19 May 2016

Pension funds' authorisation for foreign investment

Central Bank of Iceland

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 amount of the authorisation, which remains in effect until end-June 2016, is 10 b.kr. From mid-2015 through the end of the first third of 2016, pension funds have been authorised to engage in foreign investment for a total of 30 b.kr.

Foreign currency inflows year-to-date and reduced uncertainty about developments in the balance of payments following creditors’ approval of composition proposals from the estates of the failed commercial and savings banks that received exemptions on the basis of stability criteria have created the scope to authorise pension funds and other third-pillar pension savings custodians to invest further in foreign-denominated financial instruments. The Central Bank is still accumulating foreign currency for the planned auction of offshore krónur and the liberalisation of capital controls on residents of Iceland; therefore, it has been decided to keep the pension funds’ monthly foreign investment authorisations unchanged at this time. 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. 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 a view to total assets, to be weighted at 80%, and premiums net of pension benefit payments, to be weighted at 20%. The calculations are based on information from the Financial Supervisory Authority’s Statistical Information 2015, which contains figures for 2014. The exemption will remain in effect through 30 June 2016.

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 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. 9/2016
19 May 2016