Iceland’s largest pension fund, Gildi, has warned that government plans to reform how disability pension payments are calculated, which will see pension companies pay out more for disability pensions, will lead to lower old-age pensions so that pension funds can accommodate the higher disability payments.

In a letter to the Althingi (Iceland’s parliament), Gildi managing director, Davíð Rúdólfsson, said that if the reforms are passed, Gildi’s disability pension payments will increase by 12 per cent annually. As a result, he estimated that the fund will have to reduce old-age pension payments by 3 per cent to fund the increase.

The reform relates to a proposal to amend the Act on Compulsory Pension Insurance and the Activities of Pension Funds No. 129/1997 (interaction of disability pension payments), Case 430.

Currently, when calculating disability pension payments, pension funds consider loss of income and include any social security income that the fund member receives in this assessment.

If the reform is passed, however, pension funds will be banned from including certain payments from social security relating to disability pensions when assessing the loss of income of a disability pension beneficiary.

“The bill, if it becomes law, will involve increased payments for disability pensions in the future from the fund. Based on available information, the fund has estimated that additional payments for this will amount to around ISK 1,060m per year,” Rúdólfsson wrote.

He continued: “These funds will not be snatched out of thin air and the only way for the fund to finance them is to deduct them from other pension rights, especially old-age pensions. This involves a reduction in the pension rights (property rights) of fund members. It is indisputable that pension rights include property rights and very narrow restrictions are placed on the reduction of such rights.”

Therefore, he is of the view that if the government wants to increase disability pension payments in the way it has proposed, these increased expenses must be compensated for through a permanent arrangement that is regularly assessed.

“If such an arrangement is not found, the fund believes that the bill should be withdrawn until an appropriate solution in this regard is found,” he wrote.

The impact on pension funds will vary widely based on the number of members on disability pensions, with it impacting funds with the highest disability rate the most.

“It is therefore not appropriate, in the opinion of the fund, to assess only the impact on the pension system as a whole, as the impact is very different between funds, and this is indeed acknowledged in the bill,” he wrote.

Furthermore, he argued that if the bill is passed, those in receipt of a disability pension will have a higher income than when they worked. Rúdólfsson cautioned that this could lead to pension funds seeing increased disability pension applicants and a reduced rehabilitation rate.

In conclusion, he said the bill should “not be passed unchanged” as there is a “need for further analysis and assessment of the impact on fund members in individual pension funds”.

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