CONSPIRACY THEORIES are the very stuff of journalism. Few things work better than linking apparently unconnected events in a fashion that reveals the existence of a hidden and preferably evil master plan.

However, they tend by and large not to be associated with the pension industry, and it is perhaps a measure of incoherence of Government policy in this area that some are seriously wondering if they do not have some sort of ulterior motive.

What has perplexed many is the decision at this stage in the economic cycle to increase the reserves that defined benefit pension schemes must hold. (Defined or DB schemes promise to pay a pension linked to final salary regardless of the performance of the underlying investments).

Almost 80 per cent of such schemes are technically insolvent as a result of poor investment performance and the ever-increasing costs of actually providing the pensions they have promised. These schemes have either agreed a plan with the Pensions Board to return to solvency or are in the process of agreeing such a plan.

The decision earlier this month to oblige them to hold a larger level of reserves means, according to many in the industry, that a lot of DB schemes will now just throw in the towel and close down.

How this is in the interest of the Government and the taxpayer is not absolutely clear. One argument is that many schemes are beyond saving and increasing the reserve level is in effect administering a mercy killing. Rather than be allowed struggle on they are being nudged into accepting the inevitable. A number of marginal schemes – in solvency terms – may also wind up but on balance the outcome is beneficial.

It’s hard to take a view on this without some sort of breakdown on the level of insolvency among DB schemes. It also assumes there is no alternative to wind up.

And then there is the conspiracy theory.

This centres on the Coalition’s decision to create a class of government debt which can only be sold to pension schemes.

This debt – called a sovereign annuity bond – is attractive to pension schemes because it pays a high rate of interest in line with Ireland’s high cost of borrowing. At a very simple level the higher the interest a pension fund gets on its investments the further it can stretch them in terms of meeting its obligations to pay pensions. The attraction for the Government in offering these bonds is that at present it can’t find anyone else who will buy Irish government debt.

It would be win-win were it not for the fact that the high interest rate that the Coalition is offering reflects the fact that there is a far from trivial chance that the Government will default on the bonds. The country is, after all, broke.

Consequently, the attraction of such high-yielding assets to a struggling defined benefit scheme is tempered and the entire scheme has not really got off the ground.

However, when a scheme is being wound up the situation changes. In a wind-up situation a pension fund uses what money it has to buy pensions. These are normally sold by insurance companies which undertake to pay the pension of an individual in return for a large up-front payment. The size of the payments are linked to the interest paid on the government bonds in which the insurance companies invest the money. Given that most insurance companies are investing in low-risk and thus low-interest bonds the payments are high.

This means an Irish scheme that is winding up is going to find the Government’s sovereign annuity bonds very tempting because leaving its members with some sort of pension – albeit a risky one – is better than giving them no pension at all.

Put all this together and you have an explanation for the otherwise apparently irrational decision to impose an additional burden on already broke DB pension schemes.

The icing on the conspiracy cake is contained in the recent EU-IMF-ECB troika review on Ireland, in which the Government’s plans for returning to the debt markets were revealed. It contained a rather ambitious target of raising €15 billion in fresh debt by the end of next year, when the current bailout expires.

The plan is to start by raising about €1 billion in short-term loans within a matter of months, but where the other €14 billion is to come from remains unclear.

It also looks madly optimistic unless of course you had a captive market of collapsing defined benefit schemes looking to buy sovereign annuities.

Who said pensions are boring?

Disclosure. The author is a trustee of the Irish Times defined benefit scheme.