##ecd average of 7. 2 %. the occupational pension funds have grown very fast in the last few decades, through mandatory contributions from all wages and salaries, low operational costs, and long spells of good returns. around the turn of the century, they were the third - largest in eu and efta countries in terms of assets as a share of gdp, at around 80 %, after switzerland and the netherlands. shortly before the international financial crisis struck, iceland had overtaken even these countries. the funds were bound to grow much more, as they were far from reaching maturity in the sense that most of those receiving pensions had not accumulated rights based on their lifetime earnings. the clearest measure of this was the fact that the pension burden, or pensions as a share of contributions, was still below 50 %. at that time, it was estimated that, at maturity, the funds would amount to 1½ times gdp. they came close to that just before the financial crisis, but this was not “ real ”, as i will come to later. it is noteworthy that the funds do not obey simple classifications. some of the funds have an employment guarantee and would be characterised as defined - benefit funds, where the employer bears the investment risk, but in iceland only the government, municipalities and banks can guarantee pension funds. but the rest are not pure defined contribution funds. the investment risk is borne collectively by the members, and there is some scope for smoothing changes in benefits and for some risk - sharing among generations. this can matter when you have a once - in - a - lifetime shock to returns, as we experienced during the international financial crisis. the third pillar of the pension system entered the stage rather late here in iceland. it was only in 1998 that legislation on tax incentives for voluntary private pension saving was adopted, but these incentives were subsequently increased. voluntary private pensions saving then increased by leaps and bounds, reaching 10 % of gdp in 2002 and 15 % of gdp in 2007. this saving has proven to be an important cushion during the current crisis, as early repayment was temporarily allowed. so far, these early repayments have amounted to 2½ % of gdp. this is akin to a fiscal stimulus and has supported private consumption this year and last. let me now say a few words about the economic and financial effects of the pension system that we have built up here in iceland. the first thing to note is that it is always those who are economically active today who support today ’ s pension

negative implications for financial stability. and as is discussed in the aforementioned central bank report, such exchange rate volatility can sometimes be a source of economic volatility. furthermore, as examples have shown, lack of fiscal discipline together with overly loose financial regulation and lax supervision can undermine independent monetary policy with either a floating or a fixed exchange rate, even if the latter takes the form of a currency board. the “ capital flow problem ”, as we could call it, lies in capital inflow surges based on excessive optimism and underpricing of risk – capital inflows that then stop and reverse, with fire and brimstone and severe repercussions for economic and financial stability. experience shows that this problem is not limited to countries with a floating exchange rate – quite the contrary, in fact. countries with a pegged exchange rate have suffered severely from just such a scenario, as have countries within the euro area. this problem was a key player in the crises in greece and spain, to give two examples. as a consequence, there is no less need for so - called macroprudential tools in countries with a pegged exchange rate or countries in a currency union than there is in countries with independent monetary policy and a floating currency. some view foreign exchange reserves as the cost of pursuing independent monetary policy. this is not entirely correct because any country with its own currency must hold foreign exchange reserves, and it is easy to demonstrate that the reserves must be larger under a pegged exchange rate than under a floating exchange rate. i could continue to beat the drum on simplifications and magic solutions. the main thing, though, is that selecting a currency and monetary policy regime is not as simple as it is sometimes made out to be. and it is not merely a question of which policy is best if implemented perfectly – because implementation is never perfect. mistakes are made, and then it matters how robust the systems are in the face of such mistakes, and what scope there is to correct them without overstraining the systems. monetary bulletin 2016 / 4, p. 12 - 14. http : / / www. cb. is / publications / publications / publication / 2016 / 11 / 16 / monetary - bulletin - 2016 - 4 / conclusion in view of the discussion of monetary policy that has taken place recently – not least during the run - up to the parliamentary elections – i consider it necessary to engage in continued thoughtful discussion of what type of monetary policy framework will be most appropriate