IRELAND - Pension providers could reduce the costs of purchasing inflation linked pensions by approximately 5% if the government were to issue inflation linked bonds, according to a report from the Irish Association of Actuaries.
Currently, only Irish Life offers inflation linked pensions and is forced to invest in imperfect substitutes, which hikes up the cost.
This extra premium currently results in a 65 year old male paying 11% more, and a 70 year old male 9% more for their pensions, than if appropriate investments were available. Irish Life subtracts 0.95% from the discount factor as a risk margin to allow for the mismatch.
“If we had a better match, we would be more competitive on our prices,” said David Harney, marketing director, corporate business at Irish Life. For Irish investors looking for a return linked to Irish inflation, there are currently three options: Housing Finance Agency (HFA) bonds which have a government guarantee, inflation linked swaps executed with an investment bank, and thirdly, Euro HICP bonds.
HFA bonds, which are only available to pension funds, are limited in supply and highly illiquid. The investment bank option is only available to larger investors, and lastly, Euro HICP bonds are based on Euro inflation, which at times may diverge from Irish inflation.
The Association points to a number of benefits to be gained from Irish inflation linked issuance, in particular, lower long-term National Debt servicing costs and increased risk diversification on the part of the government, and a reduction in the cost of private sector inflation-linked pension provision.
Therefore, having an Irish inflation linked government bond market would facilitate other pension providers entering the Irish inflation linked pension annuity market, thereby increasing the level of competition in that market.
“It is very rare that a government gets the chance to make a lot of people better off and nobody worse off,” concludes the report.
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