as we posit in our recent macroeconomic forecast.

… while domestic shares managed to tread water

Share prices softened in Iceland and abroad after the US administration launched its trade war last spring. Unlike most foreign markets, the Icelandic equity market took its time recovering, even though it quickly came to light that US tariff policy would have less impact in Iceland than appeared at first.

The OMXI15 index fell by just over 2% in 2025. Domestic equities account (directly and indirectly) for about 16% of the pension funds’ total assets, and domestic share prices therefore cut into returns on their overall asset portfolio last year. Just as in the case of foreign equities, however, it is just as well not to panic over them. The pension funds are long-term investors, share prices fluctuate from one period to another, and in the long run, equities have historically given better returns than bonds have.

Acceptable returns in a challenging environment

Last autumn, we discussed developments in pension fund assets over the first three quarters of 2025. At that time, we considered the outlook for the funds’ real returns rather bleak for 2025 as a whole, as our calculations indicated that they had been negative in the first nine months of the year. Fortunately, the year as a whole seems to have developed more favourably than was expected last autumn.

As is noted above, the pension funds’ total assets equalled ISK 8,878bn at the end of 2025, after growing by ISK 627bn, or 7.6%, since the start of the year. Although a portion of that increase is due to net inflows of pension contributions, returns on asset portfolios ended up fairly decent, according to a recent press release from the National Association of Pension Funds (LL). That press release states that the funds’ real return averaged 2.6% in 2025. Furthermore, LL estimates the funds’ real return at 4.0% over the past ten years and 2.8% over the past five.

The pension funds’ actuarial benchmark specifies a real return of 3.5% per year. The funds therefore try to achieve a real return of at least 3.5% in the long run, in order to avoid curtailing fund members’ rights. Even though annual returns have fluctuated widely, the ten-year average is an indication of strength for the pension funds as a whole. The above-specified five-year average shows, however, that the funds cannot afford many more meagre years in the near future if they are to avoid cutting pension rights later on.