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Sovereign annuities will 'kick-start' pension buyouts in Ireland

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  • Sovereign annuities will 'kick-start' pension buyouts in Ireland

IRELAND - The introduction of sovereign annuities will kick-start the pension buyout market in Ireland, LCP has predicted.

According to Martin Haugh, partner at LCP, new longer-term bonds issued by the National Treasury Management Agency (NTMA) that facilitate sovereign annuities will make buyouts "substantially cheaper" for the country's schemes.

Currently, all buyout deals are linked to core European bonds, such as the German bund.

Speaking of the introduction of the new annuities and their possible effects, Haugh said: "It could lead to an increased level. In fact, (it could lead to) the start of a buyout market in Ireland.

"It does exist - technically, you can buy out. But it's particularly expensive. If this now allows in some way for schemes to discharge their liabilities to Irish bond yields, which are substantially cheaper - we estimate up to 30% cheaper - then that would make buyouts particularly attractive. It could kick-start some buyout activity in Ireland."

This surge, Haugh added, will be positive for both markets and schemes.

"The short-term cash call on the employer would be less," he said. "Employers are, therefore, likely to stand behind the scheme for longer."

Speaking of the new, longer-term bonds at a roundtable organised by LCP, Anthony Linehan of the NTMA said: "The government saw this initiative as providing fresh opportunities for pension funds to address funding issues.

"The bonds that will be issued will give considerably higher yields than those available at present in other EU countries such as France and Germany and will allow Irish pension funds to avail of the higher Irish yields."

However, Haugh warned that there are still too many unknowns regarding the ultimate impact of sovereign annuities, as Ireland's Pensions Board has yet to publish a revised version of the statutory funding standard.

"If the annuities are cheap enough and there is enough credit given within the funding standard, then yes, there will be a market for them," he said.

"If not, they will just go nowhere. If it doesn't really substantially change anything, then it won't go anywhere."

Look out for February's edition of IPE for a special report on the Irish pension landscape

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