Legislation was introduced last year which permitted the use of sovereign annuities by scheme trustees to meet their obligations to scheme pensioners. This legislation was followed by guidance published by the Pensions Board for scheme trustees and insurers on the use and registration of sovereign annuities. With the introduction of the Sovereign Annuity Regulations, which impose disclosure obligations on trustees who purchase sovereign annuities, it appears that the launch of sovereign annuity products in Ireland is imminent.  

Background

A sovereign annuity is an annuity issued by an insurance company in respect of a “pensioner member” where the payments made are linked directly to payments under bonds issued by Ireland or any other EU member state (known as reference bonds). Consequently the primary difference between sovereign annuities and annuity products currently on offer is that the agreed payments from the sovereign annuity can be reduced if there is an event of non-performance of the reference bonds.

If the trustees of a scheme decide to purchase sovereign annuities, they can do so in one of two ways:

  • The trustees can buy the annuities in the name of the scheme and hold them within the scheme (a “buy-in”) or
  • The trustees can buy the annuity in the name of the member and transfer the liability out of the scheme (a “buy-out”)

Buy-In

Where the sovereign annuities are purchased in the name of the scheme, the scheme will continue to be responsible for payments to pensioners, and the scheme will assume the credit risk as the member’s pension cannot be reduced to reflect any non-performance in the reference bonds. 

Buy-Out

Where trustees purchase the sovereign annuities in the names of pensioners, the scheme’s liability to those pensioners ceases and the pensioners could be exposed to losses in their pension payments in the event of a default in the underlying bond.

Regulations

Where trustees of a pension scheme decide to buy a sovereign annuity in the name of a pensioner, under the Sovereign Annuity Regulations certain information must be disclosed to that pensioner as soon as is practicable and in any event within two months after the purchase of the sovereign annuity.  The information to be disclosed includes:

  • Details of the insurer who issued the sovereign annuity
  • The policy number
  • The Pensions Board certification number
  • An explanation of the circumstances in which the payments can be reduced or restored
  • A written statement stating, amongst other things, that payments under the sovereign annuity depend on the EU member state which issued the bond meeting its payment obligation and that the member’s pension is not guaranteed and may be reduced

Comment

Given the reduced level of risk to insurance companies, sovereign annuities are likely to prove to be less expensive than other pension products, and consequently employers are likely to encourage trustees to purchase such annuities. However before making any decisions, the trustees should take appropriate legal, actuarial and/or financial advice. 

It is expected that sovereign annuity products will become available for purchase later this year and pension scheme trustees will face some difficult decisions in coming months. It is essential that trustees are aware of the risks that the pensioners will face before they make a decision to purchase sovereign annuities. Ultimately, as with all decisions, trustees will need to ensure that any decision they make is in the best interests of members.