IRELAND – Interest by Irish pension funds in buying out liabilities has more than doubled in the last year, despite respondents to the Irish Association of Pension Funds' most recent benefits survey remaining sceptical about either the purchase of sovereign bonds or sovereign annuities – specifically introduced by the government to allow for such de-risking.
According to the results presented by Rachael Ingle, managing director of Aon Hewitt's Irish office at the IAPF's annual benefits conference in Dublin, only 18% of respondents had firm plans to purchase sovereign bonds, and only one in 10 intended to buy sovereign annuities.

Additionally, only one of the survey's 93 respondents had so far purchased any sovereign annuities.

However, the lack of uptake so far is perhaps not surprising, given that only Zurich Life has been accredited to issue such annuities, and the National Treasury Management Agency (NTMA) has only conducted a single sale of the underlying Irish Amortising Bonds (IAB).

Discussing the pension industry's lack of enthusiasm for sovereign annuities – more recently blamed on Irish bond yields dipping below 5%, meaning the product would no longer act as a "silver bullet" in addressing underfunding – Anthony Linehan, deputy director of funding and debt management at the NTMA, conceded that while he would be disappointed, the agency was working on other products of interest to pension investors.

"One of the things going forward would be an inflation-linked bond, which again would be another way for pension funds to lock in real yields," he said.

Despite the uncertainty surrounding the use of the new issuances, an increasing number of respondents expressed an interest in buying out their liabilities – more than doubling over last year from 9% to 23%.

Additionally, the use of Enhanced Transfer Value (ETV) exercises to de-risk the funds was also seen as increasingly interesting, up 17 percentage points year-on-year to 23%.

Ingle said the increased demand for ETVs was "very interesting" given that companies had previously shied away from the option.

The process has come in for scrutiny in the UK in recent years, with Incentive Transfer Exercises now subject to a voluntary code of practice launched earlier in the year.

Ingle, the IAPF's vice-chair, also noted that the trend to replace wound up or closed defined benefit (DB) schemes was now split almost exclusively between pure defined contribution (DC) and hybrid arrangements, with a heavy emphasis on the former.

In cases where the main scheme would be closed to new entrants, 78% proposed replacing it with a DC fund, up from 60% in 2009.

Thirteen per cent of respondents would consider a hybrid arrangement, increasing to 20% when a DB fund was closed to new accrual.

When asked what a wound-up scheme would be replaced by, 78% said DC would be chosen, while 22% opted for a hybrid.

Across the three questions, only companies winding up their scheme did not express any interest in replacing it with a DB fund.

Commenting that DC was the "winner" across all scenarios, Ingle said: "There is more analysis being done now to see whether or not hybrid can provide a benefit, but equally at a cost level and a volatility level that is more neutral to the employers."

According to a breakdown of respondents, a quarter of the 93 funds answering the survey came from the financial services, with a further 11% from the professional or business services industries.

A further 5% of funds were for science and pharmaceutical companies and 2% from the IT industry.

The remaining 57% were not assigned a category.