Located in the remote, northern reaches of Iceland, and only a mere 100km from the Arctic Circle, the €1bn Stapi pension fund seems to have avoided the financial collapse that has crushed the country’s Reykjavik-based banks and pension funds. While there is still a great deal of uncertainty over how much anything is worth, the fund’s director Kari Karason believes that, once the annual results are in, its returns will be close to zero. This would be a remarkable achievement considering that the domestic equity market has been all but wiped out.

“We were very conservative,” says Mr Karason. “We’re hoping for 0 per cent for 2008, but it has been a difficult year. We have been very pessimistic, so we had no Icelandic equities but had some domestic corporate bonds. It has hit us, but we feel that it won’t be too bad.”

Fortunately for the fund, the vast majority of its assets were in bonds and foreign investments. At the end of November 2008, the fund had 39 per cent allocated to domestic bonds, which included government and corporates. One-quarter of its assets were in cash deposits, while another 35 per cent were in foreign assets, which included bonds, cash, private equity, hedge funds and real estate. Fortunately for Stapi, only 1 per cent of its assets were in Icelandic equities.

On another lucky note, none of the fund’s assets were managed by any of the three Icelandic banks (Kaupthing, Glitnir and Landsbanki) that were nationalised. Its money is predominantly managed by the small, local asset management firm Iceland Securities, with some assets run internally. Many of Iceland’s smaller funds have similar structures, and as a result were able to avoid much of the carnage in November 2008.

This year will be all about defending the fund’s remaining assets, something that all Icelandic schemes will have in common. It will be a predominantly domestic bond-heavy market, since the country’s equity market has vanished. Most fund managers speak of only three to five viable equities on the Icelandic Stock Exchange.

Furthermore, funds have been slapped with a new set of regulations that came into place at the end of December, which ban funds from increasing their allocations to any foreign investment. During the collapse of the domestic currency, regulators and politicians were worried that asset managers would put all of their money into foreign assets, and thereby further devalue the krona. As it stands, funds can retain their foreign assets, but if they sell them and put the money back into Icelandic assets, it stays there until the rules are changed. The same applies to the country’s investment banks and high net worth individuals. The rules will be reviewed by the Icelandic regulator in April. However, there are no signs that the rules will be either relaxed or made even tougher.

Mr Karason says that the fund will continue to be conservative and monitor the situation as it develops. He says that there is a tremendous amount of domestic risk and that the fund would look to take as much of that out of its holdings as possible. Like most Icelandic funds, he is not against the new regulations, recognising that the local currency has to be protected.

He says: “We’re like alcoholics at the moment. We take one day at a time to stay financially sober.

“Government bonds are yielding very well at the moment. So we don’t need to take much risk for performance. It’s the same with our foreign assets, where we’ll take down our equity exposure and put it into mostly money market instruments.”

Next year will certainly be a bond market in Iceland, and towards the end of the year there was considerable activity with regards to the country’s corporate and government bonds. Iceland’s government needs money badly, so Treasury bills have come out at attractive yields. However, the most startling development was when Icelandic pension funds collectively announced that they would temporarily postpone collecting payments on many of their domestic corporate bonds in an effort to ease the pressure on the country’s rattled companies.

Stapi is still collecting its bond payments, but expects to restructure several of its agreements either via suspension of payments, longer durations or lower interest rates. The thinking behind this is that it is in the country’s best interest to protect its companies. Should they fail, it would affect the wider economy and eventually the assets held in pension funds.

Mr Karason says: “It will be on a case-by-case basis. We’ll do it if it will help the company get through the current situation. If not, we won’t do it. But we expect many companies to come out and ask for their debt to be restructured. There will be a lot of restructuring going on and much more to come that must happen.”

Ultimately, Mr Karason is convinced that his fund and Icelandic pensions in general will emerge from the crisis intact. He acknowledges that the funds have been damaged, particularly in the amount of confidence that the public has in savings vehicles. However, compared to the country’s over-leveraged banks, the funds held up relatively well. They lost massive amounts with their equity holdings, but significant diversity, mainly with fixed income and overseas allocations, seems to have prevented the situation from becoming even worse.

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