Ireland Enlists Pensioners in Bond Crusade: Euro Credit

Ireland Enlists Pensioners in Kenny’s Bond Crusade
Irish Life & Permanent Plc, the country’s biggest pension provider, said March 8 that it plans to introduce a sovereign annuity, using bonds issued by the nation’s debt agency. Photographer: Aidan Crawley/Bloomberg

Irish Prime Minister Enda Kenny may be about to enlist a new bond investor as he seeks to win back the nation’s economic sovereignty: pensioners.

Irish pension funds traditionally buy annuities that invest in top-rated German bunds. The government is now in talks about making it easier for pension managers to switch to annuities tied to lower-rated, higher-yielding securities such as Irish debt. Irish bonds maturing in 2020 yield about 6.8 percent, compared with 2 percent for German bunds of similar maturity.

Irish Life & Permanent Plc, the country’s biggest pension provider, said March 8 that it plans to introduce a sovereign annuity, using bonds issued by the nation’s debt agency. A successful sale by the Dublin-based company may open a funding avenue for the state, which stepped out of the international bond markets in 2010 before the country received a 67.5 billion-euro ($90 billion) bailout.

“If it works, then it’s part of the choreography of a return to the market and will be hailed as good news,” said Eoin Fahy, an economist at Kleinwort Benson Investors in Dublin. “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.”

Ireland’s October 2020 bonds yield 6.88 percent, down from a euro-era high of 13.8 percent on July 18. The rate on the equivalent Greek security is 18 percent and it’s 12.5 percent for Portuguese debt.

‘Fiscal Position’

“Ireland clearly has to return to the market soon if it is to avoid the need for a second bailout,” said James Nixon, chief European economist at Paris-based Societe Generale SA, in a March 19 research note. “Ireland’s underlying fiscal position still looks vulnerable.”

The government is scheduled to raise 3.9 billion euros this year and 14.2 billion euros in 2013 with bill offerings and securities sold to retail investors. The state’s cash balance is 10.4 billion euros, according to the International Monetary Fund. The economy slipped back into recession in the fourth quarter, according to figures released today by the country’s statistics office.

Persuading the Irish to buy more bonds may help the nation avoid seeking additional funds, after Greece sought a second international bailout. Before the euro’s introduction in 1999, 70 percent of Irish bonds were held by local investors. The proportion has shrunk to about 17 percent, according to Ireland’s National Treasury Management Agency.

Many of the country’s pension funds are in deficit and sovereign annuities may help reduce the shortfall. Aer Lingus Group Plc said in January that the program its members are part of may buy annuities to help plug a 700 million-euro deficit.

Preserving Funds

“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,” the Dublin-based company said.

The new law makes it easier for pension funds to invest in Irish bonds as it transfers more of the risk to pensioners. In the past, if the government that issued the bonds defaulted, the pension company would have to make the full payment. Under the new arrangement, part of the loss is passed on to the pensioner.

Irish debt is rated BBB+ by Standard & Poor’s, seven levels below Germany’s AAA grade.

The cost of insuring against an Irish default for five years rose 6 basis points to 618, according to prices from data provider CMA. That implies a 42 percent probability of Ireland failing to meet its obligations within five years.

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

Annuities Estimate

Fahy estimates sovereign annuities, if successful, may bring in as much as 5 billion euros, about two-thirds more than the state plans to gain from asset sales.

The NTMA said in an e-mailed response to questions that there is “considerable interest in the proposed annuities” and the size of issuance will depend on the level of demand. The country’s debt agency wasn’t more specific.

“Given that Ireland has to raise funds itself this year and next, any initiative like this is important,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London. “If Ireland can show it has the confidence of its own people, then that’s a significant signal for the rest of the world.”

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