This is one of those first-world problems that we would like to have in Latin American countries: “I don’t know what to do with so much money.”
Although it is a caricature, the truth is that Iceland’s pension system, which has been listed as one of the most successful in the world, has such a gigantic amount of resources that there is now a debate in the country about what is the best way to invest those funds.
With assets reaching nearly twice the size of the North Atlantic island’s economy, the government led by environmentalist and environmentalist Katrín Jakobsdóttir is looking at the idea of allowing companies that manage Icelanders’ funds to make more investments abroad.
Currently, the rules limit those investments of funds abroad to 50%.
“The system has become too big”Finance Minister Bjarni Benediktsson said in An interview with local media in December.
The consequences of their own success”
With an amount of resources close to 200% of the Gross Domestic Product (GDP), about $50 billion, “the system now faces the consequences of its own success,” Hans van Meerten, professor of European Pension Law at Utrecht University, the Netherlands, told BBC World.
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 much more freedom to choose a pension fund.
Another difference is that participation it is also mandatory for self-employed workers, van Meerten points out, while in most European countries it is not.
Those kinds of features set it apart from the rest.
Iceland became in October in “the best pension system in the world”, according to the Global Pension Index prepared by mercer-CFA Institute, a renowned measurement that each year compares retirement systems in 43 countries, representing about 65% of the world’s population.
This ranking assigns different score values that are separated into three broad categories: system sufficiency (whose weight is 40% in the evaluation), 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 private pension system. well regulated and managed, and high contributions.
The Netherlands and Denmark ranked second and third on the list.
Iceland is “very well preparedor for the time bomb that we see everywhere: aging,” says van Meerten.
“It has a unique combination of private and state pensions that greatly prevents poverty in the old age of workers and non-workers.”
But how does the system work?
In short, it has three pillars: a public pension paid by the State, a compulsory pension to which workers and employers contribute, and a voluntary private pension.
Pension system in Iceland
It has 3 pillars: a public system, a compulsory labor system and a voluntary one.
15.5%The most common contribution as a percentage of a worker’s salary (in the compulsory labor system).
11.5%employer’s contribution
4%the worker’s contribution
Source: OECD
The public pension, financed with taxes, has two modalities.
A basic one that covers the entire population, except for people with higher incomes, and a complementary one, which also has limits in relation to personal income.
The second pillar is the compulsory occupational 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 states that for those people who accumulated savings during 40 working years, the amount of the pension should be at least 56% of the average income they obtained in their working years, and paid for life, according to data from the Organization for Economic Cooperation and Development (OECD).
In the mandatory system of labor savings.
56% of your average income is the minimum which must be received as a pension by a person who worked for 40 years.
Source: OECD
The final amount of the pension depends on the financial situation of the accumulated funds, but must, 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 from the age of 67 and those in the public sector at the age of 65. However, most people continue to work for better benefits.
Protect yourself from big risks
This country, of just 370,000 inhabitants and whose economy depends to a large extent of tourism, has not been exempt from international boom-bust economic cycles.
This is how the crisis triggered by the bankruptcy of the American investment bank Lehman Brothers in 2008 and the Great Crisis unleashed from the “toxic mortgages”, paralyzed its huge banking sector, almost swept the national stock market and caused the retirement system to lose more than 20% of its resources.
Faced with that crisis, the country decided to be much more cautious in how to protect itself against a wave of international financial risks.
But now that some of its funds are approaching the limit of overseas asset investment, calls to increase it. they have begun to proliferate.
The debate is hard because the more money is invested abroad, the greater the chances of being badly hurt in the event of a new crisis.
However, the authorities have warned that any increase in the internationalization of pension funds should be incremental and in line with the way the national economy evolves.
Opponents of the proposal argue that a major change can destabilize the local currency at a time when the country is facing a contraction of the tourism sector due to the covid-19 pandemic.
In fact, at the height of the COVID-19 pandemic in 2020, Iceland’s central bank made a pact with pension funds to stop investments abroad for six months, with the aim of protecting the exchange rate, the crown.
The Icelandic Pension Fund Association proposes a total elimination of the investment limit or, alternatively, setting a range of 60% to 65%.
So far, the government is evaluating the different scenarios before making a proposal to generate consensus.
