Shedding light on pension raid

Unlike the difficulties Cyprus encountered when trying to levy bank deposits, our Government’s raid on pension funds here was carried out almost without incident, writes Joe Brennan

FOR countries contemplating future bailouts, Ireland may offer a quieter way to raid savings than Cyprus by going after pensions rather than deposits.

The Government is raising €1.9bn through an emergency 0.6% annual charge on domestic pension funds introduced in 2011 and running through Jun 2014.

While worth about a third of the original Cypriot plan to deduct from deposits, the measure sparked no widespread protests, international criticism or financial panic.

“Targeting pensions is more favourable politically, socially and economically in the current circumstances,” said Austin Hughes, chief economist at KBC Bank Ireland. “In dire circumstances, it’s a superior route to tax assets that are immobile. There isn’t the same risk of capital flight.”

Less than two years after the measure was introduced, the country is close to exiting the internationally funded bailout programme that Cyprus is about to enter. Deposits at banks are rising and, at 4.16%, the yield on the nation’s 10-year bonds is below Italian and Spanish peers.

While Cyprus struggled last week to lock in a bailout agreement, Agriculture Minister Simon Coveney, deputising in the Dáil for the Taoiseach, said that the Government would “under no circumstances” go after savers.

That’s because it already has, said Jerry Moriarty, chief executive of the Irish Association of Pension Funds.

“I don’t think what’s happening in Cyprus and the levy on Irish pension fund assets is that dissimilar,” said Mr Moriarty.

“It’s a bit ironic to have ministers saying it would never happen here when they’ve attacked people’s pensions, their accumulated savings.”

While the crises in both countries were linked to over-stretched banks, the options were different for Cyprus and Ireland, which asked for a rescue in Nov 2010.

Under the Cyprus agreement reached last Monday with the EU and IMF, account holders with up to €100,000 in the nation’s banks will be spared. In the original plan rejected by the Cypriot parliament, a levy on all deposits was going to raise €5.8bn.

Uninsured deposits over the threshold now face as much as 40% losses at Bank of Cyprus, the country’s largest bank. Cyprus Popular Bank, also known as Laiki Bank, the second biggest, will be wound down, hitting uninsured depositors and bondholders.

Until now, Ireland was the worst banking crisis in the 17-nation eurozone based on the size of the rescue relative to the size of the country’s economy. Rather than being a model, the Government should have gone after senior bondholders when it had the chance to reduce the burden on the taxpayer, said Dermot O’Leary, chief economist at Goodbody Stockbrokers.

“The ‘bailing-in’ of creditors in the euro area sets an important precedent that should have been set in Ireland a number of years ago.”

In addition to the levy on private pensions, Ireland stripped the state retirement fund to finance the contribution demanded by its bailout partners as part of the bank rescue.

While European politicians, including Luxembourg finance minister Luc Frieden, said the Cypriot solution “is unique”, the locked banks and lines at cash machines triggered by the deposit grab may persuade other countries to think twice.

“The one good thing about what has happened in Cyprus is that it probably has put small depositors off limits once and for all in Europe,” said Brian Lucey, Irish Examiner columnist and finance professor at Trinity College Dublin.

“But other forms of savings, including pensions, will be fair game in future bailouts.”

Greece and Portugal, which also sought international bailouts, have cut pension entitlements, though haven’t taken money directly from retirement pools. Greek funds, though, took losses in the country’s debt restructuring.

For some larger nations, raiding pensions may be a more realistic, lucrative and a less politically dangerous option, said Raoul Ruparel, head of economic research at Open Europe, which advocates a “slimmed down” EU.

“If, say, Italy needed to be rescued, it could be possible to go after pensions,” said Mr Ruparel.

Moody’s Investors Service said on Monday that the eurozone’s handling of the Cyprus crisis raises “the risk of deposit outflows, capital flight”, and higher bank and sovereign funding costs throughout the region. The willingness to “bail in” depositors in Cypriot banks is credit negative for eurozone banks in general, it said.

The cost to insure against Cyprus reneging on debt payments using five-year credit-default swaps was 928 basis points yesterday, data compiled by Bloomberg show. Irish swaps dropped to 184 basis points from a peak of 1,196 on Jul 18, 2011.

Ireland laid the foundation this month to regain economic sovereignty with the €5bn sale of 10-year bonds, its biggest offering since the near-collapse of its financial system forced the nation to seek a bailout.

The extra yield for 10-year Irish debt over comparable German bunds, the so-called spread, was 286 basis points. The Irish rate was 82 points below Spanish 10-year debt and 50 basis points less than similar Italian bonds.

Enda Kenny stressed that Ireland and Cyprus are in a “very different position”.

“They are now beginning to enter a programme and a very difficult challenge for them as Ireland is about to exit our programme hopefully by the end of this year and return fully to the bond markets next year,” he told the Dáil this week.

In the Irish rescue, the IMF and European authorities agreed to stump up €67.5bn and Ireland had to find €17.5bn. The national pension reserve fund was valued at €22.3bn at the end of 2009. The holdings were valued at €14.7bn as recently as Dec 31, according to figures from the National Treasury Management Agency.

Finance Minister Michael Noonan introduced the levy on the private pensions fund in Jun 2011. Pensions had drawn “massive” tax breaks in the past and the money was needed to finance a job-creation programme, Mr Noonan declared.

“Long-term provision for people’s retirement is something that a government should be promoting as opposed to anything else,” said Mark Bourke, chief executive officer of IFG Group, the financial services company that administers pension funds.

While the levy drew criticism from the pension industry, public reaction was muted.

“By targeting pension pots, the perception was that it was hitting the relatively well off and that the Government was only clawing back some of the tax reliefs afforded to people building up retirement funds in the first place,” said Brian Lucey. “It helped make it more palatable.”


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