Total assets under management at Iceland’s Pension Fund for State Employees (LSR) reached a record high of ISK 1,664bn at the end of 2025, equivalent to about one third of Iceland’s gross domestic product (GDP).

In its 2025 annual report, the pension fund described its performance as “good despite challenging conditions in financial markets”. It made a real return of 2.7 per cent during the year, and its assets increased by just over ISK 107bn.

The pension fund’s main division, the A division, also ended the year with a positive actuarial position of 0.8 per cent, marking a second consecutive year in positive territory. The fund had around 32,000 active members at the end of 2025, and it paid out more than ISK 117bn in pension and private pension benefits.

Regarding asset allocation, LSR Board chair, Jökull Heiðdal Úlfsson, noted that US assets are currently “somewhat underweighted” in the pension fund’s portfolio, with no changes expected in the near term due to concerns it has with the US and that the króna strengthened by almost 10 per cent against the US dollar in 2025.

Heiðdal Úlfsson said: “The year 2025 was truly a year of upheaval, especially in global affairs and international markets. The war in Ukraine and conflicts in the Middle East continued without respite, and following the US presidential transition at the beginning of the year, uncertainty increased in both international politics and financial markets.

“Unpredictable decisions on tariffs in international trade caused significant market volatility and increased costs, contributing to global inflation.

"Statements by US officials regarding a possible takeover of Greenland – opposed by European nations – created considerable uncertainty in relations between Western countries at the end of last year.”

He added that further concerns exist in the US, where public debt has grown rapidly, and market returns have increasingly been driven by a small number of large technology companies linked to artificial intelligence (AI) development.

In terms of sustainability, Heiðdal Úlfsson noted that 2025 marked a “notable setback”, citing weakened US regulation and the European Union’s decision to simplify its sustainability regulatory framework.

“This is a worrying short-sighted development. While regulation should not go too far, sustainability efforts must not be abandoned. As long-term investors, we have a duty not to deplete natural or social resources in ways that reduce future generations’ quality of life.

“For pension funds, this is not only about positive societal or environmental impact, but about reducing the financial risks associated with unsustainable activities. Such risks can materially affect the long-term value of LSR’s portfolio.

“Since sustainability risks typically materialise over long horizons, it is essential that the fund identifies and addresses them systematically, as this supports long-term investment performance.”

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