Annuity bonds could mean a ‘win-win’ scenario for funding

The National Treasury Management Agency’s (NTMA) decision to issue annuity bonds could be a ‘win-win’ scenario for the Irish Government’s funding requirements and the Irish pension fund industry,according to global strategist with Davy Stockbrokers, Donal O’Mahony.

“There are clear incentives now in place for a sizeable asset reallocation of domestic pension funds to Irish Government debt, this from the starting point of virtually non-existent exposure.

“Irish debt management agency targeting €3bn to €5bn in related issuance over the next 18 months is a conservative estimate in light of improving sentiment regarding Irish sovereign risk,” said Mr O’Mahony in an extensive report, titled, ‘Irish solution to an Irish problem?’. Annuity bonds make principle and interest payments over the course of their 35-year lifespan.

When the single currency launched in 1999, there was a huge amount of cross border investments. By 2007, 70% of Irish Government bonds were in foreign ownership.

Periphery eurozone countries, including Ireland, have found it extremely hard to meet funding requirements since the eruption of the debt crisis. And even though the Irish Government’s stabilisation policies have ensured that the worst of the crisis has passed, the Government continues to face funding pressures, notes Mr O’Mahony.

Of the €83bn in outstanding Irish debt, only €452m, or 0.54%, is held by Irish pension funds and insurance firms. But under proposals made by the Irish pension funds industry in early 2010 and subsequently legislated for by the Government, the way is now clear for Irish pension funds to increase their holdings of Government annuity bonds.

“For Irish pension fund managers, the investment case for fixed income diversification into higher yielding Irish Governments on risk/reward ground appears a strong one, ” Mr O’Mahony said.