THE OIREACHTAS has passed new legislation which will encourage Irish pension funds to increase their holding of Irish Government bonds, through the purchase of a new type of sovereign bond issued by the National Treasury Management Agency (NTMA).
Irish pension funds hold less than 5 per cent of their assets in Irish Government bonds, a very low percentage compared to other EU countries.
The new scheme, known as the Sovereign Annuities Initiative, will allow pension trustees to buy Irish Government bonds through their insurance company.
Because Irish Government bonds have a much higher yield than German debt – which is typically used by Irish pension funds to price annuity products and match pension funds’ liabilities – this would generate huge savings for Ireland’s troubled pension funds, many of which are facing huge deficits. The NTMA will issue the bonds from January next.
The agency said it will decide what interest rate should apply “in the light of prevailing market conditions.”
With Ireland committed to paying an interest rate of 5.8 per cent over the next years if it draws down the €85 billion EU-IMF bailout fund, it is expected that the interest rate will be somewhere in the region of 6 per cent.
The bonds will have a 25-35 year duration and will be either coupon only or zero coupon bonds. The money raised by the NTMA through the bonds means the State may have to borrow less from the €85 billion EU-IMF bailout available to Ireland to fund itself.
Speaking at the launch of the new scheme yesterday, Minister for Social Protection, Eamon Ó Cuiv, said the initiative will allow pension schemes to benefit from higher yields than are available to them at present, while at the same time allowing for the retention of Irish funds for investment in Ireland.
“Where they do invest in bonds, Irish pension funds tend to invest in non-Irish bonds. This means that there is money flowing from the State which would be better invested in our country . . . in doing so they would benefit from higher yields than are currently available from the French or German markets.”
Mr Ó Cuiv dismissed suggestions that pension funds would be taking on greater risk by investing in the new bonds, stressing that there was no risk of Ireland defaulting.
“That is not going to happen” he said.
Mr Ó Cuiv added that the new initiative would in fact make pension funds more secure by encouraging funds to move away from an over-reliance on equities towards bonds.
He stressed that the scheme is voluntary and it is up to the pension scheme trustees to decide whether to partake in the scheme.
