IRELAND – Pension schemes in Ireland struggling under the reinstated minimum funding standard will soon be allowed to offset reserve requirements by holding infrastructure bonds, the Pensions Board has predicted.
Pat O'Sullivan, the regulator's head of actuarial and funding, said the list of assets defined benefit (DB) funds can use to counter incoming risk-reserve requirements – which currently allow only a 50% discount based on the value of any sovereign bonds of EU countries – is likely to be expanded.
He told the Irish Association of Pension Funds investment conference in Dublin today that any changes to the standard would be a matter for the government.
But he added: "I have a very strong understanding that the recommendations put in by the IAPF, the Society of Actuaries and the investment managers in a consultation are on the way to being, at least largely, implemented."
He said a "larger range of bonds" would likely be permissible.
"I'll be thinking straightaway of public-private partnership bonds, or infrastructure bonds – still in the bond space," he said.
Asked later if timberland investments could be viewed as suitable assets to hold in lieu of additional reserves, O'Sullivan said: "There are moves afoot to widen the scope of bonds that will be risk-reserve light, if you like. To the extent that investment in anything is structured in a bond that is of sufficient quality, that should be within the scope."
O'Sullivan said he could not say whether the changes would occur within a matter of weeks or months, as this was a matter for the government, but said he believed them to be "imminent".
LCP Ireland has previously spoken of its hope that corporate bonds would be included in any new list, allowing liability-driven investment (LDI) strategies to offset the risk reserve.
The inclusion of infrastructure is not too surprising, given the Irish government's wish to increase pension fund investment in the area.
Minister for finance Michael Noonan previously urged schemes to consider infrastructure.
O'Sullivan's comments came during a debate on how the country's reinstated minimum funding standard was impacting investment strategies.
LCP partner Conor Daly argued that the MFS was "driving" investment strategies and that DB funds were being "punished" for not holding EU sovereign debt.
Speaking prior to the conference, IAPF chairman Maurice Whyms criticised the approach to the MFS as not taking account of the long-term goals of pension funds and noted that governments across the world were making allowances for funds suffering from low interest rates.
"In the UK, the chairman of the Pensions Regulator has warned trustees against what he termed 'reckless prudence' in the current bond environment," he said. "Ireland is in danger of becoming the extreme case in this regard."
Michael O'Higgins, chairman of the UK regulator, warned trustees last October against being "recklessly prudent" during deficit reduction negotiations with sponsors.
Whyms also criticised as "illogical" the level of funding private sector schemes were forced to meet, when public sector pension obligations remained unfunded.
"Why does this state force private sector schemes to stare so hard into the mirror at the financial impact caused by these market forces," he said, "yet at the same time exempt its own pension promises from any remotely corresponding rigour or action?"
The organisation's chief executive Jerry Moriarty echoed the sentiment during the debate, noting that while private sector funds were asked to discount liabilities against AAA bond yields, the guarantee on Irish public sector obligations was not to such a high standard, due to Ireland's significantly lower sovereign rating.
