Pension funds may buy €10bn of bonds

Irish pension funds may buy as much as €10bn of domestic sovereign annuity bonds within three years, according to Zurich Life Assurance Plc, the first insurer cleared by regulators to offer such products as the country returns to debt markets.

Zurich Life, a Dublin-based unit of Zurich Insurance Group AG, was granted approval last month to offer Irish sovereign annuity bonds, according to the Pensions Board. The National Treasury Management Agency, working on a phased return to capital markets, plans to sell annuity bonds of between 15 and 35 years in maturity, according to documents published Jul 19.

“Over the next three years or so, I think there’ll be demand across the industry in Ireland for between €3bn and €10bn of sovereign annuity bonds,” Brendan Johnston, pensions director at Zurich Life, said. The NTMA may seek initial demand for about €100m of such bonds before it starts issuing in the coming months, he said.

Ireland, which sought a three-year bailout at the end of 2010, re-entered long-term debt markets on Jul 26 by selling €4.19bn of new bonds. The NTMA, which also returned to the treasury bill sales last month, plans to sell its first sovereign annuity bonds and inflation-linked bonds as it prepares to refinance debt and fund a budget deficit in 2014.

A sovereign annuity is a contract where an insurance company pays a pensioner an annual income linked directly to the yields of bonds issued by a state.

The NTMA cut its Jan 2014 refinancing requirements by 30% to €8.2bn six months ago as investors holding €3.5bn of bonds switched into bonds maturing a year later.

The new debt sale and a further €1.04bn bond switch on July 26 means the state only needs to raise a further €3bn to surmount the 2014 “funding cliff,” John Corrigan, NTMA chief executive officer, said on Jul 29.

Ireland also needs to fund an €8bn budget deficit in 2014, according to the IMF.

The NTMA estimates it will sell between €3bn and €5bn of sovereign annuity and inflation-linked bonds within 18 months, Corrigan told reporters on Jul 19.

Irish sovereign annuities may help pension funds plug deficits by offering a higher yields than their German counterparts. Ireland’s October 2020 bonds, regarded as the benchmark, yielded 6.05% at 2.39pm yesterday, compared with 0.95% for German notes of a similar maturity.

The sale of Irish annuity bonds has been facilitated by changes to the law last year. 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 will passed on to the pensioner.

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

“Irish sovereign annuities may become an important, if smallpart of the country’s funding options as it seeks to exit its bailout,” said Owen Callan, a Dublin-based analyst with Danske Bank A/S.

“The new ability of Irish pensions to buy the annuity bonds from the State will help alleviate their funding gaps and solvency requirements,” Mr Callan added.

— Bloomberg