Funds can now buy long-term state bonds
Published 18/12/2010 | 05:00
THE Government has made it easier for Irish pension funds and Irish insurers to lend to the State by buying new long-term government bonds.
The National Treasury Management Agency (NTMA) will begin issuing a range of new long-term bonds for sale to Irish pension and insurance funds from January, after legislation to allow the move was passed by the Seanad last night.
The new law allows for the creation of sovereign annuity products linked to Irish bonds. The bonds will pay a fixed annual return up to 35 years.
Anthony Lenihan of the NTMA said the new bonds will be priced based on the wider cost of government borrowing -- that means that the yields available to pensions will be comparable to the 5.8pc being paid under the bailout.
The new bonds will have terms of 25 to 35 years to match the liability profile of pension funds.
By law, pension funds must have enough assets available to buy annuity products -- investment with a guaranteed payout -- in case the fund is wound up and can no longer invest. Funds currently have to base the minimum funding provision on the cost of buying low return German or French bonds.
Allowing pensions to use the higher paying Irish government bonds as an alternative means the minimum funding requirement is less onerous.
The bond programme was launched by Minister for Social Protection Eamon O Cuiv. With relatively high returns and low risks compared to shares, the bonds look like an attractive alternative to any investor convinced that the State is not in danger of defaulting on its debt.