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Sovereign annuity introduction in Ireland could drive pension buy-ins

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  • Sovereign annuity introduction in Ireland could drive pension buy-ins

IRELAND - The introduction of sovereign annuities in Ireland could lead to an increase in pension buy-ins, as schemes look to counteract the impact of the revised funding standard, according to industry experts.

Information released by the Department of Social Protection today shows that Irish pension funds should expect the higher risk reserve to increase capital demands by 10% under the new, as-yet undefined standard.

Proposals put out to consultation over the summer said schemes should be able to offset a 20% drop in equity value, as well as a 1% decrease in bond yields and a 0.5% increase in inflation.

In a note released by the Pensions Board, the department said sovereign annuities could be used to "ease the funding liabilities on schemes and therefore reduce the level of risk reserves required".

Sovereign annuities - stemming from a Budget proposal by the previous Fianna Fáil government for longer-dated Irish bonds schemes could invest in - will be offered by a number of insurance companies, as certified by the Pensions Board, linking annuity payments to the yields of any government bond issued by a European Union member. 

Previously, Irish annuities were closely linked to the core euro-zone states, with the German bund often employed as a benchmark.

Jerry Moriarty, head of policy at the IAPF, said the new annuities would be "much better value" than those currently available and therefore a "very tempting" tool for use in liability management.

Under other changes put forward by the department, the absolute preference granted to pensioners over active and deferred scheme members in the case of a scheme wind up would soon change.

Moriarty noted that this was where annuities could be used to offset risk.

"What trustees might do is buy out with a sovereign annuity within €20,000 to €30,000 [of annual benefits]," he said. "You're putting a portion of the pension at risk, not the whole lot."

However, Moriarty conceded that sovereign annuities would be a "very difficult area" for trustees, as they allowed for payouts to be reduced in the case of a sovereign default from one of the nations forming the basis of the annuity.

"It's putting a risk on people that doesn't exist at the moment," he said, adding that this seemed to conflict with a trustee's motivation to act only in ways that benefit the member.

But he was hopeful longer-dated Irish bonds would be issued in future, once the country's yields had recovered.

He said discussions had proven the National Treasury Management Agency was "keen" for issuances that better matched pension fund liabilities.

Meanwhile, the Pensions Board has confirmed that new funding proposals - due after the reinstatement of the funding standard - will not be due prior to early July 2012.

Discussing the recovery plans, the regulator's chief executive Brendan Kennedy said trustees had to consider the interrelated nature of contribution rates, investment policy and potential benefit changes when considering the funded outcome.

He added that the best solution was one that allowed the scheme to "undertake appropriate investment risk to achieve long-term returns without such risk endangering the benefits already accrued by members".

Schemes will have until 2022 to meet the new funding standard, following a period of three years where the current standard will remain in place.

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