One consequence is that the Icelandic Treasury’s future pension payments burden is negligible compared to most other industrial countries. Of course this represents an enormous economic and social strength for Iceland. The pension funds’ huge assets also impose a great responsibility on their management, who must invest these resources securely and profitably. Furthermore, relative to Iceland’s economy, the pension funds are now at a size where they can have a massive impact on developments in the domestic financial sector. In recent years, Icelandic pension funds have been consistently investing part of their disposable funds in foreign securities. They have considerable scope for making foreign portfolio investments, which by the end of March were estimated at almost 30% of their total assets. Holdings are mainly in foreign equity funds, but they have also invested in mixed funds and individual corporations. Pension funds have also been major players in the domestic equity market. At the end of March 2006, their  BIS Review 46/2006  3  estimated holdings exceeded 200 b.kr. and constituted 16% of their total assets. At the end of 2004, pension funds owned an estimated 12% of all equities listed on Iceland Stock Exchange. Corporate lending by pension funds has also grown rapidly. It is vital for pension funds to exercise the utmost care in their domestic equity investments, and to be cautious about wielding the power that these investments grant them. Likewise, diligence in corporate lending must be an important consideration for pension funds, to avoid an inordinate degree of risk.
The reasons are large year-classes approaching retirement age, increased longevity and a lower birth rate. Conditions are quite different in Iceland, where age distribution is changing more slowly than in most countries with similar economies. Iceland’s retirement pension system is based on all working persons saving a proportion of their wages in a fund which is then used to pay their pension. Taxes therefore does not need to be raised even if there is a proportional rise in the number of pensioners. In addition to pension funds, some pensions are paid through the national insurance benefit system and there are also voluntary supplementary pension savings schemes. Iceland’s pension system thereby fulfils what has been considered international best practice in this field [the three-pillar system]. Total assets of Icelandic pension funds were equivalent to 120% of GDP at the end of 2005. No other pension system in the world is on such a strong footing. At the end of 2004, when total assets of Icelandic pension funds corresponded to more than 100% of GDP, the figure for the Netherlands was just over 100% and for the US 80-90%. In the overwhelming number of industrial countries, total assets of pension funds were equivalent to less than 20% of GDP, and the ratio was even lower than 10% in many countries, including Germany, Italy, Belgium, Austria, Sweden and Finland. By comparison, assets of Norway’s Government Pension Fund (Petroleum Fund) last year were equivalent to 60% of GDP.