Irish government announces longer-term bonds to create sovereign annuity market
IRELAND - The Irish government has agreed reforms that will see the country's pension funds able to price its annuities based on sovereign bonds, moving away from the German Bund market as a benchmark.
Additionally, the National Treasury Management Agency will begin issuing longer-dated bonds in January next year to allow for the creation of sovereign annuities, as well as make the Irish market more attractive to schemes.
Irish minister for social protection Eamon Ó Cuív said the proposal was voluntary for pension schemes, but that it could help plug deficits due to the higher returns on Irish debt and could assist schemes wishing to switch to the new defined benefit model currently being developed.
The minister said the funding standard would be amended to enable pension schemes that purchase bonds or sovereign annuities to re-price their liabilities. German bonds were used to date, due to their longer life cycle, as well as better credit rating.
"The vast majority of Irish pension funds invest in bonds that are non-Irish bonds. This leads to an outflow of money from this State - money which would be better invested in Ireland," he said.
The minister added: "Investing in bonds enables schemes to move away from equities where they have experienced losses and puts pension schemes on a more secure footing"
The proposal dovetails with the National Pensions Framework agreed by the government in March, which recognised the difficulties with the current design of defined benefit schemes and proposed an alternative approach.
Minister Ó Cuív said there was no risk of Ireland defaulting on its sovereign debt and that the initiative would assist the Irish Exchequer by bringing pension funds back home at a time when Irish pension funds hold less than 5% of their assets in domestic sovereign debt.
Jerry Moriarty, director of policy at the Irish Association of Pension Funds (IAPF), said: "We need to have the detailed proposals before we can comment on their attractiveness to trustees."
The initiative stems from proposals first put forward by the IAPF and the Society of Actuaries in Ireland.
Philip Shire, senior actuary at Aon Hewitt Ireland office, said: "We are supportive of the proposals in principle, as they give trustees greater flexibility and would reduce the cost of liabilities if scheme deficits are referenced against Irish bonds.
"There is a question as to whether trustees should invest in Irish bonds and use sovereign annuities to pay pensions in payment when there is a risk of default.
"But if the trustees or employer are not comfortable with the risk, they don't have to use it, although it might be useful for schemes in financial difficulty."
Patrick McKenna, a senior consultant at Mercer in Dublin, said: "This measure will give pension scheme trustees another option to consider when deciding how to tackle current funding deficits. The potential to reduce the size of current pension scheme deficits is to be welcomed."
He added, however, that trustees would need to consider the extent to which investment in Irish government bonds was appropriate in the context of their overall funding and investment policy.
"Liquidity, diversification and issuer covenant will need to be assessed, together with the impact on pension scheme liabilities," he said. "The devil will be in the detail, and further analysis will follow when that detail is published."
The Irish Pensions Board will announce the final deadline for funding proposals by underfunded schemes in January 2011.