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Irish scheme funding suffers due to low yields in July despite 3.5% returns

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IRELAND - Funding levels at Irish defined benefit (DB) pension schemes are still under pressure from record low bond yields despite asset gains of 3.5% last month, according to Aon Hewitt.

The consultancy's Irish subsidiary released pension fund investment performance figures for July 2012, showing that traditional managed funds gained 3.5% in July, with the index having risen 10.6% since the start of 2012.

Denis Lyons, senior investment consultant in Dublin, said: "Irish defined benefit pension schemes continue to suffer from record low bond yields.

"The rise in core euro-zone bond yields seen towards the end of June was quickly eroded as investors once again focussed on the precarious condition of Spain's finances and the possible contagion effect that could result if a solution does not transpire," he said.

July's asset gains were not enough to ease the strain put on funding levels by lower bond yields, he said. Many schemes would have seen a decrease in their funding levels as a result, he added.

The firm noted that in spite of despite positive action from central banks in Europe and the US in easing monetary policy and supporting the euro, the single European currency still weakened and performance of Eurozone equities lagged that of global shares.

There were still significant threats to the Eurozone and global economy, Lyons said.

However, he saw renewed issuance of Irish government bonds and the prospect of sovereign annuities at least offering the prospect of some help for schemes.

"Irish schemes will be able to relieve the pressure on their statutory funding standard liabilities by investing in sovereign annuities or sovereign bonds," he told IPE. 

"This will help to a certain extent depending on the liability profile of the scheme, but the default risk of the sovereign annuity will be passed to the pensioner or the scheme depending on whether the scheme is bought out or bought in," he said.

Last December, the Social Welfare and Pensions Act 2011 was amended to enable trustees to meet pensioner obligations by securing benefits with a sovereign annuity. The policies, which will be based on euro-zone government bonds, are to be certified by the Pensions Board.

In July, the government announced it would start issuing index-linked and long-dated bonds of up to 35 years. The amortising bonds would be designed to appeal to the DB pension schemes.

Although sovereign annuities are not yet available in the marketplace, Lyons said he expected to see them in place in the next three months.

"Once the providers have gained product approval, they will be in a position to provide sovereign annuities as soon as the National Treasury Management Agency issues the bonds," he said.

The bonds are expected to be issued at a yield at between 6% and 6.25%, Lyons said.

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