Iceland Pension Funds Reject Taking Losses on House Bonds

Iceland’s pension fund will need full compensation for any changes to the terms of bonds issued by the Housing Finance Fund, the head of the Icelandic Pension Fund Association said.

“The pension funds won’t even discuss changes to the terms of HFF’s bonds unless it’s clear that they are fully compensated,” Thorey S. Thordardottir said in a telephone interview. “Legally, the pension funds aren’t allowed to negotiate differently.”

Iceland’s government is struggling to find a solution for the HFF, which has about $4.2 billion in bonds outstanding. The lender is teetering near insolvency as its inflation-linked home loans lose ground to regular mortgages from commercial banks. Iceland’s Treasury may be on the hook for more than 100 billion kronur ($830 million) due to HFF’s financial difficulties, Landsbankinn hf said in June.

Finance Minister Bjarni Benediktsson in June called on HFF’s bondholders to show “flexibility” should the fund try to negotiate new terms on its outstanding debt. Welfare Minister Eyglo Hardardottir, who oversees the HFF, said in a May that she wants “radical” changes to the country’s housing market.

The government hasn’t approached the pension funds to discuss new terms on the bonds, said Thordardottir. Agreeing to change the terms without compensation could make the board members of Iceland’s 31 pension funds liable for damages to their members.

The Bleeding

“The assets of the pension funds aren’t any different than assets owned by the general population,” she said. “Those assets are protected by the constitution and that protection has been repeatedly upheld by the Supreme Court.”

Benediktsson in an interview yesterday said the government will publish its expectations for HFF in the budget that will be presented to parliament on Oct. 1.

“It’s clear that we have to decide the future structure of the fund, that is, what role it should play, how we’re going deal with the aggregated problem and stop the bleeding,” Benediktsson said. “That work is underway.”

HFF had a capital adequacy ratio of 3.2 percent at the end of last year, compared with a 5 percent minimum requirement set by the regulator, the fund said in March. The Reykjavik-based lender said defaults on home loans increased by 0.17 percent to 12.92 percent of the portfolio in June, according to an HFF monthly report.

Failure to stop HFF’s hemorrhage by restructuring the lender will force the government to annually inject about 0.2 percent of gross domestic product into the lender, the International Monetary Fund said yesterday. The Washington-based lender called for a “comprehensive plan” to deal with HFF.

That plan won’t be made at the expense of Iceland’s pensioners, Thordardottir said.

“The only way the terms of HFF’s bonds can be changed without compensation calls for changing the constitution,” she said. “The right to property would have to be revoked, allowing the government to seize or nationalize the assets without penalty. I don’t see that happening.”

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik at valdimarsson@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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