An Overview of the Icelandic Occupational Pension System

The Icelandic Pension System is based on three pillars. A tax financed public pension scheme, which is means tested, mandatory funded occupational pension schemes (the pension funds) and a third pillar of voluntary private pension savings.

In December 1997 the Parliament passed legislation (no. 129/1997) on mandatory insurance of pension rights and on activities of pension funds. This Act commonly referred to as the Pension Act enterd into force 1 July 1998. From that time the pension funds, which were operating under older legislation, had one year to apply for an operating license in accordance with the new act.

The Act is intended to provide a comprehensive legal framework for the pension funds and for pension savings whereby the rights of pension fund members are clearly defined. The obligations of pension funds, both as payers of pensions and investors, are spelled out in the Act and rules are set with the aim of ensuring the funds financial soundness. Furthermore, the Act sets up a framework for voluntary pension savings plans. Subsequent amendments to the Tax Code have proven a good incentive for people to invest into such savingplans.

According to the Pension Act, all employees and self-employed persons, between the ages of 16-70, are obliged to be a member of an approved pension fund. The minimum contribution to the pension fund is 10% of total earnings (all types of taxable wages). A specific mechanism (exchange of information between the funds and tax authorities) has been created to ensure that everyone pays. The contribution can be split into two parts. The first part shall ensure the member a minimum benefit. This minimum shall provide the person who pays for 40 years a live long old-age pension every month amounting to at least 56% of monthly wages from which contribution was paid. Furthermore, it shall ensure a minimum disability and survivors pension, which are defined in the Act. The second part can go either towards acquiring additional pension rights in a pension fund or into individual pension plans (accounts). The funds define the minimum benefit. One fund can e.g. define it so that all of the 10% contribution goes to cover minimum benefits, while another might e.g. only need 8% for the minimum and then the extra 2% can be saved elsewhere. Banks, insurance companies, securities undertakings and pension funds can receive contributions for supplementary insurance benefits.