Caution urged on sovereign annuities

ANALYSIS:"VITAL TO our national recovery" is how Éamon Ó Cuív described the new Sovereign Annuities Initiative which will begin in January.

The scheme is an innovative way for the Government to kill two birds with one stone – the money raised from the bond issuance will help alleviate the State’s funding requirements. Simultaneously pension funds, particularly defined benefit schemes which are facing huge deficits, will be able to take advantage of Ireland’s higher sovereign yields.

The proposal is a straight- forward answer to those who asked why Irish investors could not buy more of the high-yielding Irish Government bonds in the weeks preceding the IMF-EU bailout.

But it also raises questions as to whether a decision that needs legislative changes to be implemented – and has long-term implications for regulation and risk in the pension industry – is being rushed through in order to help alleviate the country’s financial woes.

The Department of Social Protection says the scheme has been in the pipeline for at least a year. The Irish Association of Pension Funds (IAPF) and the Society of Actuaries in Ireland have been in consultation with the Government and the Pensions Board from early this year.

Nonetheless, both urge caution on how the scheme is deployed, emphasising the need to balance risk as well as reward.

The IAPF says that pension schemes will now have more funds available to provide benefits for active and deferred members.

Undoubtedly one of the key issues will be price and the agreed interest rate. Cynics may point out that had the scheme been passed earlier in the year, it might have benefited from the higher yields being charged on Irish Government bonds rather than the 5.8 per cent charged on the IMF/EU fund which is likely to be the guiding price for the new bonds. The NTMA argues that Irish bonds have never actually issued money at either rate.