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IPE special report May 2018

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Irish sovereign annuities no longer 'silver bullet'

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  • Irish sovereign annuities no longer 'silver bullet'

IRELAND - The decline in Irish bond yields may mean sovereign annuities are no longer the "silver bullet" many pension funds hoped they would be, Aon Hewitt said as the country's Pensions Board extended the deadline for schemes in deficit to submit funding proposals.

The regulator said the new deadline would apply irrespective of scheme plans to submit a Section 50 - a request for reduction in benefits - initially granted an additional five months over simple recovery proposals.

In a statement, the Board said: "The Board expects there will be no lessening of the efforts by trustees to resolve scheme deficits as a result of the additional time."

Discussing the regulator's decision to push back the funding proposal deadline by six months to the end of June next year, Jerry Moriarty, chief executive at the Irish Association of Pension Funds, speculated that the delay could be the result of the Department for Social Welfare request that Mercer review the wind-up order - currently granting pensions in payment absolute priority over benefits accrued by active members.

Responding to a question about the nature of the review, a spokeswoman for the department confirmed Mercer's involvement and said the review would be completed in the autumn.

Moriarty added that several issues could have contributed to the Board's decision to extend the deadline, including the workload the tight timeframe was causing many trustees and consultants.

"You've [also] got the issue where you've only got one sovereign annuity product approved, so there isn't really a market developed," he told IPE.

Aon Hewitt senior actuary Philip Shier said he believed two companies would soon be accredited by the Pensions Board to join current sole issuer Zurich Life.

But he said the market would also have to deal with declining bond yields on new issuances, with the benchmark yield for Irish debt recently falling below 5%.

"The NTMA are certainly not going to issue bonds for the pensions industry at a premium," he said, referring to the Irish Amortising Bond used as the sovereign annuity's building block.

"Certainly, the relative pricing advantage of sovereign annuities could be significantly lower than it was three months ago."

Conor Daly, partner at LCP's Irish practice agreed.

He said that while trustees were uncomfortable with high yields and the risk associated, they were also now cautious about the reduced gains from the present lower yields.

"There's a happy goldilocks region in the middle there, perhaps 5.5-6%," he said.

"There is a view out there that, once it goes below 5%, perhaps the whole sovereign annuity concept is becoming a little bit more expensive."

Shier agreed, saying that initial expected yields of 6-6.25% were more attractive.

"If you just look purely at the numbers, without risk-adjusting anything, it does make the sovereign annuity approach less of a silver bullet than it might have been expected to be," he said.

He said that if a decision were made to change the wind-up priority, it would change the approaches trustees could take with their current deficits, and that the six-month extension offered by the Pensions Board was therefore important.

"It's certainly important they have time to understand any further changes that come in between now and the end of the year - take them on board - rather than making a decision and then discovering a few months later, if they'd waited a little while, the situation would have been different," he said.

However, Shier said he hoped the change in yield and later deadline would not result in funds postponing important decisions.

"I do hope at least some of the schemes will at least bite the bullet and press on - otherwise, they are just going to kick the can down the road a little further," he said.

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