'No barrier' to issuing new bonds for pension products

Donal O'Donovan Twitter Email

April 11 2012 04:47 AM

THE Government says there is now no barrier to creating new bonds that can be used to create so-called "sovereign annuity" pension products. Plans to issue the bonds have been in the works since 2010.

The National Treasury Management Agency said yesterday that it was ready to "press the button" on the bonds.

State-controlled pension provider Irish Life said last month that it wanted to launch an annuity product as early as May.

If it goes ahead, it will be the first time the Government has borrowed money from the private sector since the bailout.

Under the current plan, the State will issue new long-term bonds -- due to be repaid over as much as 35 years -- to financial institutions that can then use them to create annuities.

An annuity is an investment product that pays out a fixed amount of cash over a defined period.

Annuities work much like any loan -- the pension fund or pension trustee pays cash upfront to the Government, which is then repaid with interest over time.

Unlike traditional government bond auctions, it's understood that the new bonds will only be created to order. It means it is difficult to know how much the State can raise through the new bonds.

Analysts at Glas Securities estimate that the State could raise between €1.5bn and €2bn in 18 months from annuity sales.

The annuity is being seen as a win-win for the State and the pensions industry, but creates new risks for individuals.

Low-risk

Traditionally, Irish pensions have only dealt in low-risk German annuities that offer very low return to investors.

"Irish" annuities became feasible after the law was changed so that any losses from a sovereign annuity that goes wrong will be carried by pension holders themselves, not pensions companies, as was previously the case. It means money managers are now happy to use higher-risk Irish government debt to generate a better income for pension funds.

The Irish IOUs will pay annual interest of around 6pc, compared with less than 2pc on German IOUs.

That should help plug deficits built in defined benefit pension schemes, while raising new debt for the Exchequer.

Meanwhile, nationalised AIB will pay back €1.5bn in senior, unsecured bonds later today, in the latest controversial payment to bondholders in a bailed-out bank.

The debt was not covered by a specific government guarantee, though it benefited from the Government's decision not to "burn" senior bondholders in the State-controlled banks.

Last night, the bonds were trading at face value; they have seen a sustained rise in prices as the repayment date approached. (Additional reporting Bloomberg)