Tuesday 19 February 2019

Use of 30-year bonds will help cut cost of pension funding

Charlie Weston Personal Finance Editor

PENSION funds will be able to buy 30-year bonds at an interest rate of around 5pc, in a move that could ease funding difficulties for schemes.

To be known as sovereign annuities, the new bonds may also lessen the liabilities in pension funds.

Director of funding at the National Treasury Management Agency Oliver Whelan told a conference yesterday there will also be an inflation-linked version of these bonds.

Mr Whelan did not say specifically what interest rate would be paid on the bonds, but he indicated that it would be roughly in line with the expected new rate of 4.8pc on the IMF/ECB bailout funds.

The majority of private sector defined benefit pension funds are in deficit, with many shifting investments out of equities into bonds in a bid to lower the risks of the fund.

Buying the likes of "safe" German 10-year bonds yields only 3pc, which does little to ease the funding difficulties in pensions.

An ability to invest in higher yielding Irish sovereign annuities would improve the funding position for pensions, while the liability position (calculations of the cost of meeting pensions payouts) would also be helped.

Mr Whelan said the new bonds should be available soon after the results of the latest stress tests on the banks were available and it was clear how much the State needed to put into the banks to finally capitalise them.

This way the sovereign or State bond market could be separated from the bank bond market, he told the Irish Association of Pension Funds (IAPF) annual conference.

Mr Whelan insisted that there was no default risk for pension funds buying Irish sovereign bonds, despite repeated questions from a number of trustees about such a risk.

Trustee of the ESB pension fund Joe La Cumbre said it was a contradiction to say that pension funds should de-risk by selling equities and buying sovereign annuities, as funds would be taking on a default risk by doing this.

The bonds could also be bought to buy annuities for individuals, at a better rate than currently available.

However, pension experts pointed out that the concept behind the sovereign annuity means any default by the State would mean the losses would be borne by the pension scheme members.


Mr Whelan insisted that no western country had defaulted since West Germany in 1948.

"I am not sure I would lose any sleep at night by investing in these bonds. I do not subscribe to the view that there will be a default on Irish bonds."

There will be inflation-linked version of the bonds made available to pension funds. This is the first time there will be inflation-linked bonds in this market, based on the consumer price index. The yield has not been determined yet.

There will also be coupon-only bonds, with no principle paid back at maturity.

The bonds will be 30-year maturities, much longer than anything issued here up to now.

All will be available through all the stockbrokers in the Irish market. The bonds will be issued on a demand-only basis as buy and hold investments, with no secondary market.

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