Lífeyrissjóður starfsmanna ríkisins (LSR) recently published its “Fjárfestingarstefna Séreignardeilda Lífeyrissjóðs starfsmanna ríkisins 2026” (Investment Policy for the Supplementary Pension Divisions of the State Employees’ Pension Fund 2026) on November 26, 2025. The document outlines significant changes to the fund’s investment strategy for its supplementary pension divisions, effective January 1, 2026.
Investment Pathway Consolidation
Effective January 1, 2026, LSR will reduce its supplementary pension investment pathways from four to two. The new pathways will be named “Verðbréfaleið” (Securities Pathway) and “Innlánaleið” (Deposit Pathway). Members in the supplementary pension division will be able to invest their premiums in both pathways, while members in the specified supplementary pension division can invest in the Securities Pathway. The existing portfolios of Pathway I, Pathway II, and the specified supplementary pension division will merge into the new Securities Pathway. Pathway III will be renamed the Deposit Pathway. This change was announced in a news release on LSR’s website on November 7, 2025 (page 3).
Securities Pathway: Strategic Asset Allocation for 2026
For the fiscal year 2026, the Securities Pathway will target an asset allocation of 60% equities and 40% bonds. The target allocation for foreign (currency-denominated) assets is 50%. This allocation is designed to achieve the most efficient combination of securities, considering the average age of members in this pathway, which is approximately 48.7 years. The strategy emphasizes investments in liquid asset classes, primarily marketable securities, UCITS funds, and other funds with strong redemption rights. The current asset allocation as of September 30, 2025, for the combined predecessors of the Securities Pathway (Pathway I, Pathway II, and the specified supplementary pension division) was 45.0% in foreign equities, 11.7% in domestic equities, 32.4% in bond funds, 5.9% in government and municipal bonds, 2.1% in covered bonds, 2.8% in deposits, and 0.1% in foreign bonds. The new target allocations for 2026 are 45% in foreign equities, 15% in domestic equities, 10% in bond funds, 13% in government bonds, 5% in municipal bonds, 5% in covered bonds, 2% in foreign bonds, 1% in corporate bonds, 1% in institutional bonds, and 3% in deposits (page 10).
Deposit Pathway: Low-Risk Strategy for 2026
For the fiscal year 2026, the Deposit Pathway will maintain an asset allocation of 100% in deposits. This strategy aims to minimize fluctuations in returns and is primarily suited for members seeking low-risk supplementary pension savings or those nearing retirement. The returns in the Deposit Pathway are comparable to bank accounts offering the best deposit rates, with interest rates adjusting with general interest rate levels. The current asset allocation as of September 30, 2025, was 100% in deposits. The strategy for 2026 anticipates approximately 10% of total assets in unindexed deposits, with a permissible range of 5% to 25% (page 11).
New Investment Approvals for Unlisted Assets
LSR will require prior approval from its board for initial investments in funds falling under the Act on Operators of Specialized Funds No. 45/2020 (and comparable foreign funds), other than specialized funds for general investors, where LSR has not previously invested with the respective management company. Board approval is also required for initial investments in companies not listed on a regulated securities market or financial instrument trading venue, with the exception of companies aiming for listing prior to an offering. Furthermore, prior board approval is necessary for investments in unlisted bonds issued by a legal entity not currently in LSR’s portfolio (unless the issuer is a listed company), if the loan-to-value ratio exceeds 70% of the collateral’s value or if the bond is unsecured. The investment committee will make decisions on investments that do not require board approval but fall outside the investment authority of employees. Unusual or significant transactions require board approval (page 12).
Active Management Threshold for Securities Pathway
For the Securities Pathway, a minimum of 41% of assets must be under active management. Actively managed assets include all assets except index funds and indexed deposits. As of September 30, 2025, the proportion of actively managed assets in the predecessors of the Securities Pathway was 72.3% of net assets. In the Deposit Pathway, unindexed bank accounts are defined as actively managed, and up to 25% of assets may be invested in unindexed bank accounts (page 16).
Bond Portfolio Duration Target for Securities Pathway
The Securities Pathway’s bond portfolio will target an average duration of 4-7 years. Under specific circumstances, a shorter or longer average duration may be permitted. This target does not apply to the Deposit Pathway (page 16).
Liquidity Targets for Both Pathways
LSR aims to maintain sufficient liquid assets to cover expected payment flows. Liquid assets must exceed the estimated net outflow for the next 12 months. Liquid assets include uncommitted deposits, unit certificates in securities funds, and foreign equities and bonds. In the Securities Pathway, the target for deposits is 2% of total assets, with a maximum of 15%. The majority of deposits should be readily available to meet unexpected outflows or transfers between investment pathways. In the Deposit Pathway, all assets are invested in deposit accounts. At least 5% of assets must be uncommitted at all times to cover withdrawals and unexpected outflows (page 16).
Currency Exposure Target for Securities Pathway
For the fiscal year 2026, the Securities Pathway aims for 50% of its assets to be currency-denominated, with a maximum of 54.5% of total assets. The currency composition of assets should align as closely as possible with the composition of the benchmark index for each asset class. As of September 30, 2025, the currency-denominated assets in the predecessors of the Securities Pathway (Pathway I, Pathway II, and the specified supplementary pension division) were 45.2%. The fund’s policy does not include hedging currency risk for foreign currency assets. This target does not apply to the Deposit Pathway (page 16).
Sector Diversification for Securities Pathway
In managing the portfolio, attention will be paid to concentration and ensuring adequate diversification of assets across sectors. The weighting of equities in domestic companies, within a single sector or related sectors, should not exceed 50% of the value of equities in the fund’s equity portfolio. In the portfolio of domestic corporate bonds, efforts will be made to diversify investments across different sectors. The sector allocation of the fund’s foreign equity investments will be guided by the MSCI All Country World Index (identifier: NDUEACWF), although the portfolio’s composition may deviate from the benchmark’s allocation. In managing the foreign bond portfolio, efforts will be made to diversify investments across different markets and sectors. This guideline does not apply to the Deposit Pathway (page 16-17).
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