NTMA may raise €2bn from bonds to pension funds

THE NATIONAL Treasury Management Agency is ready to raise funds of up to € 2 billion this year by issuing annuity bonds to domestic pension funds. If successful, the issue could help ease the Government’s funding requirements beyond 2013.

According to the State funding and debt management agency, it is “ready” to issue annuity bonds, subject to market demand and subject to yield.

While the amount of issuance is yet unclear, fixed income research firm Glas Securities has put it in the range of €1.5 billion to €2 billion over an 18-month period.

“Any funding relief created by annuity bonds will reduce future funding requirements beyond 2013,” Glas Securities said in a note yesterday. And, given the low domestic ownership of Irish Government debt, any increase in these levels is also likely to be seen in a positive light by international investors.

According to a spokesman for the NTMA, it will issue annuity bonds which are particularly suited to the manufacture of annuity products, because they are amortising bonds that provide a series of equal payments each year over their life.

Whether they will be auctioned or issued at a price will be a decision made at the time of issuance, he said.

Pension funds have greeted the decision with some enthusiasm. “It’s certainly something that would welcome,” said Maurice Whyms, chair of the Irish Association of Pension Funds. He added that there is “certainly a demand for them” and noted that pension funds – many of which are facing sizeable deficits – are finding annuities based on German sovereign bonds “unaffordable”.

According to Mr Whyms, indications are that Irish annuity bonds could be up to 25 per cent cheaper than these conventional annuities, although this will depend on the yield at which they are issued.

However, with a cheaper price comes more risk. As Mr Whyms points out, if the Government fails to make a coupon payment on an annuity bond, it could impact on the benefits of members of the pension fund.

Up until now, there have been a number of barriers to Irish pension funds purchasing such annuities, including the soaring yields on Irish Government debt. Now, however, with yields back at about the 6 per cent level, it is more “realistic” to do so, said Mr Whyms.

Another issue has been the short-dated nature of Government debt, with the longest bond in issuance just 13 years. For pension funds, this does not offer a suitable match. In this respect, it is expected that the new annuity bonds could have a maturity of up 35 years.

“It’s a good example of the Government trying to issue in a way that suits the buyer,” said Mr Whyms, adding inflation-linked bonds could be next on the NTMA’s agenda.