Industry prepares to climb Iceland’s cash mountain

Iceland is in the grip of capital controls stemming from its disastrous foray into leveraged banking in the past decade, but asset management services providers such as Advent Software are beating a path to this northern outpost because those controls are keeping pension contributions and net investments in a limited range of asset classes, including cash, with investors desperate to find improved yields.

Advent, which makes software for asset managers, together with local partner Applicon, co-hosted a seminar for an audience of financial services sector professionals in Rejkjavik on 24 November. At the seminar, it was noted that Iceland’s recovery from its financial crisis in 2008 had progressed sufficiently for the industry to now start contemplating further investments in IT infrastructure required to take advantage of the key characteristics of the market.

Applicon works across the Nordic region with financial groups. Its managing director Ingimar Bjarnason said that there were a number of compelling reasons to push IT solutions into the local financial services industry at the current time: partly the market is looking for more sophisticated solutions, he said; partly there are increasing regulatory demands; partly institutions are tiring of developing their own solutions in-house, particularly in mind of the brain drain threat currently hanging over the country (see below); but mostly because it is felt that the sector needs to “prepare for growth going forward”.

Growth in domestic assets held by investors remains very much in the hands of indstitutional and pension fund investors, rather than the retail sector, where risk aversion remains high.

Iceland, unlike most of western Europe, has a young population, with a low dependency ratio, which has resulted particularly in continued net contribution year-on-year to portfolios run on behalf of pension funds. These funds are required by law to achieve a 3.5% return.

Birgir Stefánsson, investment manager Foreign Assets for LSR, the Pension Fund for State Employees – the biggest of its kind in the country – noted that the buckets into which net contributions can be made are effectively limited to government securities, cash and certain other assets such as property or private equity. This is because of the impact of the capital controls.

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