Gap in bond yields driving pension fund deficits higher
THE gap between the interest rate investors get for investing in German instead of Irish bonds is set to remain high, putting pressure on Irish pension funds.
The yield, or return, bondholders demand for investing in 10-year Irish government bonds fell slightly yesterday after news of the EU/IMF bailout deal, but remains around 8pc.
Bond trader Ryan McGrath of Dolmen Securities said he expects the yield on Irish debt to trade in a range of between 7pc and 9pc for the foreseeable future.
The yield on Greek bonds did fall sharply after it agreed a bailout deal in May, but quickly moved back up to the pre-bailout levels of around 11pc. That is because of concerns that the debt could be at risk after a three-year bailout ends.
If the 500 percentage point gap between the interest rate on German and Irish bonds persists it will renew pressure on company pension schemes, experts said last night.
"The bigger the gap, the worse the situation for pension funds," director of policy at the Irish Association of Pension Funds Jerry Moriarty (left) said.
Some eight out of 10 company pension (defined benefit) schemes are in deficit.
The calculation of this deficit, known as the minimum funding standard, is based on a situation where a pension scheme is assessed on the basis that it is forced to close down and has to buy annuities for all its members.
Under the rules, Irish pension schemes have to price annuities off German bond yields (interest rates), which have been at historically low levels.
Mr Moriarty said: "The bigger the gap between the yield on German and Irish bonds the more expensive an annuity costs."