Pension funds are the cure for all ills facing the world - or so politicians would have us believe. This is true in many countries - the UK government is pushing schemes to take on infrastructure projects it cannot or will not pay for.
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. It is also hoping to get schemes to invest in infrastructure, having already raised a 0.6% per annum levy on all assets under management.
The latest development in this tale of support comes in the form of new Irish funding regulations, which will “incentivise” funds to buy the country’s sovereign debt, if not demand it.
The Bill was only made public last month - and many details were unclear. Despite this, the government was expected to pass it into law by the end of April, prior to statements from the regulator about implementation.
The Irish situation is not dissimilar to the one facing all European IORPs, with provisions in the 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, unlike the majority of countries severely affected by a revised IORP directive - such as Germany, the Netherlands and the UK - Ireland has been barred from capital markets, making the treatment of sovereign debt in the new Bill all the more noteworthy.
Critics note that by treating both domestic sovereign bonds and other EU bonds as a risk-free asset, the regulation could expose pension funds to an ever-greater concentration of risk should market turbulence recur - as is currently the case with rising Spanish yields.
Many in Ireland go further and point to Greece as the most recent example that no sovereign is risk free. Joseph O’Dea, investment consultant in Towers Watson’s Dublin office, notes: “At the moment, you have the strange scenario that you could hold, say, Spanish, Italian, Irish and Greek bonds and be required to hold less capital than if you were holding US, Norwegian, Japanese or Australian bonds hedged back to euros.”
Another senior industry representative claims it creates a “simplistic” scenario where sovereign debt is regarded as good and everything else bad. “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 do.”
Irish concerns are amplified by the Bill’s rushed implementation. A number of consultants noted how light on detail the legislation was, with several pledges made by the government discarded, seemingly in a rush to get the nearly five-month-late Bill drafted.
Most worrying, however, is the provision allowing the minister for social protection to increase the funding reserve from 15% to as much as 50% without parliamentary scrutiny - this has been criticised as a “blank cheque” by Philip Shier of Aon Hewitt - forcing schemes into holding ever larger amounts of sovereign debt, potentially allowing the government to avoid the capital markets and unsustainable yields.
This could be achieved through the recently announced annuity bond, although a National Treasury Management Agency spokesman was unable to say if the body would pursue an open auction or issue the papers on demand. This could lead to pension funds providing an estimated €2bn over 18 months, when others would baulk.
O’Dea stresses the “conflict of interest” that would arise from pension funds being encouraged to lend to a government locked out of the market, as it could concentrate investments in riskier counterparties, rather than the more secure sovereigns previously mentioned, and damage an already fragile system.