The pension sector in Ireland is broadly similar in structure to the UK, according to a 2023 report from consultants Milliman, which said the main difference is one of scale. Data from the Irish Pensions Authority shows that in March 2022 the country’s 525 defined benefit (DB) pension schemes had total assets of €73.7bn ($80bn).
With liabilities at the same date standing at €65bn, the stage was set for an uptick in pension risk transfer (PRT) deals amid the global rise in interest rates. This hasn’t yet happened and John Lynch, Partner at actuarial consultants, Lane, Clark and Peacock in Ireland, says trustees have instead been focussing on two new sets of European Union regulation.
The European Insurance and Occupational Pensions Authority (EIOPA) steered the revised Institutions for occupational retirement provisions (IORP II) onto the statute book on 1st January 2024.
The directive is aimed at rebalancing pensions regulation to reflect the reality of the switch from DB to defined contribution (DC) pension structures and Lynch says it has also distracted trustees’ attention away from the PRT sector.
“IORP II has raised the standard in terms of governance in pension schemes in Ireland and before it was introduced PRT activity was starting to increase. But while there are opportunities in the current market for pension schemes to derisk or buy annuities we don’t see trustees engaging like they should,” he said.
IORP II includes the requirement for schemes to produce an own risk assessment (ORA), as well as an annual Pension Benefit Statement, and also beefs-up the regulator’s powers.
“Trustees have been actioning the directive and associated requirements over the last couple of years and in theory pension schemes should now have the bandwidth to look at PRTs. Maybe next year things will have quietened down in terms of regulatory requirements and pension funds will be able to look more closely at PRTs,” Lynch added.
The problem is that at the start of next year all financial entities operating in the EU must implement comprehensive information and communications (ICT) risk management processes as part of the trading bloc’s impending Digital Operational Resilience Act (DORA).
“Now DORA is being introduced by the EU. And that will again add time, cost and effort for trustees. So, actual market activity has been very low in 2024, much quieter than expected. It will probably get busier in the fourth quarter but nothing like the market needs, wants, or expects,” says Lynch.
According to Lynch, the market needs activity to happen because, in common with pension schemes globally, funding levels that were depressed by the extended period of low interest rates in the post-Global Financial crisis era have now rebounded, leaving schemes in a position to buyout.
“There was very little buyout activity when bond yields were so low as schemes couldn’t afford to transact. In line with the UK market schemes are now generally a lot better funded than they have been in the past,” he said.
Buyout activity may be muted but Lynch says that Irish pension funds are derisking by investing into German government bonds, which have seen an uplift in yield in line with tighter global monetary policy. On 3 October, 20-year German government bonds were yielding 2.48%, versus -0.3% in July 2019.
Despite this marked rise, Lynch said that buy-outs could be a better option for some schemes.
“Schemes can actually get a higher return through taking a buy-out contract than they can by investing in German bonds, for example. I also think that schemes could generate a surplus if they opt for a buy-out meaning that a lot of pension schemes could actually improve their financial position with a PRT,” Lynch says.
“When funding levels were in deficit it meant that if a scheme bought annuities for pensioners, it was prioritising this group over other members. Whereas schemes now actually are quite well funded and are generally holding assets to ensure all members are seen to be treated fairly. They could easily sell those bonds and buy annuities and actually improve the position that the scheme is in doing so, both in terms of funding, but also risk,” he added.
The start of September saw the US Federal Reserve opt for a bumper 50 basis points rate cut, an approach taken by five of the five of the nine central banks overseeing the 10 most heavily traded currencies globally.
This raises the possibility that Irish funds could miss the window of opportunity if they don’t transact soon. Lynch says, however, that the derisking by Irish pension funds means that the majority will have immunised their portfolios against interest rate decreases by ramping up their government bond holdings.
If pension schemes move to buy-out once the two EU directives have been fully digested, Lynch says that the market could be worth in the region of €1bn annually, via a series of relatively – by international standards – smaller deals.
“A €50m buyout will be considered large in Ireland and a very large deal would be around €150m. Ones over €200m are even rarer,” he says.
The PRT market in Ireland had previously been a duopoly of Irish Life and New Ireland Assurance, until the recent exit of the latter from the market. However, Aviva has now entered the sector, and Lynch says there is sufficient capacity – and appetite – from insurers for when pension funds start focussing on buy-outs, which he is hopeful will happen soon.
“We were expecting a lot more action this year, but it just hasn’t happened,” said Lynch. “But I think it will at some point. The Pensions Regulator has come out and said all trustees should be considering buy-out as a method of de-risking. Trustees will consider buy-out – it’s just been slow to sort of take-off and for transactions to actually happen.”
