March 22, 2012

Ireland Woos Pensioners for Bonds

Successful drive could help country avoid additional borrowing

Ireland plans to entice its senior citizens to invest in Irish bonds through their pension plans. If it succeeds, it could avoid having to seek a second bailout—although sales of bonds to such “captive buyers” are not as positive as if they were snapped up on the open market.

Bloomberg reported Thursday that Prime Minister Enda Kenny hopes to put Ireland back on firmer financial footing, and part of his plan is to make it easier for pension plans to invest in Ireland’s own sovereign bonds instead of the top-rated German Bunds they customarily purchase. The government is discussing ways to encourage pension managers to switch to annuities that depend on lower-rated, higher-yielding securities—like Irish bonds.

Irish sovereign debt with a maturity date of 2020 currently offers a return of 8.8%, compared with a 2% return for similar German Bunds of like maturity. Those higher rates of return could also help pension plans that are underwater. Aer Lingus Group Plc said in January that it would consider such a plan to help cut its deficit, saying, “These measures seek to preserve a higher level of pension benefit for members than would be the case if the scheme were wound up, which Aer Lingus believes is inevitable in the absence of corrective action.”

Still, the plan is not without risk. Current rules say that if a government issuer of sovereign bonds defaults, the pension plan must make up the difference to the pensioner. The proposed rule would exempt pension plans from doing so in the case of Irish bonds and the pensioner would take the loss.

“If it works, then it’s part of the choreography of a return to the market and will be hailed as good news," Eoin Fahy, an economist at Kleinwort Benson Investors in Dublin, was quoted saying. "But it’s more complicated than that, as to some extent Irish pension funds are a ‘captive buyer.’ It will be seen as less positive than if the money was raised on the open market through an auction.”

Fahy added, “Trustees may decide sovereign annuities are too risky because essentially it passes the risk to the pensioner. On the other hand, they could decide a pension with lots of risk is better than no pension at all.”

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