Why having so much pension money is such a puzzle in Iceland – Financial sector – Economy

It’s one of those first global problems that we would like to have in Latin American countries: “I don’t know what to do with so much money.

Although this is a caricature, the truth is that Iceland’s pension system, which has been ranked among the best performing in the world, has such enormous resources that there is now a debate in country to find out what is the best way to invest these funds.

With assets nearly twice the size of the island economy in the North Atlantic, the government led by environmentalist and ecologist Katrín Jakobsdóttir is exploring the idea of ​​allowing companies that manage Icelanders’ funds to invest more abroad.

Currently, the rules limit these investments of funds abroad to 50%.

“The system has grown too big,” Finance Minister Bjarni Benediktsson said in a local press interview in December.

“It goes without saying that we cannot limit all investment opportunities to the internal market,” he said.

“The consequences of your own success”

With an amount of resources close to 200% of gross domestic product (GDP), or about 50,000 million US dollars, “the system is now facing the consequences of its own success”, explains Hans van Meerten, professor of law, in a dialogue with BBC Mundo. European Pension Board of the University of Utrecht, The Netherlands.

Iceland has a system of compulsory participation in a pension fund, explains the researcher, as in many economies in Europe.

But unlike the Netherlands, for example, Iceland has a lot more freedom in choosing a pension fund.

Another difference is that participation is also compulsory for the self-employed, notes van Meerten, while in most European countries it is not.

These kinds of characteristics set it apart from the rest.

Iceland became “the best pension system in the world” in October, according to the Global Pension Index prepared by the Mercer-CFA Institute, a recognized measure that compares pension systems in 43 countries each year, accounting for around 65% of the world’s population. .

This ranking assigns different score values ​​which are separated into three main categories: system adequacy (which weighs 40% in the assessment), sustainability (35%) and regulatory framework (25%).

In 2021, Iceland achieved the highest score with 84.2 points, showing strengths such as a “relatively generous” public pension, a well-regulated and managed private pension system and high contributions.

The Netherlands and Denmark were second and third on the list.

Iceland is “very well prepared for the time bomb that you see everywhere: aging,” says van Meerten.

“It has a unique combination of private and public pensions that largely prevents senior poverty for working and non-working people.”

But… how does the system work?

In short, it is based on three pillars: a public pension paid by the state, a compulsory pension to which workers and employers contribute, and a voluntary private pension.

  • the public pension, financed by taxes, has two modalities.

A base that covers the entire population, with the exception of people with higher incomes, and a complementary one, which also has limits in relation to personal income.

  • The second pillar is the compulsory work pension. The law establishes a minimum contribution of 12% of the salary, where the employee pays 4% and the employer 8%.

However, the most common contribution scheme in the country is 15.5%, where the employer pays 11.5% and the worker 4%, thanks to union negotiations.

The law establishes that for people who have accumulated savings during 40 years of work, the amount of the pension must be at least 56% of the average income they have obtained during their working years and paid for life , according to data from the Organization for Economic Cooperation and Development (OECD).

Pensions in Iceland.  In the compulsory labor savings system. [ 56% de su ingreso promedio es el mínimo que debe recibir como pensión una persona que trabajó 40 años. ], Source: Source: OECD, Image:

The final amount of the pension depends on the financial position of the accumulated funds, but should, at a minimum, be linked to the consumer price index.

  • And the third pillar is a voluntary savings.

Workers in the private sector can retire at 67 and those in the public sector at 65. However, most people continue to work for better benefits.

Protect yourself from big risks

This country of only 370,000 inhabitants and whose economy depends heavily on tourism, has not been spared by international economic cycles of boom and bust.

This is how the crisis triggered by the bankruptcy of the American investment bank Lehman Brothers in 2008 and the Great Depression triggered by “toxic mortgages” paralyzed its huge banking sector, almost wiped out the national stock market and made the system lose. pension more than 20% of its resources.

Faced with this crisis, the country has decided to be much more careful in how to protect itself against a wave of international financial risks.

But now that some of its funds are approaching the limit on overseas investment, calls for an increase have started to proliferate.

The debate is hard because the more money you invest abroad, the more likely you are to be seriously affected in the event of a new crisis.

In any case, the authorities have warned that any increase in the internationalization of pension funds should be gradual and in line with developments in the national economy.

Opponents of the proposal argue that a significant change could destabilize the local currency at a time when the country faces a contraction in the tourism sector due to the Covid-19 pandemic.

Indeed, at the height of the covid-19 pandemic in 2020, the central bank of Iceland made a pact with pension funds to stop overseas investments for six months, in an effort to protect the rate. exchange, the crown.

The Icelandic Pension Fund Association proposes a total elimination of the investment limit or, failing that, a range of 60% to 65%.

So far, the government is evaluating the different scenarios before making a proposal to generate consensus.

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BBC-NEWS-SRC: https://www.bbc.com/mundo/noticias-59823322, IMPORT DATE: 2022-01-03 05:00:07