(April 8, 2013) — Ireland’s National Treasury Management Agency (NTMA), which issues bonds on behalf of the government, received a slap in the face today after it was revealed that domestic pension funds and insurance companies have dumped almost €1 billion worth since the start of 2013.
The Irish Independent reported €934 million of Irish gilts had been sold by the insurance and pensions sector, meaning it holds just €11 million today – down from €945 million at the start of 2012.
Such a significant sell-off comes as a blow to the NTMA, which wants to woo domestic investment as part of its push to exit the bailout.
The NTMA has been trying to encourage greater investment by pension funds in particular, by developing amortising bonds that repay interest and capital – creating a more attractive income stream – but it appears it’s to no avail.
The Irish Central Bank, which has been forced to take on government bonds as part of the deal to shut down Irish Bank Resolution Corporation (IBRC) is now thought to be the biggest single holder of government bonds.
Interestingly, external investors have been piling into Ireland’s debt market, betting that the country – one of the lowest rated in the euro zone – will successfully complete the €85 billion bailout deal it took on in 2010 and return to the market with regular auctions.
In March 2013, Dublin issued its first benchmark 10-year bond since the bailout; a deal that was heavily oversubscribed and contributed to a strong rally in Irish bonds.
Donal O’Mahoney, analyst for Irish stockbroking firm Davys, told aiCIO the Irish Independent’s figure of €934 million wasn’t accurate in his view, and that the impact of various initiatives to encourage the domestic market to buy into Irish debt hadn’t come into play yet.
“The reason domestic funds haven’t been investing in domestic debt are structural, not to do with the fundamentals of the Irish economy,” he said.
Changes to Irish pension liabilities
Since Ireland acceded to European Monetary Union in 1999, pension annuities have typically being priced by reference to longer-dated German bunds, given their duration suitability, liquid availability and “risk-free” credit rating (AAA).
Following the significant and sustained decline in “risk-free” yields since the onset of the global credit crisis in 2007, the price of annuities and, by extension, the value of pension in payment liabilities for DB schemes have increased substantially.
In 2011, legislation facilitating the introduction of sovereign annuities was passed by the Irish parliament, thereby creating a new type of annuity product where payments are directly linked to the proceeds of these sovereign bonds and Irish sovereign debt.
Under these products, if there is ever a non-payment event on the underlying bonds, the benefit payments under the sovereign annuity can be reduced.
As a consequence of the higher yields available on Irish debt over the German and French sovereign bonds, which back traditional annuity products, the cost of sovereign annuities will be significantly cheaper than existing alternatives.
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And then last summer, the Pensions Board announced the reintroduction of the Funding Standard, but the new regime included two important amendments –
1. The ability to reduce the value placed on scheme pensions in payment to the extent that the scheme has invested in sovereign bonds and/or sovereign annuities, and
2. The introduction of a risk reserve from January, 2016 based on15% of non-matching assets i.e. assets other than cash and bonds, plus an additional amount to protect the Scheme’s funding position in the event of a reduction in interest rates and/or equity values.
“The rules were changed to incentivise Irish pension schemes to buy government debt. Now if you buy 20% exposure to Irish debt, you get a 20% blend contribution to your discount,” O’Mahoney continued.
“We’re in the early stages of reallocating assets away from the Eurozone and into Irish markets and Irish debt. We’ll probably see more bonds issued skewed towards targeting Irish pension funds – perhaps even a 30-35 year bond, which would be a first for this country.”
The international view
But perhaps the Irish know something the rest of the world, until now, doesn’t.
The International Monetary Fund (IMF) issued a statement on Sunday warning the Irish government could be looking at €16 billion in fresh losses through its stakes in the banking system and the National Asset Management Agency (NAMA).
The potential losses, which would be the equivalent to 10% of GDP, are based on the economy failing to grow over the next few years.
The IMF also raised a number of concerns about Ireland’s ability to make a sustained re-entry to the market when it exits the bailout programme later this year, given the mounting mortgage arrears crisis the country faces.
And in a further blow it appears the IMF may force Ireland to stress test the Irish Central Bank before the rest of the EU, as the institution’s mission head to Ireland, Craig Beaumont, wants it to be completed before Ireland exits its bailout in November.
This flies against Ireland’s finance minister Michael Noonan’s wishes; he wants the tests to coincide with EU-wide bank stress tests scheduled for next March.
With growth continuing to look sluggish, it’s likely the already high unemployment rate would rise. Combine this with worsening mortgage arrears, and NAMA losses mounting as the property market fails to recover, and you can see why the Irish eyes may not be smiling.
Related content: Bonds Bring Good News to Ireland (and its Pension Funds) & Interview with NTMA CEO John Corrigan