€1bn bond sale reduces 'funding cliff' facing Coalition

Market sources suggested that the ESB’s pension fund, one of the biggest in the State, was a big buyer of the amortising bonds, though a company spokeswoman said the trustees of the fund did not comment on investments.

RISK AND RETURN WHAT IS AN AMORTISING BOND?

Amortising bonds pay investors an equal sum each year over the life of the debt – comprising interest and a partial payment of principal on the loans.

This is in contrast with standard bonds, which pay out interest annually and the principal at maturity.

The bonds sold by the National Treasury Management Agency raised €1 billion and are tied to five Government bonds with maturities of 15, 20, 25, 30 and 35 years.

Much like a mortgage, the debt repaid in the initial years comprises mostly interest, gradually moving towards full payments of principal as the debt matures.

Given that the majority of Irish defined benefit pension schemes are in deficit, the new sovereign bonds will be attractive to pension trustees. They can sell annuities linked to the sovereign bonds to help plug the holes in pension funds as they give certainty on a long-term stream of income at a time when they must show how they plan to fund future liabilities.

The cost of annuities sold by pension providers have until now been linked to German bond yields.

With the yield or interest rate on this debt falling so low, the cost to a pension provider of buying an annuity has been very high.

The average yield of 5.91 per cent on the amortising bonds sold by the NTMA yesterday means that Irish pension companies can fund annuities at a cheaper rate.

The new bonds come with risks. On traditional annuities, the risk of the issuer of the bond defaulting rested with the insurance company. On the new sovereign annuities, this default risk passes to the pension scheme and, in turn, the members of the scheme.

Given the risk associated with Irish government debt at the moment, investors will be taking a greater exposure to a State that is not seen as being as creditworthy as the likes of Germany and France.

Pension fund members will have retirement payments from their nest eggs linked to the prospects for the Irish economy.

But given the fact that pensioners are going to be earning very little from German and French bonds, taking on some form of risk on Irish bonds may be the price to pay for higher returns.

There is clearly an element of “putting on the green jersey” at play as Irish pension funds can support the State’s efforts to fund the exchequer’s requirements and help the return to the markets, while at the same time take on higher-yielding investments for members and tackle their deficits.