State to consider €10bn fund for pension liabilities
THE Government has confirmed it is considering a radical proposal that would see an additional €10bn invested in Irish pensions put into government bonds.
The move would mean pension funds would be able to lower their deficits, as they would have to set aside less money to cover liabilities in the event of a scheme winding up.
Three-quarters of company -- or defined benefit -- pension schemes are in deficit. Last month the Pensions Board said these deficits amounted to as much as €30bn.
Now pensions experts have put together a proposal that could see a typical company pension scheme with €100m in assets and a €30m deficit, reduce its deficit by €20m, the Irish Independent has learned.
Pensions experts insisted this would not be a "bailout" of private sector pensions as there would be no extra cost to the State.
A spokesman for Social Protection Minister Eamon O Cuiv said yesterday the department was considering the proposal.
The scheme would involve the State underwriting a national annuity bond.
An annuity is a contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement.
At the moment, annuities in this market are priced off 10-year German or French bonds. Yesterday, German 10-year bond yields were at 2.65pc, compared with Irish yields of 5.5pc.
Annuity costs (German 10-year yields) are used to test the solvency of Irish pension funds.
Also, when a scheme is being wound up, annuity rates are dictated by German and French bond yields.
Under the proposal, commercial insurers would write annuities based on Irish bond yields. Pension schemes could then invest in these sovereign annuity bonds.
This could act to reduce the liabilities for a pension fund that invests in the bonds.
An additional €10bn could be invested in government bonds if the scheme is put in place, experts said.
The proposal is understood to be seen as positive by Department of Finance officials because of the boost it would give to fund-raising by the State.
It could also mean a reduction in the extra contributions that would have to be made by employees and employers into any pension schemes that were in trouble.
However, major changes would have to be made to pensions legislation to allow pension benefits to be reduced if the Irish State defaults on its debt obligations.
It is understood that officials in the Department of Social Protection are nervous about this type of change to legislation.