BUSINESS OPINION:Solving private sector pension crisis could facilitate agreement between FG and Labour
ONE OF the many challenges facing the incoming government is how to extract some of the value built up over the years in various State assets. An inventory of these assets has already been compiled by a group led by UCD’s Colm McCarthy, but it remains under lock and key in the Department of Finance.
At the time of writing, a coalition between Fine Gael and Labour looks like the most likely outcome of the general election.
What to do with State assets – and the big State companies in particular – is one of the areas in which the policy gap between the two parties appears quite significant. But when you look a little closer, there is some common ground.
Fine Gael has said it wants to sell non-strategic State assets and has identified the power generation assets of the ESB and Bord Gáis. However, it has ruled out selling either the electricity or gas networks.
Labour on the other hand has said it is determined that semi-State companies play a full role in the recovery, but it is opposed to “short termist privatisations” of key State assets, such as Coillte or the energy networks. Critically it has not put generating assets on its list of untouchables.
It’s clear that enough wriggle room exists for the two parties to agree a programme for Government that both sides can sign up to. But it’s hard to actually see what could be realistically achieved that Labour – with its strong links to the unions that hold sway in the State companies – could actually live with.
It will require some imagination and some sort of imperative. The dire state of the national finances should be sufficient to provide the imperative.
The solution to making any initiative palatable to Labour probably lies in ringfencing the benefits of the process for some sort of socially desirable purpose.
The one that springs to mind is the pension crisis. Not the public sector one, but the private sector one. The pension industry has been pinning its hopes for a solution to the problem of pension fund deficits on the sovereign annuity bond that was announced in the budget. This bond will be issued by the State to Irish pension funds and will give Irish pension funds the opportunity to avail of the high yields on Irish government debt.
The benefit of this is what it means for the liabilities of Irish schemes, many of which are in deficit. If they are able to price their liabilities – the cost of buying pensions for members – using high Irish bond yields rather than the very low yields on French or German bonds they could cut their liabilities by up to 30 per cent according to pension experts.
This would go a very long way towards wiping out pension scheme deficits which are putting a very heavy strain on companies and members at exactly the wrong time.
The launch of this bond is delayed for technical reasons according to the Pensions Board. It has not said what they are, but it may well be that a lot of Irish pension funds would actually have a difficulty investing in Irish government bonds because of the risk of a sovereign default by Ireland.
It appeared for a while that pension funds might be able to have the best of both worlds. They would be able to price their liabilities off the high yielding sovereign annuity bond, but would not actually have to invest in them. The view now apparently is that they must hold the bonds at a time when bonds are out of favour and peripheral European bonds particularly so.
However, there is one type of bond that all pension schemes would like to hold and that is infrastructure bonds. Most schemes are being advised to invest in this asset class as an alternative to equities and sovereign bonds. There would seem to be a case then for looking at using specific State assets to underpin the sovereign annuity bond. It would solve a lot of problems.
Firstly, a Fine Gael-Labour government would be able to release some of the value locked up in State assets without having to fully open the can of worms that is privatisation.
Secondly, it would be able to make a very significant inroad into the pensions problem and the deficits that are acting as dead weight on many companies at the worst possible moment in the economic cycle. As an aside, it is worth noting that helping pension schemes reduce their deficits – and theoretically the members’ contributions – would take much of the sting out of any move to reduce the tax relief on pension contributions.
How you would actually go about constructing such a bond is another day’s work and falls into the realm of financial engineering. Indeed, there is one obvious flaw in the argument which is if you attach State assets to the sovereign annuity bond to give pension funds a greater degree of comfort, you are by definition reducing the risk in the bond and thus the justification for the high yield which the pensions funds are also seeking. It is a problem worth trying to solve.
