Pension Board outlines sovereign annuity proposals

PENSIONERS MAY be exposed to losses in their pension payments for the first time if the underlying asset on which their annuity is based defaults, under new sovereign annuity proposals outlined by the Pensions Board.

The Pensions Board yesterday published its certification conditions for sovereign annuities. Last year’s budget introduced legislation to facilitate sovereign annuities, but the scheme has suffered significant delays.

Outlining the certification conditions for the new scheme, Brendan Kennedy, chief executive of the Pensions Board, said the scheme had been “highly complex and technical” and involved “considerable consultation with the insurance industry.”

Under the scheme, approved insurance companies can offer sovereign annuity products to pension trustees. Trustees of occupational defined benefit and defined contribution pension schemes can decide whether or not to purchase sovereign annuities.

At the moment all pension products are backed up by some form of bond, usually German bonds. The new sovereign annuity scheme permits Irish pension funds to invest in a mixture of sovereign annuities, including Irish and other peripheral euro zone debt.

While the higher rate of interest on some sovereign bonds will allow pension schemes to reduce their liabilities, the scheme will involve a greater element of risk. In particular, the new scheme sees a significant shift in risk towards the pensioner as payments under sovereign annuities can be reduced due to an event of non-performance by the reference bonds.

However, it will be ultimately up to the individual pension scheme to decide how that risk is distributed and whether pension payments are affected.

While it was envisaged under the original proposal that the NTMA would issue Irish sovereign bonds directly at a set interest rate, this has now been omitted from the final scheme, as it was believed that insurance companies could buy Irish bonds at a higher rate in the market.

Pension Board chief executive Brendan Kennedy yesterday said it was a matter for the trustees of a scheme to decide whether or not to purchase sovereign annuities. “The board has no role in assessing the creditworthiness of the reference bonds underlying sovereign annuities.”

Jerry Moriarty, director of policy at the Irish Association of Pension Funds, said that it was important that trustees take time to consider the proposals.

“It opens up new options for trustees in terms of reducing liabilities within the scheme, but it does add a new risk to pensioners. Trustees will have to consider their options very carefully.”

David Harney, chief executive of corporate business at Irish Life, said he expects a broadly positive response to the scheme.