Foreign Investment Limits Loosened for Icelandic Pensions

The Central Bank of Iceland has announced measures to relax some foreign investment limitations imposed on the country’s pension funds during its financial crisis.

It is to grant exemptions from the Foreign Exchange Act, which prevented investors from buying international currencies, which would have increased pressure on the Icelandic króna.

An upturn in the economy and increased inflows of foreign currency to the island encouraged the move, the bank said.

“Such investments represent a benefit to the national economy in that they will enable the pension funds to achieve a better spread of risk in their asset portfolios while reducing the build-up in pension funds’ foreign investment requirements once capital controls are lifted,” the bank said.

The total authorised for such investments will amount to ISK 10 billion ($74 million), with pension funds applying for permission to be allocated an amount, based on their size and inflows. The exemptions will last until the end of the calendar year.

In 2013, CIO spoke with the head of risk management at one of Iceland’s largest pensions. Hlynur Þór Björnsson of the Gildi Pension Fund explained how the crisis virtually wiped out domestic stocks and led institutional investors to shift abruptly from only managing assets, to focusing on risk.

“There are capital controls, which mean we cannot buy US dollars—there’s just us and Cuba in that situation,” said Björnsson.  At that time, just 25% of the pension’s assets were invested in foreign stocks through mutual funds, the rest were held in domestic securities.

“There’s not a lot to choose from so the concentration risk is high,” Björnsson said.

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