Vulnerability of pension fund balances

Abstract

Although the Icelandic general labour market pension funds are built on the proviso that pension schemes are fully funded these funds are still grappling with the devastating financial effects of the 2008 economic collapse that rendered most of them in a significant actuarial deficit. The public sector pension funds are based on an employer guarantee that makes up for any lack of funding that historically has been quite significant. We identify the relatively high actuarial discount rate and increasing longevity as two factors that add to the vulnerability of the Icelandic pension system. We present a stochastic model in order to obtain reasonably sound estimates of the effect of revising such key parameters of the actuarial assessments of the pension funds and thus obtain a view of the viability of the Icelandic pension system when confronted with the potential necessity of such parameter shifts. We present results of stochastic simulations of this models made to assess effects of changes in these major financial and demographic assumptions in actuarial evaluations of pension fund balances. Our results suggest that the Icelandic pension funds may be significantly less well funded than is generally perceived.