Return and risk of supplementary pension savings in Iceland

Abstract

This article examines returns, risk, and costs in the Icelandic supplementary pension savings system and compares its performance with that of the mutual insurance divisions of pension funds. The study is based on data from the Financial Supervisory Authority of the Central Bank of Iceland on sub-funds in the supplementary pension system over the period 2000–2024. The results indicate that supplementary pension savings funds have, on average, delivered lower returns than mutual insurance funds. The difference amounts to approximately 112 basis points per year on average, and around 50–54 basis points when controlling for asset allocation, risk, and other explanatory variables. At the same time, the risk of supplementary pension funds is found to be significantly higher. A substantial share of supplementary pension savings is also held in bank deposits, which have generated very low returns relative to the risk-free rate and can in most cases hardly be considered an appropriate investment vehicle for long-term savings of this type. The findings suggest that the institutional framework of supplementary pension savings—where individuals choose both participation and investment options, and where profit-seeking financial institutions play a major role —has had a negative effect on the system’s performance, due to weaker asset management outcomes and higher costs.