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Some provisions affected limits on investing in external funds: pension funds can hold up to 25% of the shares of an individual UCITS fund, which has not changed from the previous rulebook. However, the limit for “investment funds” was decreased from 25% to 20% of shares. There is also a 20% maximum for other types of fund.Other provisions include:The limit on individual equities has been increased from 15% to 20% of the company’s share capital;UCITS and investment funds are no longer “looked-through”, i.e. underlying assets will not be included in investment limits;The restrictions on counterparty risk are virtually unchanged, but former look-through funds will be seen as a specific counterparty, instead of as underlying assets;The 50% limit on foreign currency exposure in a pension fund’s portfolio is unchanged.The new regulation was not connected with the changes made to rules on foreign investments: all restrictions were largely lifted by the Central Bank of Iceland in March this year.Meanwhile, the new ESG rules related to the pension funds’ investment policy statement. Pension funds were already obliged to include an assessment of returns and risk in the statement, which has to be reviewed each year.Now, however, they must also include a clear ESG benchmark or guideline in the statement, although there was some flexibility as to how this was to be done.Pension funds must also now send an annual report on ESG compliance to Iceland’s Financial Supervisory Authority, along with their investment policy statement.Gunnar Baldvinsson, managing director at Almenni Pension Fund, told IPE: “We regard these changes as positive for pension funds. In addition to modifications to the restrictions, there is a clause about risk management, which is good for the industry.”Balvinsson said any extra work caused by these regulatory changes would be insignificant.He added: “Investment restrictions are similar as before, but are put forward in a new and clearer way. Almenni has already updated its investment policy in accordance with these changes.”Halldór Grétarsson, institutional asset management specialist at Arion Bank Asset Management, said: “The regulation is helpful to pension funds and their asset managers, as it formalises and specifies the role of risk management and risk monitoring. It also focuses on the prudent person principle, rather than setting only numerical limits.”Gretarsson continued: “However, the regulation increases the need for human resources by pension funds and their asset managers, as well as tougher requirements for the risk management set-up and systems. For example, it requires a dedicated risk manager who is independent from the CEO of the fund.”The regulation came into force on 1 July but there is a transitional period to 1 December 2020, by which time pension funds must comply fully with the new investment limits. A new investment regulation for Icelandic pension funds has shifted risk management provisions towards the prudent person principle, rather than simply relying on prescriptive investment limits.It has also introduced new requirements for environmental, social and governance (ESG) related investment reporting.Previously, pension funds were allowed to invest in 11 different asset categories, with limits for each category. Additional restrictions included limits for individual equities and foreign currency exposure, as well as restrictions on counterparty risk, except for government bonds.The new regulation left asset categories largely unchanged, but restrictions have been directed towards groups of similarly risky assets – a form of risk budgeting – instead of individual asset categories.