The tourism-dependent nation has long been vulnerable to boom-bust cycles. The turmoil that followed the bankruptcy of Lehman Brothers in the autumn of 2008 crippled its outsized banking sector, almost wiped out the domestic stock market and caused the retirement system to lose more than 20%. With some funds nearing the cap on foreign holdings, calls to raise it have grown louder recently.
Even so, Gov. Asgeir Jonsson said any increase in overseas investing by pension funds must be incremental and in line with the developments in domestic economy. Too drastic a change risks destabilizing the krona, just as the country deals with a pandemic-induced slump in overseas visitors too.
"We have to earn the currency they use to invest abroad by selling fish or other exports like tourism," he said in an interview.
The central bank last year made a pact with the pension funds to halt foreign investments for six months at the height of the pandemic to protect the exchange rate of the krona and reduce its fluctuations.
Iceland's retirement system outclasses all others in the Mercer CFA Institute Global Pension Index ranking published in October, having displaced the Netherlands and Denmark as the long-time leaders by joining the list for the first time.
Strengths include a "relatively generous" state pension and a well-governed and regulated private system covering all employees who contribute a high share of their income.
Working Icelanders, including contractors and part-timers, must pay at least 12% of their salary into a pension. Most employment contracts mandate a 15.5% contribution, of which the employer pays 11.5%.
While foreign assets of retirement funds have grown steeply during the crisis as global stock markets surged, net foreign currency purchases have eased, the central bank said last month. Some funds have approached internal limits for overseas holdings as a share of the total and have been forced to pull back on new investments abroad.
With such strains showing, the Icelandic Pension Funds Association is proposing an outright removal of the investment cap, or as an alternative, setting a range of 60% to 65%. Mr. Benediktsson is preparing an assessment on the matter, and expects the government to resolve it within its first year in office, though he's aware of the risks.
"We need to listen when the funds say they need more leeway for foreign investments," he said. "But every step needs to be thought through when it comes to this."