Legislation facilitating the introduction of sovereign annuities was passed in June 2011. Subsequently the Pensions Board published FAQs for trustees of occupational pension schemes and insurers on the use and registration of sovereign annuities. Disclosure regulations have now been issued which impose disclosure obligations on trustees who purchase sovereign annuities.
A sovereign annuity is an annuity issued by an insurance company in respect of a "pensioner member" which annuity is referenced to bonds issued by Ireland or any other Member State of the European Union and payments under which can be reduced due to an event of non-performance in relation to the bonds to which the annuity is referenced. Trustees of occupational pension schemes can only purchase sovereign annuities in respect of pensioner members (i.e. persons who are receiving benefits under their scheme or have reached normal pension age).
Should trustees purchase sovereign annuities?
Employers are likely to encourage trustees to purchase sovereign annuity given their favourable pricing when contrasted with traditional annuities. Trustees must consider whether to purchase sovereign annuities having taken appropriate legal and actuarial advice. Trustees should assess both the appropriateness of using sovereign annuities and the terms of the sovereign annuity being offered by the relevant insurer. All sovereign annuities must be certified by the Pensions Board but the Pensions Board does not assess the creditworthiness or stability of the Member State bond underlying the sovereign annuity.
Buy out or buy in?
One feature of sovereign annuity that distinguishes it from a traditional annuity is that the agreed payments from the sovereign annuity can be reduced if there is an event of nonperformance in relation to the bonds to which the annuity is referenced. If the trustees of a scheme decide to purchase sovereign annuities, they can do so in one of two ways: (a) they can buy the annuities in the name of the scheme and hold them within the scheme (a "buy-in"); or (b) they can buy the annuity in the name of the member and transfer the liability out of the scheme (a "buy-out").
Where the trustees purchase the annuities in the name of the pension scheme, the scheme remains fully liable to pay the member's pension and the annuities are subject to the pensions levy. If there is a non-performance in the underlying annuity bonds, the...