The scale of the funding crisis in Defined Benefit
Schemes has been a topic of much debate for the last number of years. One of
the solutions proposed by government was to introduce a Sovereign Annuity
option. As the yield on Irish Government bonds is higher than the yield on the
bonds normally used to back annuity the effect should be to reduce the scheme’s
liabilities. Thus a sovereign annuity is
designed to ease funding pressures on a Defined Benefit scheme, provide a
source of funds to the State and also to adjust the priority rules in a more
acceptable manner.
The first sovereign annuity product is due to be launched
in the coming weeks. Initially, this sovereign annuity product will be based on
Irish and French bonds. It is expected that this will mainly be of interest to
schemes which are in wind up and in some cases where the employer company is
also in liquidation. It is estimated that the total value of the sovereign
annuity market will be approximately €2-3 billion.
However this sovereign annuity product will only be
available to pensioners and not to active and deferred members. This causes a dilemma
for the trustees: are you disadvantaging pensioners (by linking their pensions
to sovereign annuities) to improve the position of other member classes (by increasing
the amount of the fund available to pay for their benefits)?
So it remains to be seen how sovereign annuities will
work in practical terms. It will be interesting to see how trustees and pension
scheme members will react to this new and long awaited product.
