November 2002 Archives

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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