The funds’ foreign assets came to ISK 2,258bn, or 35% of total assets. The share of foreign assets has risen steadily in recent years, from just under 22% at the end of 2016. It can be said that a considerable share of the current account surplus of the past few years has been used to bolster the pension funds’ foreign assets, as Iceland’s positive net international investment position, measuring more than a third of GDP as of end-June 2021, is largely reflected in these assets.

The vast majority of the funds’ foreign assets are in foreign mutual funds. Their value in ISK – and their value as a share of total assets less net asset purchases at any given time – therefore changes in line with foreign equity market prices and the ISK exchange rate. Since year-end 2020, these assets have risen by ISK 327bn, or 17%. According to CBI figures, the pension funds bought foreign currency for a total of ISK 46bn over the first eight months of 2021. Furthermore, in the first three quarters of the year, the MSCI World share price index rose nearly 20% and the S&P500 by 16%, albeit offset in part by a 2% appreciation of the ISK versus major currencies over the same period. As these figures show, the increase in foreign assets largely reflects rising foreign market prices and some asset purchases, with movements in the ISK exchange rate pulling slightly in the opposite direction.

Mortgage loans decline, yet the share of non-indexed loans rises

As a share of the pension funds’ asset portfolio, mortgage loans to fund members have increased substantially from the level seen in the mid-2010s. They peaked around mid-2020, at ISK 545bn, or just over 10% of total assets. In the past year, however, the balance of outstanding loans has contracted markedly, owing to increased demand for non-indexed loans in response to lower interest rates, whereas the pension funds have generally been more active in indexed lending. That said, non-indexed loans constitute a growing share of pension funds’ assets, accounting for just over a fourth of their household loan portfolio at the end of September.

Outlook for strong real returns in 2021

The past few years have been bountiful ones for Iceland’s pension funds. Real returns in the coinsurance and third-pillar system averaged 9.5% in 2020 and 11.8% in 2019, according to CBI data. It goes without saying that this is far in excess of the 3.5% benchmark used indirectly to assess the funds’ position vis-à-vis current and prospective pensioners. Over the past decade, in fact, the funds’ real return has averaged 5.8%, according to figures from the National Association of Pension Funds, and their ability to fulfil their future obligations has therefore increased steadily.

In the first nine months of 2021, the funds’ assets increased by 12.4%. Based on a few assumptions concerning inflows of premiums, payments of pension benefits, and withdrawals of pension savings, as well as developments in consumer prices over this nine-month period, we estimate that the pension funds’ real returns were between 5% and 6%, which corresponds to 7-8% on an annualised basis. The outlook is thus for yet another boom year for the Icelandic pension system, and it is likely that the funds’ ability to support acceptable post-retirement living standards for their members will increase even further.