Introduction of Sovereign Annuities / Bonds
Wednesday 08 December 2010: In his budget speech on Tuesday 7 December 2010, the Minister for Finance announced that new bonds which will facilitate a sovereign annuity pensions product will be available for pension schemes from January 2011. The Minister for Social Protection provided further information during the Social Welfare budget announcements on Wednesday 8 December 2010.
The introduction of sovereign annuities is based on proposals by the Irish Association of Pension Funds and the Society of Actuaries in Ireland to assist pension schemes with funding difficulties and broaden the range of options available them to restore the solvency of their schemes. Sovereign annuities are annuity products issued by insurance companies where the payment of the annuity is linked directly to the payment of specified bonds.
The National Treasury Management Agency will shortly issue bonds to facilitate the creation of sovereign annuities based on Irish Government bonds. These will be either coupon only bonds or zero coupon bonds, and will be available for purchase by any investor, including pension funds. The yield on the bonds will be announced in January 2011 in the light of market conditions prevailing at that time. Any sovereign annuities issued by the insurance industry on the basis of these bonds must be certified by The Pensions Board.
There is no obligation on scheme trustees to buy sovereign annuities or the related bonds. However, trustees may choose to buy sovereign annuities from insurance companies on behalf of pensioners. In this case, the annuity will belong to the pensioner, and the scheme trustees will have no further obligation. Alternatively, the trustees may choose to buy the sovereign annuities or to buy the bonds directly in the name of the scheme, or adopt any combination of these approaches. The Minister for Social Protection will change the funding standard to allow pension schemes that invest in these bonds or sovereign annuities to reflect the higher yield in their liability calculations to the extent of their investment.
By purchasing the bonds or scheme annuities in the name of the scheme, the pension scheme will continue to be responsible for payments to pensioners: in the event of scheme wind-up, the current priority given to pensioners continues to apply. However, where sovereign annuities are purchased in the pensioner’s name, the annuity belongs to the pensioner and there is no further scheme liability. Because every pension scheme has a different membership profile and funding status, scheme trustees will decide what is best for their particular scheme.
The Minister also stated that he will announce details of a new defined benefit model in January. The introduction of sovereign annuities, changes to the funding standard and the new defined benefit model are complementary measures integral to the longer term pension policy as outlined by the Government in the National Pensions Framework. These initiatives, along with the many measures taken in the last two years, mark the completion of the measures that the Government intend to take to support pension schemes.
The deadline for submission of funding proposals will be re-introduced early next year by The Pensions Board. The Minister has urged scheme trustees, employers and unions to move quickly thereafter to address their liabilities, their risks and their investment strategies in order to ensure that they are properly funded and more secure for the future.
Legislative changes will be required to introduce the sovereign annuities/bonds.
The Pensions Board will issue guidance notes and further information on legislative changes in due course.