A Look At Sovereign Annuities

Author:Mr Paul Glenfield, Brian Buggy, Bryan Dunne and John Dunne

Sovereign annuities were developed in an attempt to assist employers and trustees to deal with the funding crisis currently being experienced by many defined benefit pension schemes in Ireland. A sovereign annuity is an annuity contract where the annual income payment is linked directly to payments under bonds issued by Ireland or any other EU Member State (also known as "reference bonds"). In contrast to the annuity products currently on offer, agreed payments from a sovereign annuity can be reduced if there is an event of non-performance of the reference bonds. This feature will be of concern to pension scheme trustees given their duties under both pensions legislation and trust law generally. Sovereign annuities can only be purchased by trustees in respect of a person who is receiving benefits under a scheme or has reached normal pensionable age. Scheme trustees can buy sovereign annuities in one of two ways; a "buy-in" or a "buy-out". Where there is a buy-in, the annuity is owned by the trust. Purchasing sovereign annuities in this manner will result in an immediate reduction in liabilities however the scheme remains responsible for payments to pensioners and assumes the credit risk. A buy out, in contrast, arises where the annuity is owned by the member. The scheme's liability to pensioners in respect of whom sovereign annuities are purchased ceases and the risk is transferred to...

To continue reading