The Pension Fund for State Employees

The role of the Fund

The principal role of the Pension Fund for State Employees (LSR) is to pay pensions to its members upon retirement and throughout their lives and to ensure their families with a pension following a loss of income due to an impaired ability to work or due to death. The Funds receive contributions and invest them in order to meet their liability regarding old-age pension, disability pension, spouse's pension and children's allowance. Furthermore, the Funds grant loans against a mortgage to Fund members and accept and invest voluntary pension savings.

Based on assets, the Pension Fund for State Employees is the largest pension fund in Iceland. In 2017, LSR and LH had a total of 31,029 active members and 22,266 members received pensions and other benefits. The Funds pay over one-third of all pensions and benefits paid by Icelandic pension funds.

LSR operates in three divisions, divisions A and B and a division for individual retirement accounts. All divisions operate under the same Board but are financially separate from each other.

Division  A

Division A of the LSR is fully funded. Benefit rights are based on the amount of contributions collected. All employees that are being paid in accordance with salary agreements for public employees of the state or state entities as well as certain municipal employees are entitled to become members of LSR. Amongst fund members, there are large groups of teachers, healthcare staff, policemen and others.

The contribution paid to division A amounts to 15.5 per cent of total contributions. The member pays 4 per cent and the employer 11.5 per cent. Both parties, i.e. the employee and the employer, pay their part of the premium as long as the employee is employed in a post that qualifies him/her for membership in the Fund. A contribution ceases to be paid to the Fund at the end of the month when the member reaches 70 years of age.

All new fund members pay into division A.

Division B (The older system)

The older system of the LSR is a mixed system that is partially based on funding from accumulated contributions and in part from supplemental contributions from public sources. The rights of fund members in division B is based on their working life and the relative proportion of full-time work.

This division were closed to new fund members at the end of 1996. Those members that possess rights in these divisions still preserve them in division  B according to the rules of the funds.

Pensions and benefits

The Pension Fund for State Employees pay:

  • old-age pensions
  • disability benefits
  • spouses' benefits
  • children's benefits.

Members in division B have a right to an old-age pension at the age of 65. If a member has paid contributions for three years or more, the pension is price-indexed; whereas in case of a contribution payment-period of less than three years, it is not.

The old-age pension right also commences at the age of 65 in division  A. Members of division A can begin to draw a pension when they choose to between the age of 60 and 70 years with a commensurate decrease/increase in pension benefits.

Fund members must apply for pension from the fund and payments are then transferred to the member's bank account on a monthly basis.

Division S for individual retirement accounts in LSR

Contributions paid to division S are in addition to those contributions paid to divisions A and B. Account balances in division S are the property of the account holder and constitute an inheritance in a similar manner as other personal property.

The advantages of individual accounts are:

  • The employee has a right to a counter-contribution from the employer and the state. The counter-contribution is 2 per cent against a 2 per cent contribution of the fund member.
  • Balances in individual retirement accounts are neither subject to net wealth tax nor to capital income tax.
  • Such balances do not count in the computation of tax-related children's benefits or interest rebates from the state.
  • Contributions paid are not subject to income tax, thus creating a tax benefit.
  • The savings may be inherited.
  • Withdrawal can commence at the age of 60.
  • Disposable income during the pension years is augmented and the personal tax allowance is more fully utilized.
  • This form of savings is convenient as  the employer deducts the saving from the pay check and transfers it to the individual retirement account.  

To qualify for membership in division S, one must be a member of or have paid contributions to one of the following:

  • The Pension Fund for State Employees, including members of Parliament and Government ministers.
  • Other public employees receiving salary according to public employee pay rates.