New authorisation for pension funds’ foreign investment
The Central Bank of Iceland has decided to grant pension funds and other domestic custodians of third-pillar pension savings an exemption from the Foreign Exchange Act, no. 87/1992, thereby permitting them to invest in financial instruments issued in foreign currency. The total authorisation, which amounts to 15 b.kr., remains in effect until the year-end. From mid-2015 through end-September 2016, the above-specified parties have been authorised to invest abroad for a total of 80 b.kr. In 2016, the authorisations granted amount to 85 b.kr., including those announced with this press release.
Foreign currency inflows year-to-date and reduced uncertainty about developments in the balance of payments following the recent foreign currency auction and the failed banks’ estates on the basis of stability conditions have created the scope to authorise pension funds and other third-pillar pension savings custodians to invest further in foreign-denominated financial instruments. This exemption for foreign investment is smaller than before for precautionary reasons, owing to the recent passage of amendments to the Foreign Exchange Act, no. 87/1992, which represent important steps in the liberalisation of capital controls on individuals and firms. This is in accordance with previous statements to the effect that the pension funds would be granted generous investment authorisations during the prelude to liberalisation of controls on individuals and firms but that authorisations would be reduced during the first steps towards general liberalisation. In this context, reference is also made to the Central Bank of Iceland’s 19 August 2016 analysis of potential outflows upon capital account liberalisation.
As before, the grounds for the exemption are that there are macroeconomic benefits associated with allowing the pension funds to diversify the risk in their portfolios and reduce their pent-up investment need before the controls are lifted in full. This, in turn, reduces the risk of monetary and exchange rate instability upon liberalisation of the controls. In the long run, these increased investment authorisations over the months to come will have minimal impact on the foreign exchange position, as it can be assumed that the pension funds’ foreign currency purchases in coming months will reduce their need to buy currency in the future.
The investment authorisation will be divided among pension funds and other custodians with reference to total assets, to be weighted at 83%, and premiums net of pension benefit payments, to be weighted at 17%. The calculations are based on information from the Financial Supervisory Authority’s most recent publication of key annual accounts data, which contains figures for 2015. Under the exemption, each party’s authorisation will remain valid through 31 December 2016 and will be spread equally over the three months from October through December.
Pension funds that have operating licences according to Chapter V or XI of Act no. 129/1997 and other domestic custodians of third-pillar pension savings that have received confirmation from the Ministry of Finance and Economic Affairs on the basis of Article 10 of Act no. 129/1997 and are interested in applying for an exemption from the Foreign Exchange Act, no. 87/1992, for the aforementioned investments are invited to submit an application to the Central Bank of Iceland. The exemption application form can be found on the following page: Application form.
Applications should be sent to the Bank by postal mail at the following address:
Central Bank of Iceland
att’n: Capital Controls Surveillance Unit
Further information can be obtained from Már Guðmundsson, Governor of the Central Bank of Iceland, at tel: +354 569-9600.
19 October 2016