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The Minister for Social Protection, Joan Burton T.D., has today (22 October 2013) welcomed new data which shows pension schemes have spent €400 million on sovereign annuities so far this year with total sales of amortising bonds by the National Treasury Management Agency amounting to €1.377 billion to date.

Annuities are financial products purchased from insurance companies to provide an income (pension) for the duration of retirement. Sovereign annuities were introduced by Government in 2011 to help support defined benefit pension schemes. They provide an option for scheme trustees to secure pensions at lower cost than that provided through traditional annuities, thereby ensuring more scheme assets are available for current and former scheme members. As the annuities are backed by Irish amortising bonds issued by the National Treasury Management Agency, availing of this option provides an additional benefit of injecting money into the economy.

A recent update from Irish Life shows that sovereign annuity sales accounted for 75% of all annuity sales for defined benefit schemes in 2013. Some 1,500 pensioners to date have received sovereign annuities and €70m has been saved by schemes to support the other scheme members, over the comparable cost of traditional annuities.

Minister Burton said: “I am keenly aware that many defined benefit schemes are coming from a deficit position and this is a difficult problem that requires careful management. The Government’s introduction of the sovereign annuity initiative provided an option which enables trustees to reduce pension scheme liabilities and benefit from the premium available through sovereign annuities over traditional annuities. I am pleased to see the uptake of sovereign annuities has been very strong, which confirms the advantages that this option has provided to scheme members and trustees.  Such news is to be welcomed as it facilitates the release of extra of funds for scheme members.”

The Minister also noted the wider economic benefits of sovereign annuities: “Irish pension schemes have the majority of their assets invested outside of Ireland. As well as providing a mechanism for more prudent investment and a better outcome for scheme members, sovereign annuities deliver a win-win benefit as they ensure the retention of funds within the domestic economy.  This initiative by Government has attracted significant pension fund investment into the economy, with feedback from the NTMA indicating a continuous demand, amounting to €1.377 billion to date, for the amortising bonds used to underwrite sovereign annuities.”

ENDS

Note to Editor:

Sovereign Annuities

A sovereign annuity is a new type of annuity product where payments under the policy will be directly linked to the proceeds of Euro-denominated bonds issued by any EU member state. Legislation was introduced in the Social Welfare and Pensions Acts 2010 and 2011 to allow scheme trustees to use such annuities to meet their obligations to scheme pensioners.  The Pensions Board certifies sovereign annuity products. The certification process will ensure that the annuity products for pensioners are allowable for pension purposes under the Pensions Act.

In October 2011, the Pensions Board published its certification conditions for sovereign annuities. Insurance companies interested in offering such products must have them certified by the Board.  The Board’s conditions set out what requirements insurance companies must meet if they wish to offer these products to scheme trustees. (http://www.pensionsboard.ie/en/Regulation/Sovereign_Annuities/).

As part of this initiative, the NTMA issue - subject to market yields - amortising bonds of a sufficient duration to provide matching assets for pension schemes.  These bonds pay the investor an equal amount each year over the life of the bonds instead of the usual interest (or coupon) payment each year followed by the repayment of principal at maturity. The bonds are designed to facilitate the construction of annuities by the life assurance offices.

Where scheme trustees buy sovereign annuities, the payment of those annuities will be linked directly to the bonds underpinning the annuity. In the case of sovereign annuities linked to Irish bonds, these bonds are guaranteed by the Irish Government. Because sovereign annuities are likely to be less expensive than other pension products, the purchase of these annuities would make additional assets available to secure the benefits of active and deferred scheme members.

The first sovereign annuity product was launched by the market in 2012.  Pension schemes that purchase sovereign annuities or the underlying bonds benefit from a reduction in their liabilities under the Funding Standard to the extent that they actually make those purchases.

This initiative was introduced to widen the options available to the trustees of DB schemes.

The initiative provides pension schemes with an option which was not previously available. Irish pension schemes have the majority of their assets invested outside of Ireland.  So, as well as being a mechanism for more prudent investment, this initiative has the potential to attract pension funds into the economy.