See below discussion by Kathleen Barrington, easily one of the best Irish financial journalists. We say the government can underwrite Irish bonds by declaring that it will accept them at face value in payment of Irish taxes. That virtually eliminates the default risk. Read Marshall Auerback and Warren Mosler ‘Greece Can Go It alone’ along same lines. Irish pension funds should not invest outside Ireland and especially not get tax relief for the investment. We need all our funds working at at home. Again too, we have to keep stating this as it can be forgotten in discussing the detail of financial and fiscal schemes …the best pension fund is keeping our young educated citizens at home.
Pensions industry eyes a gamble on Irish bonds
from kathleen barrington by Kathleen
10 October 2010
…..Currently, Irish pension schemes buy annuities based on German bonds which are seen as extremely safe, but are giving rock-bottom yields of about 3 per cent.
The industry wants the government to make available a supply of 12-to-15-year Irish government bonds issued by the National Treasury Management Agency.
The idea is that since Irish government bonds are offering 7 per cent, it will take a smaller pot of money to buy the income for retirees.
That in turn will leave more in the kitty for future pensioners and mean that hard-pressed employers will have to pony up less cash to plug the holes in their schemes.
The pensions industry calculates that buying annuities backed by German bonds is 20 per cent more expensive than ones backed by Irish bonds.
It also reckons investing in high-yielding Irish bonds would increase the value of pension funds from about 40 cents to 60 cents in the euro for a typical pension scheme.
In fact, the saving for pension funds would now be substantially greater, as Irish government bonds are now yielding far more than in February, when the industry made the original calculations on which its pleading is based.
The main problem with the proposal is that the interest rate on Irish government bonds is very high because there is a perceived risk that the Irish state might default on its obligations.
The pensions industry suggests that legislation would have to be amended to allow annuity payments to be cut if the underlying government bonds do not perform as anticipated.
In short, if the state were to default, then pensioners would lose out.
But supporters say that if the pension funds cannot invest in higher-yielding bonds, the alternative is that many more employers will have to cut the promised benefits to members or wind them up altogether leaving the country’s future pensioners much worse off in retirement.
In effect, the industry is caught between a rock and a hard place. Jerry Moriarty, chief executive of the Irish Association of Pension Funds, is the first to admit that ‘‘there is no real silver bullet.”
Supporters and opponents of the proposal agree it is a high risk strategy.
Where they differ is on the question of whether it was a risk worth taking, while some feel it might be a risk worth taking if certain conditions were attached.
Supporters said it was preferable to invest in risky Irish sovereign debt than to cut pensioner benefits. Some also argued that putting Irish pension money into Irish bonds was in the national interest as it would help the government to raise funds.
They played down the sovereign default risk, making the point that if that were to happen, all bets would be off anyway.
One Irish fund manager said he supported the proposal: ‘‘The general argument is, why buy German and French bonds when you could buy your own. I have sympathy with that.”
He considered that the current high probability of default attaching to Irish government bonds was ‘‘plain ridiculous’’.
In any event, he argued: ‘‘If Ireland goes into default, what happens to my pension fund is the least of my problems.”
An Irish bond expert said: ‘‘I am broadly in favour of the measures clearly they’re largely in sync with my thesis that pension liabilities should have a solid grounding in fixed income assets.”
A US bond expert said: ‘‘Not a bad idea. Intergenerational accounting should be done between the local savers (pension funds) and the local spenders (government today).
This will improve the chances that the debt gets paid back.”….
