Funding standard does not 'incentivise' Irish debt investment
IRELAND - The head of the Irish Pensions Board has refuted claims the goal of the country's new regulatory framework is to "incentivise" investment in Irish sovereign debt.
Speaking to IPE earlier this week, Brendan Kennedy denied the introduction of sovereign annuities and the use of sovereign bonds to offset increased funding demands came as part of the regulator's brief to increase interest in the National Treasury Management Agency's forthcoming annuity bonds.
Kennedy was responding to concerns privately raised by industry figures that parts of Section 42 guidance encouraged investment in higher-yielding euro-zone bonds, such as debt issued by Spain, Italy and Ireland.
"It is not our brief, and it is not our intention to incentivise anything," he said, noting that, because trustees would be able to avail themselves of sovereign bonds and sovereign annuities, it was the regulator's role to reflect all options in its guidance.
The use of sovereign annuities has proven contentious, with Martin Haugh, partner at LCP, saying the guidance limited the use of sovereign bonds, as schemes could only avail themselves of a 20% discount on any paper that yielded 3% above the 30-year German bund.
But this discount would fall to just 5% upon reaching the end of the funding period in 2023.
Haugh said: "This potentially makes the purchase of sovereign annuities more attractive than an investment in sovereign bonds, as this crystallises the full value of the discount and at the same time provides for risk sharing with the pensioner population."
Discussing the current sovereign annuity market - inactive, as no insurance company had to date been granted a license to issue the products - Kennedy said the Board's statutory guidance would have to be "very actively" managed and would be modified as providers entered the market.
The chief executive also addressed concerns raised by Aon Hewitt's Philip Shier that new investment guidelines were too prescriptive, stipulating only the use of sovereign debt and cash for any pension liabilities in payment.
Kennedy countered by saying the Board wanted to see liabilities and assets aligned more closely in future.
"We do have a criticism of Irish pensions - the practice has been very high risk, relatively low levels of matching by international standards," he said.
"We are essentially saying that, if you have a funding plan - absent other specific peculiarities of the scheme - we expect that at least your pensions in payment liabilities are covered by bonds and cash."
He added that he doubted anyone would view that as "unreasonable".
Asked what he thought about the absence of a change in wind-up priority in the Social Welfare and Pensions Act, he declined to comment, as wind-up priority is outside of the Board's remit.
But he did say that "everybody" would have preferred for the issue to be addressed at the same time as the introduction of the new funding standard.
Under current legislation, pensions in payment are given absolute priority upon scheme liquidation over active and deferred member benefits.
Kennedy said: "We could have argued for delaying these funding-standard changes until the pensioner priority was sorted out, but … given the suspension of the funding standard rules, the Pensions Board felt very strongly that it had taken long to get here. We didn't want to delay it any further."