Irish pension funds are being encouraged to buy 30-year government bonds to de-risk their liabilities, although due to the perilous state of the country's public finances, trustees appear reluctant to take up the offer

The clarion call to buy 30-year-bonds at an interest rate around the 5% mark was made by the National Treasury Management Agency (NTMA) at a Dublin pension conference as reported by the Irish Independent. This offers a tempting rate of return at first glance to Ireland's private sector defined benefit (DB) schemes, many of whom took a hit in the financial crisis due to exposed equity holdings.

The proposed long-dated Irish bonds would also benefit funds who have been typically investing in longer dated eurozone government bonds that generate a smaller return. It is also reported that funds will also be able to combat inflation worries by purchasing inflation-linked Irish government bonds for the first time.

There was no rush of trustees with chequebooks in hand; however, as worries were raised that any benefits made in hedging equity and inflation risk by purchasing the bonds would be cancelled out by acquiring the risk of a default.

Oliver Whelan, the chairman of the Treasury Management Agency, reassured the conference that defaults in Western Europe were very unlikely events in recent history. Many analysts say, however, that the bailed-out government finances are still running a real risk of default in the future (recently rated at a likelihood of 41% over the next five years on the basis of credit default swap trades).

Jerry Moriarty, director of policy at the Irish Association of Pension Funds says it is currently very difficult for trustees to understand the future value of bonds while the new Irish government try to restructure the public debt. Moriarty told Pension Funds Insider: "The NTMA has indicated that they will issue the bonds based on the rate at which they can borrow from the IMF/EU funds which is 5.8%, indicating a yield of about 6%. If Ireland was to secure a reduction in the interest rate on the funds it is borrowing, however, then the yield would be less than this."

Having to steer between an optimistic government and a pessimistic market is also no easy task, adds Moriarty: "One of the difficulties for trustees would be to buy at this yield when the market is saying that close to 10% is the appropriate yield for the current ten year bonds."

Moriarty also says there is a possibility of these long-term bonds being marketed to annuity providers. This raises the prospect of Irish pensioners holding a stake in their government's debt and seeing a reduction in their pensions in the event of a default. 

dbillingham@wilmington.co.uk 

First published 06.04.2011