Return on assets and risk for Icelandic pension funds 1993-1997

Abstract

This article analyzes the return on investments by mutual insurance pension funds in Iceland in the period 1993-2017. Chapter 1 provides a historical overview and discusses prior research, Chapter 2 provides an overview of the methodology used, Chapter 3 contains the main numerical results and Chapter 4 further analysis. The time period was chosen as the Icelandic Financial Supervisory Authority (FME) has made data available on individual pension funds for all these years. Data for the first 4 years is however limited. Thus, the main focus is on the period 1997-2017. We also analyze returns for various subperiods. The return on the assets of the pension funds as a whole has been reasonable in light of the collapse of Iceland’s financial market and as can be expected given the yield on the asset classes that the funds mainly invest in. The average annual real return was 3,73%. Their overall return is quite similar to the risk-free return over the period so they have not benefitted from any risk premium, despite investing to a degree in risky assets. The return across funds varies significantly. This will inevitably affect their ability to provide pensions. In addition, there is a substantial difference in the demographics of the workers behind each fund. This will also affect their ability to pay out pensions. The system thus generates substantial risk for future pensioners, leading to differences in the standard of living that they will be able to afford depending on which fund they have paid into. The structure of the pension system could be changed to address this, substantially reducing the risk facing individual pensioners.