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Government's "Rainy Day" Fund

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In addition to allocating €750 million from the Ireland Strategic Investment Fund to help fund builders, the Minister for Finance has signalled that at least €1.5 billion will be transferred to a 'rainy day' fund next year.

Does he not realise that the 'rainy day' has already arrived in the form of major housing, health and transport investment crises?

Letter published in the Irish Times on 12th October 2017.

Funding Solution to Housing Crisis

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As pointed out by Harry McGee ("Government's silver bullets for housing crisis have been blanks", Analysis, August 15th), successive housing ministers have singularly failed to address the housing crisis.

By only tinkering at the edges, ministers may have ignored an enormous funding resource sitting in plan view.

This is the uncommitted €5.3 billion sitting in the Ireland Strategic Investment Fund's Discretionary Portfolio and invested since 2014 in low-yielding international assets.

In the same way that the then-minister for finance directed the ISIF's predecessor, the National Pension Reserve Fund, to invest €21 billion in the failing  banks, so also could the current Minister for Finance set up new institutions to prudently invest the ISIF's massive surplus funds in major initiatives for housing in addition to health and other urgent infrastructure.

For example, a €3 billion development fund to finance social and affordable housing on public- and NAMA-owned land could easily carry an equivalent amount of debt.

This would facilitate the construction of up to thirty thousand public-owned homes for rent or sale and would be infinitely more productive than the short-term, stuttering tactics adopted to date.

Given the scale and urgency of the housing crisis, accelerated provision of these homes should outweigh every institutional, political or ideological impediment.

Letter published in the Irish Times on 16th August 2017.

Clearly the Minister for Finance's left hand does not know what his right hand is doing. 

On the one hand, he has the National Pension Reserve Fund with €17 billion invested in about 2,900 companies worldwide in addition to €7 billion invested, on his instructions, in the two main banks. Financed mainly by Exchequer borrowings, the Fund has produced a meagre 2.6% annual return since 2001. It now proposes to tilt its portfolio towards riskier investments in the hope of doubling its annual return so as outperform the cost of government debt, currently 5%.

On the other hand, the Minister is investigating the possibility of selling prime State assets to reduce the national debt. Such sales could occur at a low point in the economic cycle and would have to be "priced to go" to deliver profits to investors.

If the Minister joins his hands together, he could direct the Fund to dispose of its overseas investments and lend the proceeds to the Exchequer to generate a risk-free return for the Fund that matches the State's cost of borrowing. Alternatively, the proceeds could be used to make arms-length purchases of suitable State assets or invested in new infrastructural projects in Ireland.

Letter published in the Sunday Business Post on 8th August 2010.

Who will Control Nama

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Based on the draft Nama legislation, the Minister for Finance will effectively control a €90 billion property empire and, given Nama's expected life span, several individuals of different political hues could fill this position over the next decade.

This raises concerns about the robustness of checks and balances to ensure that these ministers don't use Nama for pet projects at variance with its original purpose. Couldn't happen?

Just look at Nama's sister body, the National Pension Reserve Fund which was set up to develop a high-grade, international investment portfolio over a twenty-year horizon. Suddenly, at the direction of the Minister for Finance, it has been stuffed with €7 billion of Irish bank shares amounting to a third of its total assets.

Any requirement that finance ministers account for Nama to the Oireachtas offers absolutely no solace based on that body's track record. Instead, the legislation must include overarching controls to ensure that Nama cannot become a ministerial sweet shop offering goodies like bail-outs, tax-breaks, benchmarking and decentalisation.

Budget Reactions

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It is clear that (a) the Mininster has underestimated the looming problems (b) taxpayers were braced to accept some pain provided it was seen as equitably distributed (c) reform of the public sector has become a priority and (d) failure to recapitalise the banking systems will lead to a credit famine.

Here are some suggestions to address these matters:

  1. It is clear that the majority will pay for the excesses of the past few years even though only a small minority were the principal beneficiaries. On the basis that those who gained most should pay most, the income levy percentages should be extended on a sliding scale from 0% for the lowest paid up to, say, 10% for those on the very highest incomes and expanded, as a condition of retaining Irish citizenship, to the worldwide incomes of our tax exiles. These changes should raise sufficient revenue to roll back the budget cuts and tax increases impacting on young, old and weak.

  2. Extremely high salaries should be subsidised by shareholders rather than by taxpayers, To this end,  the Finance Bill should disallow any elements of total salary, bonus and pension contribution exceeding, say, 15 times the average industrial wage (c. €600,000) from being tax deductable.

  3. Payroll costs account for about half of all public sector expenditure and salary rates are well ahead of their equivalents in the private sector and abroad. To help reduce costs, restore parity and reduce future borrowings, the Government should plead "inability to pay" other than to the lowest earners under the proposed new national wage agreement.

    It should only agree to recommence payment of increases post-rationalisation and -restructuring as guided by the forthcoming report on the Task Force on Public Service.

  4. The scale of the looming pensions problem is evidenced by the sharp declines in the National Pension Reserve Fund and private sector funds, the poor uptake of pensions by the unpensioned and the surging cost of public sector pensions.

    Taxpayers with low/no pensions should not be required to subside "gold plated" pensions for politicians and public servants. The Government should immediately initiate a realistically funded contributory pension scheme in lieu of the present prohibitively expensive and inequitable "pay-as-you-go" arrangement.

  5. The National Treasury Management Agency should immediately acquire substantial stakes in the quoted Irish banks to recapitalise them as insurances against defaults linked to the State guarantees and in anticipation of their profit declines over the next few years.

    Alternatively, the NPRF should liquidate some of its overseas holdings to acquire these stakes on the grounds that if our banking system fails the funding of pensions for two decades hence becomes academic. Of course, the annual payments of 1% of GNP, financed by borrowings, to the NPRF should be suspended immediately.

Pension Fund Strategies

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The National Pension Reserve Fund has lost about €3 billion (15% of value) over the past four quarters as a consequence of the international credit crisis.

In these circumstances, it makes no sense for the Exchequer to continue borrowing about €1.6 billion a year from abroad for the Fund to continue to making risky overseas investments while cutting back on domestic investment and turning to expensive Private-Public Partnerships and massive tax breaks to progress critical national projects.

This nonsense is compounded by the fact that the Fund must achieve a return on its investments in excess of the cost of borrowing "to wash its face". It is noteworthy that the NPRF is one of the few funds in the world not financed by oil and commodity revenue surpluses. Has the government forgotten the rules about never borrowing money to buy shares or investing what you cannot afford?

Surely it makes more sense for borrowings earmarked for the Fund to be redirected immediately to finance much-needed, major infrastructural projects now instead of being used to make overseas investments for pensions payable decades hence. This could be done simply by legislating a "contributions holiday", say, for three-years to free up about €5 billion.

This would enable critical projects to be progressed more quickly and kept in public ownership. For example, the eight co-located hospitals which will cost the taxpayer a fortune and further fragment our two-tier health service could be progressed in public ownership using a fraction of these liberated funds.

By 2025, the NPRF could be valued €80 billion at current prices (€150 billion at 2025 prices). Given that every taxpayer and consumer will have contributed to the Fund, what guarantees can be offered that payments out of the Fund after 2025 will be equitably distributed and not skewed towards increasingly unsustainable, unfunded "gold-plated" pensions for politicians and the public sector at the expense of much more numerous, poorly pensioned citizens in the private sector?

For example, the NPRF has indicated that public service pension costs will reach 3.7% of GDP by mid-century while social welfare pensions for a far larger number of people will only rise to 10.1%. 

As contributors to the Fund, we should be given absolute assurances that future governments will not treat the Fund as a massive "slush fund" to support vested interests as done with decentralisation, benchmarking etc.

Lead letter published in Irish Times on 26th July 2008.

Partnerships and Pensions

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The article "Why public-private partnerships work" (2nd March 2008, Sunday Business Post) included a picture captioned  "West-Link Toll bridge: an example of a successful public-private partnership in action". Successful for  who? Certainly not for the users of the M50 who, for years, have paid through the nose to queue at the toll or for the taxpayer who has been obliged to pay hundreds of millions to terminate the partnership.

Continuing use of PPPs and provision of massive tax breaks to developers, especially in the health service, are very hard to justify when the Government is borrowing well over a billion euro a year to invest in the National Pension Reserve Fund for onward investment in thousands of overseas companies and funds. This fund, valued at €21.3 billion at end 2007, lost 1.8% in the last quarter of 2007 and has probably lost a multiple of that in the current quarter. 

Perhaps more disconcerting is the fact that as recently as December last, the NPRF was increasing its investments in emerging markets, property and private equity from 7% of the fund's overall value to 23% by end 2009. No doubt these declining markets will recover but, in the meantime, we will have given the NPRF billions of borrowed money for risky investments and simultaneously provided huge tax breaks to developers and handed over critical public infrastructure to PPPs. Why?

Paying for Pensions

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Cliff Taylor's item about "Balancing the Books" (Sunday, 7th October) indicates that the Government will need to borrow about �1.5 billion this year to finance day-to-day expenditure. This is almost equivalent to the amount to be invested this year in the National Pension Reserve Fund and begs some basic issues about the Fund's operation and direction:

  1. What is the economic justification for borrowing money simply to invest in overseas equities to fund future pensions? As recent market volatility has shown, this is a "good times" strategy that would be completely unsustainable in the event of any serious international or national slowdown or rise in inflation.
  2. Surely a better return could be secured for the nation if these borrowings were invested in much-needed local infrastructure, or used to displace profit-seeking private funds going into private-public partnerships, or used to bring forward projects which could encounter above-average inflation?
  3. The Fund is currently worth about 21 billion euro and will continue to grow rapidly as profits are generated and 1% of GNP is invested each year. As every taxpayer and consumer will have contributed to the Fund, what guarantees can be given that payments will be equitably distributed and not skewed towards increasingly unsustainable and unfunded pensions for politicians and the public sector at the expense of much more numerous, poorly pensioned citizens in the private sector? For example, the NPRF indicates that public service pension costs will reach 3.7% by mid-century while social welfare pensions payable to a far larger number of people will only rise to 10.1%.

As contributors to the Fund, we should be given absolute assurances that future Ministers will not treat the NPRF as a massive "slush fund" to support vested interests as done regularly in the past. The classic examples being decentralisation, benchmarking and the distribution of National Lottery funds.

Letter published in the Sunday Business Post on 21st October 2007.

Prescription for Pensions

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David Clerkin's piece on pensions (12th March) has highlighted inequities in public and private sector pension arrangements and in the role of the National Pension Reserve Fund.  Tax payers, predominantly in the private sector, are contributing over �2 billion a year in taxes to pensions. Unfortunately, this is not for their own pensions. About half their contributions go to pay "gold-plated" pensions of public servants and politicians, and the balance goes into the National Pension Reserve Fund. 

The following suggestions would put some fairness into national pension arrangements and help resolve the looming pensions crisis:

  1. The next round of benchmarking should take full account of the cost of public sector pensions. In addition, the public sector should progressively introduce self-funded schemes for all its employees.

  2. State organisations with pension deficits, amounting to a billion euro, should be required to sort these out internally and not be baled out by the taxpayer and by raising prices to consumers.

  3. The role of the National Pension Reserve Fund should be clarified as regards the expected distribution between public sector and social welfare pensions. This should take account of the fact that the vast bulk of the payments into the Fund effectively come from private sector workers notwithstanding that the main beneficiaries will be the public sector. Indeed, a fundamental reassessment of this organisation should be conducted on the grounds that the State effectively borrows over a billion euro year to invest in this Fund while it has a deficit in infrastructural funding which is being addressed via expensive and inefficient public-private partnerships.

  4. As TDs and Ministers are amongst the best paid and, probably, best pensioned in the world, they should fund their own pensions over and above a single basic scheme. The sums involved are not large but there is a principle involved and a lead should be given.

This prescription is likely to be painful but, as everyone knows, it is better to start pension planning earlier rather than later. So, before introducing mandatory pensions, the Government should create an equitable starting point.

Letter published in the Sunday Business Post on 19th March 2006.

Investment Double-Speak

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The Tanaiste wants to give tax cuts to Irish investors to encourage investment in local hospitals rather than in overseas property. If investment in hospitals and other infrastructual projects is so urgently needed that tax breaks and tolls are required to support it, what is the justification for the State investing over a billion euro a year of tax revenues in overseas businesses via the National Pension Reserve Fund?

National Pension Reserve Fund

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I have some queries about the National Pension Reserve Fund which should be answered before another cent is invested in it. This Fund stands to absorb huge tax resources over the coming years. The 20 plus billion euro (at current prices) yet to be invested would equate to the total income tax take by the Exchequer for two full years.

1. Why is the State investing in overseas companies and funds at the same time as it is raising taxes, engaging in borrowing, cutting essential services and urgently needs funds for internal investment?

2. Given that the Fund will accumulate reserves to contribute to future pensions for social welfare recipients and public servants (and politicians), what is the planned split between these two groups?

3. How equitable will this split be given that every taxpayer and consumer contributes to the Fund?

Letter published in the Irish Times on 25th July 2003.

National Pension Reserve Fund

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I have three queries about the National Pension Reserve Fund which has been set up by the Minister of Finance to help funds social welfare and public sector pensions post 2025. In the light of the State's deteriorating finances, they are extremely pertinent as they impact on every taxpayer and consumer in the State both now and decades to come. 

1. How can further investment in this internationally focused Fund be justified when the State is running a current account deficit and urgently needs funds for infrastructural investment?

Effectively, the State is borrowing money to invest in the Fund. The setting aside of one percent of GNP a year might sound relatively small but it amounts to about a billion euro a year and equates to ONE-TENTH of all income tax to be collected in the current year. If payments into the Fund were to be suspended, we would either pay less income tax (or experience lower tax increases) or the State would need to borrow less.

Currently, the Fund is worth about eight billion euro before allowing for losses incurred in the recent stock market downturns. The short-term performance of the Fund is very dependant on a recovery of world economies and peace in the Middle East. In effect, the Fund is gambling on these two matters and any further investment could amount to "bottom fishing". Given our difficult and uncertain economic prospects, the question of continued payments into the Fund should be reviewed even if a notional "killing" could be made if and when stock markets should ever recover to last year's levels.

2. Given that the purpose of the Fund is to accumulate reserves to contribute to future pensions for social welfare recipients and public servants, what is the planned split?

The Fund was set up to help fund social welfare and public sector pensions post 2025 on the basis that our aging population will have great difficulty in meeting its pension liabilities at that time. The Fund's legislation provides for periodic assessments of  the projected profile of Exchequer outlays on social welfare and public sector pensions. 

I don't know what these outlays will be in the future. As a guide, projected expenditure for 2002 on non-contributory social welfare pensions is about half a billion euro and further billion euro is being spent on public sector pensions. In addition, two and a half billion plus euros will be paid out by the contributory Social Insurance Fund for old age, retirement and widows pensions.

It would be desirable to clarify at this stage whether the Pensions Fund will only help finance non-contributory social welfare and public sector pensions or whether it will also support the self-funded Social Insurance Fund. If it does not, then the prime purpose of the Fund would appear to be to boost public sector pensions.

3. How equitable will the planned split be bearing in mind the mix of contributors?

Presently, social welfare pensions are, more or less, subsistence-level pensions. In contrast public sector pensions are much more beneficial as, in the main, they offer guaranteed benefits.

For many years, there has been a debate about the true actuarial cost of providing guaranteed benefits to public servants. As I understand the situation, it would be virtually impossible to purchase these benefits in the open market especially as they are linked to prevailing wage levels and not simply to cost-of-living increases.

In recent years, we have seen a reduction in the availability of defined-benefit pensions schemes in the private sector in favour of defined-contribution schemes. This is partly due to the falls in stock markets but it is also related to the fact that funding a defined-benefit pension scheme is very, very expensive. To compound the problem, defined-contribution schemes have been hammered by the decline in the stock market.  In contrast, public sector pensions are, in the main, financed from Exchequer revenues (i.e. taxpayers) and they do not have to contend with "real world" volatility and uncertainty. Finally, it should also be bourne in mind that a substantial proportion of people  working in the private sector have no pension schemes of any description but are obliged to help fund very attractive public sector pensions.

Allowing for the fact that ALL taxpayers and consumers are contributing to the Fund, how can we be certain that the Fund will not end up funding exceptional pensions for a minority of the contributors while the vast majority of contributors stand to derive very limited benefits? Surely, it should be ordained that all sectors should benefit from the Fund in line with their contributions.

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