Freedom to choose
In our Pension Book, Arnaldur Loftsson, CEO of Frjálsi Pension Fund, discusses mandatory membership in pension funds. Not everyone is free to choose their pension fund, but those who can should make their selection carefully as the structure of funds varies. Therefore, the pension of people with the same salary throughout their career can differ, and additionally, some funds like Frjálsi offer the option to direct part of the mandatory pension savings into private pension accounts that can be inherited.
A shorter version of the article can be read below.
Mandatory Membership in Pension Funds
Choosing a pension fund, which you contribute to throughout your working life, is one of the most important decisions people make. Pension funds differ in their returns and structure regarding the composition of private savings and collective insurance. Therefore, the pension benefits for people with the same salary during their working life can vary, as well as how much of their pension savings goes to heirs upon death, depending on which pension fund they chose.
Possible Violation of the Constitution and Human Rights Convention?
Unfortunately, the majority of wage earners cannot choose their pension fund. According to law, membership in a pension fund is determined by the collective agreement that sets minimum terms in the relevant industry or by special legislation if applicable. If a collective agreement does not cover the relevant field or if employment terms are not based on a collective agreement, the individual chooses a pension fund according to what the rules of individual pension funds allow.
There has been consensus about the obligation of working individuals to contribute to a pension fund, but the same does not apply to mandatory membership in specific pension funds. Additionally, doubts have been raised about whether this legal obligation complies with provisions of the Constitution and the United Nations Human Rights Convention. In an article in the Financial Supervisory Authority's online journal, written by Gunnar Ásgeirsson, a lawyer at the authority, in 2014, it was stated that one can question whether such an obligation meets the requirements that the Supreme Court and the Human Rights Court would impose on people's freedom of association according to Article 74, Paragraph 2 of the Constitution and Article 11, Paragraph 2 of the Human Rights Convention. I regret that this matter has not yet been tested in court to determine whether the provisions of the law comply with the above provisions. In my opinion, it is a fundamental issue that fund members should be able to decide where their pension savings are invested instead of having their industry or union membership determine which pension fund is chosen.
Different Options for Pension Savings Allocation
Tinna Finnbogadóttir, a specialist in the Ministry of Finance and Economic Affairs, highlighted in speech and writing in 2022 that fund members who are required to pay into specific pension funds according to collective agreements have less choice regarding the allocation of their pension savings. Funds with open membership offer more options than funds with mandatory membership, with the former offering the possibility to split the mandatory contribution between collective insurance and private savings, where no more than 8% of wages go to collective insurance.
Freedom to Choose a Pension Fund
One could argue that it is unfair that fund members who are required to pay into specific pension funds have less choice about the allocation of their pension savings than members who pay into open funds. However, it is worth noting that pension funds linked to unions have been able to offer comparable options for their members but have chosen not to do so. To ensure that pension fund members have comparable options, a suitable solution would be to abolish mandatory membership in specific pension funds. But which pension fund would members contribute to if they didn't choose any pension fund? The arrangement could be such that if members did not choose a fund, the provisions of current law would determine which pension fund would be selected, i.e., membership in a pension fund would follow the collective agreement that determined minimum terms in the relevant industry.
Fund members could choose the fund that offers the path that suits them, and funds would automatically increase their range of options to avoid losing members and to attract new ones. Competition between pension funds would increase, leading to better service, and it could be expected that smaller pension funds, which would not have the same capacity to compete, would merge into larger funds, which can be considered good for the pension system as a whole. Finally, freedom of choice would increase members' awareness of their pension savings, which should lead them to make better decisions about the options available to them.
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