Pensions Board queries plan to fix hole in Aer Lingus scheme
EFFORTS to address an €800m deficit in the pension scheme that serves staff at Aer Lingus and Dublin Airport Authority (DAA) have hit another hurdle after the Pensions Board queried a planned investment in credit default swaps CDSs.
The trustee of the Irish Airlines Superannuation Scheme (IASS) outlined updated plans last month that could see the troubled pension vehicle invest as much as €1bn in CDSs.
It's part of an investment plan aimed at trying to achieve a 5.5pc target return as part of a "freeze and de-risk" strategy.
However, the trustee has indicated that he believes the maximum yield that the scheme can target is 5pc. That would involve the IASS, which has assets of about €1.4bn, investing in €300m of credit default swaps.
CDSs, which are also known as credit derivative contracts, are financial instruments that effectively provide insurance to the seller in return for the payment of a premium to the buyer. The swaps promise to cover losses on certain securities in the event of a default event.
But the chief executive of the Pensions Board, Brendan Kennedy, has written to the trustee of the IASS to question whether the planned investment in credit default swaps is permissible.
"In considering the proposal that the scheme issues CDSs, the question arises as to whether such a transaction constitutes an investment of the resources of the scheme," he said. "The relevance of this matter is not just whether the investment regulations apply to such a transaction, but also about whether the trustees have the power, either under trust law or the specific scheme rules, to engage in such a transaction if it is not an investment."
The Pensions Board has asked the trustee to detail how the issuance of the CDSs could affect the risk-weighting of the entire IASS portfolio, including the "likely gains and losses under a variety of scenarios".
Chairman of the IASS trustees Brian Duncan told the Irish Congress of Trade Unions in a letter yesterday that he accepted the proposed new investment strategy "contains an element of risk".
"But we consider this unavoidable when assessed against the alternative of having no other realistic option but to ask the Pensions Board to wind up the scheme, where the position of the active and deferred members would be much worse", he said.
IASS members face cuts in retirement benefits unless the deficit can be addressed.
The Pensions Board rejected a Labour Court plan that would have seen Aer Lingus inject €140m into a new defined contribution scheme for workers.
The DAA would have come up with €60m for a new scheme for its workers.