Originally published on Visir.is on 15 July 2026.
It is safe to say that few savings options can match the benefits of Private Pension. When you choose to contribute 2% of your salary to Private Pension, your employer contributes an additional 2%, effectively giving you an immediate 100% return on your own contribution. No other savings vehicle can offer that.
Over time, the amount accumulated can have a significant impact on how you plan your retirement. For example, if you start contributing 4% of a monthly salary of ISK 700,000 at the age of 22 and earn an annual return of 3.5%, your savings would grow to approximately ISK 55 million by the age of 67. That's a substantial difference.
When saving over such a long period, however, investment returns and costs become critically important. Recently, Gylfi Magnússon, Professor of Economics at the University of Iceland, and Kári Sigurðsson, an investment management professional based in London, published a detailed academic paper in the Icelandic Review of Economic and Business Affairs comparing returns on Private Pension savings with those of traditional pension divisions in Icelandic pension funds. They found that the average return on Private Pension savings is 1.12 percentage points lower than the average return achieved by traditional pension divisions. That may not sound like much, but over an entire working lifetime, every percentage point can amount to millions. In the example above, reducing the annual return from 3.5% to 2.5% would lower the final balance from approximately ISK 55 million to around ISK 42 million by age 67 – a difference of ISK 13 million.
In an interview with Morgunblaðið on 26 June, Gylfi explained that this difference is mainly due to two factors. First, higher fees charged by commercial investment providers reduce returns because the savings are "largely managed by financial companies operated for profit, whereas pension funds are run solely for the benefit of their members." Second, many savers fail to choose an appropriate investment option for long-term retirement savings, for example by selecting deposit-based plans that are not well suited to long-term investing.
It is, of course, disappointing that the average return on Private Pension savings has not matched that of traditional pension divisions. The good news, however, is that by choosing your Private Pension provider carefully, you can avoid high costs while still achieving returns comparable to those of traditional pension funds. Icelandic pension funds, for example, are entirely owned by their members. Their Private Pension funds are therefore not operated for the benefit of shareholders, but solely to maximise returns for fund members. Pension funds also do not operate expensive sales organisations or deduct sales commissions from members' contributions.
LSR, Iceland's largest pension fund, has recently simplified its range of Private Pension plans to reduce costs further and increase operational synergies with its traditional pension division. One of LSR's two Private Pension plans, the Securities Plan, follows the investment strategy of LSR's A Division. Over the past ten years, the average real annual return (that is, the return after inflation and fees) has been very similar: 3.9% for the A Division and 3.7% for the Securities Plan. According to Aurbjörg's comparison, it ranks among the best-performing Private Pension funds in Iceland over the past decade.
LSR's other Private Pension plan is the Deposit Plan, which is primarily intended for members approaching retirement who want to minimise fluctuations in the value of their savings during the final years before withdrawals begin. It is generally not recommended for members with a longer investment horizon.
Private Pension is an outstanding savings vehicle, but as the findings of Gylfi and Kári's study demonstrate, you can achieve significantly better results by choosing the right option from the many plans available. While it may sound complicated, it is actually quite straightforward. First, choose a Private Pension plan that focuses on long-term investment returns, and avoid deposit-based plans unless you expect to begin withdrawing your savings in the near future. Second, selecting a low-cost Private Pension provider can make a substantial difference over time. Compare your options and choose carefully.
Performance of LSR's Private Pension plans since 2017
The chart below shows the performance of LSR's Private Pension plans since 2017. As shown, the Deposit Plan has delivered steady returns, while the Securities Plan has experienced greater short-term fluctuations. Despite these temporary ups and downs, the Securities Plan has generated substantially higher long-term returns.
*Before 1 January 2026, the Securities Plan was called Plan I and the Deposit Plan was called Plan III.*