Ireland's Social Welfare and Pensions Bill: A bridge too far?
'Incentivising' Irish pension funds to invest in sovereign bonds might not be the best idea, warns Jonathan Williams.
Pension funds are the cure for all ills facing the world - or so politicians would often have us believe. This is true in many countries in Europe and across the world, with the UK government pushing for schemes to build roads, houses and most anything the Treasury is unable or unwilling to pay for at present.
It is also true in Ireland, where the government tapped into its National Pensions Reserve Fund to recapitalise banks - effectively reducing the portfolio to €5.4bn - and is hoping to get schemes to invest in infrastructure, having already raised a 0.6% per annum tax on all assets under management.
The latest development in the tale of how pension funds will support the Dublin government comes in the form of new funding regulations, which will at least "incentivise" exposure to the country's sovereign debt, if not outright demand it.
Critics note that by treating both domestic sovereign bonds and other EU bonds as a risk-free asset, they could expose pension funds to an ever-greater concentration of risk were market turbulence to recur. This turbulence is already rearing its head once again as Spanish bond yields fluctuate and nudge towards a rate deemed unsustainable for Ireland, Portugal and other bailed-out countries.
Many in the Irish industry go further and point to Greece as the most recent example that there is no such thing as a risk-free sovereign.
"It's almost as if they are trying to force people to buy sovereign bonds, and I'm not sure that would be the most prudent thing for trustees to be doing," notes one senior industry representative, saying that it creates a simplistic scenario where sovereign debt is regarded as good and everything else bad.
The Irish situation is, of course, not dissimilar from the fate looming for all European IORPs - with provisions in Ireland's Social Welfare and Pensions Bill mirrored in proposals for the 'holistic balance sheet' currently being pursued by the European Insurance and Occupational Pensions Authority.
However, Irish concerns are amplified as the Bill is expected to pass into law before the end of the month, ahead of the regulator publishing its detailed guidance on implementation.
A number of consultants noted how light on detail the Bill was, with several pledges made by the government discarded, seemingly in a rush to get the nearly five-month-late legislation passed. These pledges included increasing the Pensions Board's powers and adjusting current legislation that ranks pensions in payment as more important than any accrued benefits on wind up.
Most worrying is the provision allowing the minister for social protection to increase the funding reserve from 15% to as much as 50%, criticised as a "blank cheque" to force schemes into holding ever larger amounts of sovereign debt, potentially allowing the government to circumvent the capital markets and avoid an embarrassing situation whereby yields increase to unsustainable levels once more.
This could be achieved through the recently announced annuity bond, although a National Treasury Management Agency spokesman was unable to confirm whether the body would pursue an open auction, or issue the papers on demand from insurers and pension funds - allowing domestic pension funds to provide capital at a time when, potentially, even the usual bond market participants might baulk.
For more on Ireland's Social Welfare and Pensions Bill, see the May issue of IPE magazine.