The first pillar provides coverage based on years a person has resided in Iceland. Since there is no specific tax on wages to finance the system, general government revenues cover the cost of benefit payments. A person receives credit for each year he or she resided in Iceland, and receives a proportionally higher benefit amount based on each year he or she lived in Iceland. Iceland bases benefit amounts on the ratio of years a person resided in Iceland to the years between ages 16 and 66, multiplied by a flat-rate figure calculated annually by the Icelandic government. Additional supplements to this amount exist based on the person’s income, care for dependent children, and for various social assistance purposes.

The second pillar covers all economically active persons in Iceland, except certain civil servants who have coverage under a special system. Under Icelandic law, all workers and their employers must pay contributions amounting to a certain percentage of payroll to a State supervised private pension fund. While the amount of a benefit varies depending on the performance of each fund, Icelandic law requires the minimum pension amount to be at least 56% of the worker’s wages.

The third pillar is based on voluntary individual pension savings with tax incentives. Third pillar contributions are managed by the same pension funds, banks, and insurance companies that manage the occupational pension system (second pillar). Pension funds must make payments in equal installments over at least seven years.