Like most Icelandic pension funds, Söfnunarsjódur lífeyrisréttinda, the IKr55.6bn (€460m) Icelandic General Pension Fund, is coming to terms with a bad year. In nominal terms, the fund returned 6.1 per cent in 2007, but only pulled in 0.2 per cent adjusted to inflation, far below the country-wide target of 3.5 per cent.

“I can’t say I’m happy with our returns, but I’m satisfied. We also managed to beat all of the benchmarks we compare ourselves against. Furthermore, other pension funds had returns similar to us or lower,” says Sigurbjörn Sigurbjörnsson, managing director of the fund.

Last year was certainly a tough year for most Icelandic funds. According to Hrafn Magnusson, managing director of the Icelandic Pension Funds Association, Icelandic pension funds returned less than 1 per cent last year. But, although the investment returns were a matter of some concern, he believes it will have small impact over the long term. Mr Sigurbjörnsson is confident going forward.

“I think we have a healthy portfolio that we will benefit from this year. We are quite conservative, but have still had one of the best long-term results compared to other Icelandic pension funds,” he says. And Mr Sigurbjörnsson has good reason to feel confident. Over the last five years, his fund has posted average returns of 8.7 per cent and 5.9 per cent in average returns over 10 years.

Increasingly eager to diversify, the fund is looking to add to its already significant allocation to private equity. Including commitments, the fund currently has 6.7 per cent of its assets allocated to private equity. So far, only 3.5 per cent has been invested.

“Our aim is to have 5 per cent of the private equity allocation invested by 2010, so we will need to increase our commitments to about 8 per cent,” says Mr Sigurbjörnsson.

Its private equity investments are predominantly via funds of funds in Europe, emerging markets and Asia, but it also has some exposure to single funds.

“We like private equity very much – it gives us good exposure to all areas of the equity market. It also suits us very well and is good for covering our liabilities,” Mr Sigurbjörnsson says. He expects private equity to pull in returns 5 per cent to 8 per cent higher than listed equities.

The fund is also considering investing in hedge funds and property.

“We think hedge funds are an interesting vehicle and have also looked at real estate, but have so far not invested in any other alternatives than private equity,” says Mr Sigurbjörnsson.

Like most Icelandic funds, its asset allocation is heavily tilted towards domestic bonds, which make up 65 per cent of assets. Both its domestic bond and equity portfolios pulled in its best returns last year. Icelandic bonds turned in 10.7 per cent and domestic equities, which make up 11 per cent of assets, returned 5.5 per cent.

The remaining 24 per cent of its assets are allocated to foreign equities, foreign bonds and private equity. Its equity portfolio, which is invested in global funds, is divided equally between passive and active management. Unsurprisingly, its global equity holdings had a negative contribution, returning -6.8 per cent.

But global market volatility has not made the fund more cautious. Instead, Mr Sigurbjörnsson believes it provides good investment opportunities and says the fund is looking into how to best take advantage of that. Any fears that Iceland might be the first country to fall victim of global market turmoil is also rejected by Mr Sigurbjörnsson.

“They don’t know what they are talking about. What’s happened in the Icelandic market has been a healthy correction,” he says, while pointing out that the state does not really have any debts.

The General Pension Fund has an impressive amount of members, which includes more than a third of the Icelandic population. But despite its 116,000 members, out of a population of 316,000, it only has assets of €460m. The explanation can be found in the fund’s name, the General Pension fund, which signifies its particular role in the Icelandic pension system.

Unlike most other second pillar pension funds, which are industry-wide, it does not have any direct relationship with the labour market. Instead, it is a part of the government and acts as the pension fund for workers who do not belong to any specific pension scheme.

“We have a special role in the pension system to close the gap in the Icelandic pension fund model,” says Mr Sigurbjörnsson.

The fund, which was set up in 1974, also manages the assets of those who do not pay contributions. Together with the tax authorities, the fund, every year, ensures that companies follow the mandatory second pillar system and are paying its contributions. If not, the General Pension Fund collects the premiums. It also takes on members from other pension funds, which have got into trouble or become too small. The fund also competes for members and is open for selection.

“Our members rate our fund highly. The reasons are low costs and stable returns,” says Mr Sigurbjörnsson. About 7,800 people contribute to the fund every month.

• Location: Reykjavik
• Assets: IKr55.6bn (€460m)
• Members: 116,000
• Active members per month: 7,800
• Pensioners: 5,000

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