IRELAND – Corporate bonds may soon be recognised as matching assets under Ireland’s new funding standard, allowing for “sophisticated” liability-driven investment (LDI) strategies to help offset planned risk reserve requirements, LCP Ireland has told IPE.

According to Martin Haugh, a partner within the firm’s Dublin office, there is currently a disconnect between good investment strategy and regulation.

He pointed out that certain LDI strategies had fallen foul of the Social Welfare and Pensions Act.

The Act – which from 2016 legislates for a risk reserve of 15% above liabilities and a second reserve able to offset an interest rate fall of 0.5% – currently only allows sovereign bonds of European Union member states and cash to be used to offset the additional funding requirements.

However, according to the law, other assets “of a type that offer a similar degree of security” may be included, if permitted by the minister for social protection Joan Burton.

LCP Ireland’s head of investment consulting Michael Butler said the Pensions Board was currently in discussion with the industry on changes that would allow for corporate bonds to be deemed matching assets.

According to sources familiar with the matter, the Pensions Board invited the Irish Association of Pension Funds, the Society of Actuaries in Ireland and the Irish Association of Investment Managers to suggest assets outside the current list that could be exempt from the risk reserve requirements.

The source added that the regulator was “generally happy” with the suggestions and “anxious” to see progress on the issue.

Butler was positive about a change to allow corporate bonds.

“If that would be the case, then certainly corporate bonds are more attractive than a AAA-rated sovereign bond at the moment,” he said.

“In particular, if trustees are able to get access to an inflation-linked corporate bond, then that’s even more attractive.”

The actuary noted that many of the country’s pension funds found themselves in a situation where they had diversified their bond holdings over the past couple of years, only to be faced with the decision to sell them again, as they were deemed unsuitable.

Haugh added: “At the moment, you have a disconnect between what we would see as good investment strategy, legislation and regulation.

“The regulations are pushing it one way, and I suppose rational investment decisions are pushing it the other way.”

Initially, the restrictions on matching assets – as well as a “blank cheque” clause allowing the government to increase the risk reserve to 50% without vote in the Dáil – led to concerns it was meant to “incentivise” investment in Irish government debt, a claim dismissed by Pensions Board chief executive Brendan Kennedy at the time.

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