Pensions Board sets out annuity scheme guidelines

INSURANCE COMPANIES must apply this week to the Pensions Board for inclusion in the sovereign annuity scheme.

The Pensions Board wrote to insurance companies last week setting out guidelines on the creation of new sovereign annuity products which will allow pension schemes to increase their holding of Government bonds.

Legislation to allow pension schemes to purchase sovereign annuities was passed last December, but has since suffered significant delays.

Proposals to introduce a sovereign annuity scheme were first mooted by the pension fund industry last year as a way of helping pension schemes with funding difficulties.

Under the scheme, pension funds would be permitted to increase their purchase of Irish sovereign bonds, benefiting from the higher yields such bonds currently offer. German debt, which has a much lower yield, is typically used by Irish pension funds to price annuity products and match pension funds’ liabilities.

However, the turmoil on the bond markets has led to concerns about the risk implications for pension funds. The products being developed are now more likely to involve a mix of Irish bonds and other sovereign bonds, with annuities linked to a “basket” of bonds rather than solely Irish Government debt.

A major source of concern for the pension industry has been that, unlike traditional annuities, the sovereign annuity scheme could result in the credit risk transferring to the fund or its members in the event of a default or restructuring of the underlying sovereign bonds. As a result, trustees may be encouraged to purchase bonds directly.

One aim of the sovereign annuity scheme was to encourage Irish pension funds to switch their investment focus from equities to bond-type products.