Icelandic savers could lose millions of krónur over their working lives by selecting unsuitable or expensive private pension investment options, Iceland’s Pension Fund for State Employees (LSR) has warned.

In an article originally published by Vísir, LSR chief executive, Harpa Jónsdóttir, said private pension saving remained one of the most attractive ways to build retirement wealth, but stressed that investment returns and charges could have a significant impact on long-term outcomes.

Under Iceland’s private pension system, an individual who contributes 2 per cent of their salary can receive a matching 2 per cent employer contribution, effectively doubling the value of the initial employee payment.

Jónsdóttir noted that this made it difficult to match private pension savings through other savings methods.

She illustrated the long-term impact with the example of a worker earning ISK 700,000 a month who begins saving 4 per cent of their salary at age 22.

Assuming an annual return of 3.5 per cent, the individual could accumulate approximately ISK 55m by the age of 67.

However, reducing the assumed return to 2.5 per cent would lower the final fund to around ISK 42m, representing a difference of ISK 13m.

Indeed, research by University of Iceland professor of economics, Gylfi Magnússon, and London-based asset management professional, Kári Sigurðsson, compared returns from private pension savings with those generated by Icelandic pension funds’ mutual insurance divisions.

It found that average returns from private pension savings were 1.12 percentage points lower than returns from mutual insurance arrangements.

Jónsdóttir warned that while this difference may appear relatively modest, its effect can compound significantly over the course of a full working life.

According to the article, Magnússon attributed the return gap primarily to higher provider costs and to savers' selection of unsuitable investment options.

Private pension assets are often managed by commercial financial institutions, where charges can reduce returns, while pension fund mutual insurance divisions are operated for the benefit of their members.

Savers may also select deposit-based options that provide stability but are not necessarily appropriate for long-term investment.

Jónsdóttir acknowledged that the findings were concerning, but stressed that savers could improve their outcomes by choosing funds with lower costs and investment strategies focused on long-term returns.

She highlighted Icelandic pension funds as one option, noting that they are owned by their members and do not operate to generate profits for external shareholders.

They also avoid some of the sales and distribution costs associated with other private pension providers.

With this in mind, Jónsdóttir argued that savers should focus on two principal considerations when selecting a private pension arrangement: whether the investment strategy is designed to generate long-term returns and whether charges are kept at a competitive level.

“Private pension saving is a great way to save, but the research shows that savers can get much more from it by choosing the right option,” she added.

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