28 December 2016

Pension funds’ authorisation for foreign investment in 2017

Central Bank of Iceland

The Central Bank of Iceland has decided to grant pension funds and other domestic custodians of third-pillar pension savings a new 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 100 b.kr., remains in effect until year-end 2017. From mid-2015 through end-2016, pension funds and other domestic custodians of third-pillar pension savings have been authorised to invest abroad for a total of 95 b.kr., 85 b.kr. of it in 2016.

The amendments to the Foreign Exchange Act, no. 87/1992, that entered into force in October entailed important steps towards lifting capital controls on individuals and firms. Thus far, capital outflows from Iceland have been limited, and there are few indications that this will change radically after restrictions on foreign investment have been further eased and transfers of deposit balances authorised at the beginning of 2017.

Iceland’s foreign exchange position has improved markedly, concurrent with strong foreign currency inflows, owing in part to a record current account surplus in Q3/2016, and the likelihood of large foreign currency outflows in the wake of further capital account liberalisation has diminished substantially. As a result, it is now possible to grant authorisations for foreign investment over a longer horizon than before – that is, for the entirety of 2017 – as well as increasing the maximum authorisation from the 2016 level. This will better enable pension funds to prepare investment plans and will promote more efficient foreign securities purchases. As before, however, it will be required that the pension funds distribute their investments more or less evenly over the year. The authorisation for 2017 is based on granting the funds maximum scope for foreign investment, but without selling domestic assets or pulling out of the domestic bond market to a disruptive degree. The authorisation is granted with the proviso that amounts could change if the scope for foreign exchange purchases proves considerably less than is envisaged at present; for instance, if the balance of payments should develop unfavourably or other circumstances should change. If foreign currency inflows continue to be strong in 2017, however, it may be possible to increase the pension funds’ authorisations for foreign investment.

As before, the rationale for such an authorisation is that there is an economic advantage in enabling the pension funds to further diversify the risk in their asset portfolios. Furthermore, it is desirable to mitigate the pension funds’ accumulated need for foreign investment before the capital controls are finally lifted, thereby reducing the risk of monetary and exchange rate instability. In the long run, these increased investment authorisations will have minimal impact on Iceland’s foreign exchange position, as it can be assumed that the pension funds’ foreign currency purchases in 2017 will reduce their need to buy currency later on.

The investment authorisation will be divided among pension funds and other custodians with a view to total assets, to be weighted at 86%, and premiums net of pension benefit payments, to be weighted at 14%. 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 2017 and will be spread equally over the twelve months of the year.

Pension funds that have operating licences according to Chapter V or Chapter 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
Kalkofnsvegur 1
150 Reykjavík

Further information can be obtained from Már Guðmundsson, Governor of the Central Bank of Iceland, at tel: +354 569-9600.

No. 33/2016