Pension funds in Iceland Hrafn Magnússon Managing Director National Association of Pension Funds Reykjavík September 30th 2005.
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Pension funds in Iceland Hrafn Magnússon Managing Director National Association of Pension Funds Reykjavík September 30th 2005
The pension system The Icelandic pension system is developing according to the three pillar principle: A tax financed and means tested public pension A mandatory membership in occupational pension funds A free individual pension saving with tax incentives
History The foundations of the present day pension fund system in Iceland were laid by general wage settlements in the spring of 1969, where the labour unions traded wage increases for the setting up of fully funded mandatory occupational pension funds from the beginning of 1970.
Icelandic pension funds At the beginning of 2005 there were 48 pension funds in Iceland. Of these, 10 were no longer receiving contributions. 10 had employer guarantees from the government and municipalities. There were 28 fully operational occupational pension funds that do not have an employer guarantee.
Occupational pension schemes It has been estimated that according to present rules a typical general occupational pension fund will pay a pension amounting to 45- 58% the earnings and that the basic public pension might add another 11%, giving a total replacement ratio of 60-70%.
The Pension Act Passed into law in 1997 Minimum pension rights and forms of pension are defined. General requirements for operating pension funds regarding size, risk, internal auditing and funding are defined.
The Pension Act cont. Full funding All pension funds shall be fully funded except those that are guaranteed by central or local government. Full funding is defined in such a way that the divergence between the present value of assets and liabilities can not be more than 10% for a year or 5% over a period of five years.
Benefits All pension funds on the general labour market in Iceland pay old age, disability and survivors' pensions. The main rule is that members can begin to withdraw old-age pensions at the age of 67. It is, however, possible to start withdrawing pension as early as 65, but then with a reduced benefit, or as late as 70 with additional benefits.
Benefits cont. The accumulated pension rights in funds on the general labour market are price indexed and not linked to wages and salaries. In 2004 60,2% of the pensions paid by these funds were for old age. 27,5% for disability 10,2% was for survivors’ And 2,1% for childrens’
Number of Icelandic Pension Funds in the end of the year 1991 to 2004
Ten largest Icelandic Pension Funds as a proportion of total assets.
Assets Assets of Icelandic pension funds amounted to 987 b.kr. at the end of 2004 or 110 % of GDP. 2004 the assets increased 20,1% or 15,4% over CPI.
The problem of ageing Smaller than among most developed European countries: The Icelandic nation is younger than many other European nations and the problem of ageing will thus be less during the first decades of this century. High labour participation rates of the elderly Mandatory membership of fully funded pension funds (at least 10% of wages)
The Icelandic nation is younger than among most developed European countries and will continue to be so well into this century
A free individual pension saving – the 3 rd pillar Employees are allowed to deduct from their taxable income a contribution to authorised individual pension schemes of up to 4 per cent of wages.
A free individual pension saving – the 3 rd pillar – cont. Employers have further accepted in wage settlements to contribute 2 per cent to voluntary pension saving. The total contribution can therefore become 6.0 per cent for those that have decided to pay 4 per cent to voluntary pension schemes.
A free individual pension saving – the 3 rd pillar – cont. The schemes are in most cases defined contribution individual accounts. (DC plan)
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