National Pensions Reserve Fund Accounts 2001.

Dr. M. Somers (Chief Executive, National Treasury Management Agency) and Mr. D. Geaney (Chairman, National Pensions Reserve Fund Commission) called and examined.

We are discussing the NationalTreasury Management Agency accounts 2001, chapter 13.1 - national debt, and chapter 13.2 - savings bank fund; and the national pensions reserve fund accounts 2001.

Witnesses should be aware that they do not enjoy absolute privilege and be apprised as follows. Members' and witnesses' attention is drawn to the fact that, as from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 grants certain rights to persons identified in the course of the committee's proceedings. These rights include the right to give evidence; the right to produce or send documents to the committee; the right to appear before the committee, either in person or through a representative; the right to make a written and oral submission; the right to request the committee to direct the attendance of witnesses and the production of documents and the right to cross-examine witnesses. For the most part, these rights may be exercised only with the consent of the committee. Persons invited before the committee are made aware of these rights and those identified in the course of proceedings who are not present will have to be made aware of them and provided with a transcript of the relevant part of the committee's proceedings if the committee considers it appropriate in the interests of justice.

Notwithstanding this provision in legislation, members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise, or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable. Members are also reminded of the provision within Standing Order 156 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a Minister, or the merits or objectives of such policy or policies.

I invite Dr. Somers, chief executive of the National Treasury Management Agency, to introduce his officials.

Dr. Michael Somers

Some officials are present with me while others are in the public gallery. Mr. Oliver Whelan deals with the funding and debt management activities of the National Treasury Management Agency. Mr. Brendan McDonagh is our finance director and deals with all the financial aspects - financial control, information technology, transaction processing, counter party credit limits with banks, etc. Mr. John Corrigan deals with the national pensions reserve fund, of which the NTMA is manager for ten years. Mr.Corrigan deals with all associated activities. Mr. Donal Geaney has a separate existence as chairman of the National Pensions Reserve Fund Commission. Mr. Jim Farrell is chief executive of the National Development Finance Agency while Mr. Adrian Kearns deals with the State Claims Agency. Mr. Ronan O'Connor works with Mr. Corrigan on the pensions fund while Mr. Bob Curran, a member of the National Pensions Reserve Fund Commission, is attending as an observer.

I invite the Comptroller and Auditor General to introduce the accounts and chapters.

Mr. John Purcell

I will give a general short introduction to all the items on the committee's agenda. Under the governing 1990 Act, I am required to report to Dáil Éireann on the results of my audit of the accounts of the National Treasury Management Agency and the Post Office Savings Bank fund as part of my overall reporting responsibility for the appropriation accounts. Consequently, under existing legislative arrangements, my annual report will always contain a reference to these two accounts, even though there may be no critical comment, as is the case for the 2001 accounts. That, in a nutshell, is the background to chapters 13.1 and 13.2 of the report before the committee for examination.

The NTMA is unusual for a State organisation in that its expenses are met directly from the Central Fund, that is, without having to be part of the annual Estimates process. Each year an indicative budget ceiling for administration expenses is agreed with the Minister for Finance. To date the agency has not had any difficulty living within the limits.

In 2001 administration expenditure came to €9.7 million, an increase on the figure of €8 million for the previous year. It continued to rise in 2002 when it amounted to almost €13.7 million according to the 2002 accounts which I have just finished auditing. The upsurge in costs is mainly attributable to the agency taking on a considerable volume of new work, for example, the operation of the State Claims Agency, which was referred to, and the management of the national pensions reserve fund. There were also major salary hikes for senior staff of the agency which would also have contributed to the increase in costs.

On the national debt, the committee will note the fall in both the level and cost of servicing the debt. The level of debt at the end of 2002 was much the same as the previous year, at €36.36 billion, but the annual cost of servicing has fallen further to €2.17 billion.

The Post Office Savings Bank fund dates back to 1861 and is used to lend funds deposited with the bank to the Exchequer. Since the transactions underlying the fund, in common with most other small savings schemes, are administered by An Post and form an integral part of its operations, the audit work is carried out on my behalf for practical reasons by the firm which has responsibility for the audit of An Post's accounts.

The account of the national pensions reserve fund for 2001 shows, on the income side, the transfer of €6.5 billion which had accumulated in the temporary account from such matters as the privatisation of Telecom Éireann, with the annual payment from the Exchequer of an amount equivalent to 1% of gross national product, which amounted to €972 million in that year. At the end of 2001 the balance in the fund was entirely held in cash deposits pending the making of strategic investment decisions which were made during 2002 but with the slump in the equities market the 2002 account will show significant diminution of the value of the assets standing to the credit of the fund at the end of the year.

I invite Dr. Somers to make a brief opening statement.

Dr. Somers

I will concentrate on the NTMA. I am not sure how the Chairman wishes to handle the pensions fund but we will come back to it at a later stage.

Mr. Geaney may want to make a statement on the fund after Dr. Somers.

Dr. Somers

The Comptroller and Auditor General has commented on the growth in costs of the NTMA. Perhaps it would be useful if I was to outline the growth in the functions of the agency in recent years.

The NTMA was established in 1990 originally to deal with the borrowing and debt management activities of the State which had previously been carried out by the Department of Finance and the Central Bank. There were serious problems in this regard. It was almost impossible to recruit staff and interest at that stage comprised 8% of GNP and was seen as a huge burden on the State. The Government of the day came to the conclusion: "If you can't beat them, join them". People were leaving to join the private sector. We took over the issue of bonds, foreign exchange, the small savings schemes run through the Post Office, the placing of deposits, prize bonds, etc.

We were seen as doing a reasonably good job and, as time passed, functions were added to our remit. The first was to securitise the local authority mortgage brokerage where the State had lent money to local authorities which it, in turn, had lent to individuals to buy houses and the State wanted to get its capital back. We established the company which issued bonds, got the money, gave it back to the State and received the income from the mortgage repayments.

As time passed, one of the major issues that arose for the Government was the question of people suing the State, individual Departments, the Attorney General, etc. A former Attorney General mentioned to me that he had seen both sides and thought that it certainly could be better handled by a different organisation. The only reason the function was given to us in 2000 was not that we had expertise in this area but that we were the only organisation associated with central government that could hire people at commercial rates of pay from the private sector and adopt a private sector approach to dealing with the issue. We have been dealing with the State Claims Agency for about 18 months.

More recently in this area the Government has decided, because of problems at the medical end where medical insurance companies have run into trouble, that we should take over claims against hospitals, doctors, health boards, etc. That is an active chunk of business we have taken on and is all done under legislation. We are the agent. We do whatever the Oireachtas and the Government tell us to do. We do not take on activities of our own accord.

We also provide a central treasury service for local authorities, health boards, vocational education committees, etc., in which we take deposits from them or lend them money. Again, this was to get over the problem where the banks were charging them huge amounts to lend money and offering them low rates of interest on deposits. We provided an alternative for them if they wished to get money on a short-term basis. We have also lent money on a long-term basis, again, to keep down the costs they would otherwise have to pay the banks. We are providing competition.

We have taken on fund management services. We manage the social insurance fund for various Ministers. Under the National Pensions Reserve Fund Act, we have been appointed to manage the fund for ten years on behalf of the National Pensions Reserve Fund Commission, an independent body appointed by the Minister for Finance to take decisions on the investment of funds. The commission does not have any staff and is obliged to act through us for ten years following which it will be free to use someone else, if it wishes. We are the guardians of the public cash. At the time there were questions as to whether we, the Central Bank, the Department of Finance or the new organisation would do the job and it was decided we would do so.

The National Development Finance Agency has been established in recent months and given us extra functions. It has a separate board, of which I am anex officio member. It also has outside members. It is an attempt to reduce expenditure on the appointment of the vast array of financial consultants by Departments and agencies in respect of the financial viability of public private partnerships. Every capital project costing over €20 million must now come before us for evaluation. We also have the possibility of guaranteeing €5 billion in respect of PPPs. We can set up special purpose companies, with the agreement of the Minister for Finance if it is useful to do so, to get these items off the State balance sheet. One of the major problems regarding expenditure relates to being caught by the Maastricht treaty criteria.

Under other specific legislation, we have taken on responsibility for the management of the dormant bank accounts fund while under other legislation we will take responsibility in about one year for dormant insurance industry funds. We also have responsibility under covered assets legislation, where so-called Germanfanbriefe are issued in Ireland. If the issue falls outside the loop, we are obliged to come in and take its place. It is quite complex legislation into which I can go if members are interested. We get a tiny fee from the institutions involved.

The range of activities we are undertaking has increased enormously since we started. We run very efficiently. I had a staff of over 65. When we started, we thought we would need a staff of 50 to 100 but got it down to just over 40. While it is now 85 and rising, I emphasise we cover a huge range of activities. We have also hired in experts from the market - five accountants, six lawyers, two actuaries, bond dealers, experts in claims management and so on. You name it, we have it. We wanted people who were experts, who could hit the ground running, who were proven experts in their fields of expertise. The amounts involved are vast - our throughput of cash last year was €300 billion, three times the rate of GNP. Before we came here this morning, we had an auction for €600 million worth of bonds, while this afternoon we will have to raise €400 million on the short-term paper market. We have to have people who can do the job.

I will be happy to expand on any of these issues.

I welcome Mr. Geaney, chairman of the National Pensions Reserve Fund Commission. He is free to make an opening statement.

Mr. Donal Geaney

I am happy to do so. This is my first opportunity to address the committee on the work of the commission. I thank the committee for its invitation.

The accounts in question on today's agenda relate to 2001, the establishment year. As this is our first appearance before the committee, I will deal with the work involved in setting up the fund and the strategies engaged in by the commissioners which inform investment decisions. The fund provides for the partial prefunding of social welfare and public servants' pensions from 2025. The commissioners and I are keenly aware that every citizen has a stake in the fund and an interest in its success.

By 2026 the number of pensioners will have increased by 70% over the figure for 2001 when there were just over five people at work for every pensioner. By 2056 there will be less than two people working for every pensioner. Current social welfare and public service employee pensions cost the Exchequer 5% of GNP each year. Given our population structure and the fact that people are living longer, healthier lives, this cost is expected to rise significantly. Projections carried out in late 2000 suggested that, to maintain the current level of provision, the cost would rise to 8% of GNP in 2025, the first year the fund would come into play, and to about 12.5% by 2056.

While this problem is faced by many countries, our comparatively young population means Ireland has a chance to address the funding question through the NPRF mechanism. Ireland has been ahead of many countries in developing provisions for the future. The Government decided to set aside and invest the proceeds from the sale of Telecom Éireann, about €6.5 billion, a sum equivalent to 1% of GNP annually from 2001 to 2055. To fully fund in advance the cost of pensions and health costs, it is estimated it would cost over 3% of annual GNP for the next 50 years, that is, without making any provision for costs which will arise after this time. As an annual contribution rate of 3% was deemed too great an investment in the future to expect of any generation, a figure of 1% was decided upon.

In 2001 almost €7.5 billion was contributed. To the present day the fund has received about 10% of total projected income up to 2024. Under law, no drawdowns are possible until 2025. Assuming the fund terminates in 2055, it is estimated this prefunding arrangement will allow for a cap of about 6.5% of GNP on net Exchequer outlay on pensions from 2025 to 2055, which, as I said, would otherwise rise to 12.5%.

The establishment of a pensions reserve fund in Ireland has been welcomed by the World Bank and the international credit rating agencies. Similar funds operate around the world. France and New Zealand are seeking to establish similar funds in respect of which they are looking at Ireland as a model. Their projects are structured in a similar way.

As required by legislation, the seven commissioners were appointed in April 2001 and the NTMA appointed as fund manager for ten years. The commissioners are independent of Government. While we determine and implement the fund investment strategy, tactical day-to-day investment decisions are delegated to fund managers. We set the parameters and boundaries within which investments are made.

The guiding principle behind the fund is that it should be managed and operated on commercial lines to achieve the best return on investments. At its first meetings the commission decided that, for the most part, asset management should be out-sourced to specialist asset managers. We also retain Mercer, international investment consultants, to advise on an appropriate long-term strategic benchmark for the fund. A two day meeting was held, at which a range of possible portfolios, with different risk reward trade-offs, was presented. The one chosen, as it offered the most attractive balance between risk and reward, was an 80-20 split between equity and other real assets to bonds and a 50-50 split between euro and non-euro equities.

It was recognised in setting up the fund that, given the size of the market, Irish equities would never represent a significant holding. In taking the NTMA's advice to average into the market and not to invest all the money on day one, the fund to date is well below the 80% benchmark and has thus escaped the worst impact of the current bare market. All of the academic studies at which we have looked show that timing is a minor point in the overall success of a long-term investment such as the national pensions reserve fund. The key decision in determining returns is asset allocation which accounts for approximately 90% of returns over the life of long-term funds.

The NTMA carried out a global search for managers to run the investments according to the strategy agreed by the commission. This was a tender process initiated according to European rules. A total of 574 expressions of interest were received by August 2001. Their evaluation was a mammoth task but efficiently carried out. A total of 178 companies were invited to make more detailed submissions in October that year. Some 50 managers were subsequently interviewed and 14 successful external managers appointed on a phased basis. Our fee negotiations included securing best or favoured nation terms. The NTMA has put in place state-of-the-art performance measurement attribution and risk management systems.

During the period under review no investments were made as the programme of gradual market entry did not begin until January 2002. The fund has performed relatively well compared with the average Irish managed pension fund and the fund's long-term strategic benchmark. In 2001 there was a 3.27% increase. From inception to the end of 2002, the fund was down 13% compared to a figure of 19% for Irish funds. This was turned in against a virtually unprecedented three successive year decline in global equity markets. The key point in relation to the fund is its long-term perspective. Over the horizon to which it is operating, equities must outperform bonds because investors must be rewarded for buying riskier assets, otherwise the entire free enterprise system collapses and there are no adequate rewards for risk-taking and no incentives to invest in business.

With the overarching principles bedding down and in continuing the search for the best possible returns to citizens, recently we have been considering additional asset classes. It was decided, in principle, to invest in small cap equities, corporate bonds, public private partnerships and property. A €200 million allocation has been made. We hope significant progress will be made on these issues over the remainder of this year and early next year. However, with the bulk of the fund always invested in the stock market, such investments will never be of equal significance.

I hope my remarks were brief. I know members will want to explore the issues in more detail and hope it was a useful overview. We will be pleased to answer any queries.

May we publish your submission?

Mr. Geaney

Yes.

How much has the State invested in the national pensions reserve fund since 2001 and what is its current value?

Mr. Geaney

Initially the State invested the capital sum of €6.157 billion. GNP contributions of €2.558 billion have been received to date. The fund has received income and made gains up to €915 million. It has also had marked market losses of €1.215 billion. There is a net sum of €8.415 billion in the fund.

What were the net losses?

Mr. Geaney

Up until yesterday the marked market losses were €1.215 billion.

Are you dismayed at these losses?

Mr. Geaney

One must offset them against income and gains. Clearly, we would like to make profits all the time. However, portfolio management does not work like that and we have had an unprecedented period of market losses since inception of the fund. Overall, up until last night, its net performance showed a minus of €300 million, in the circumstances a pretty good performance.

Dr. Somers, would it be a fair summary that the common theme of the management of the national debt, the National Claims Agency, the National Development Finance Agency and the national pensions reserve fund has to do, to a greater or lesser extent, with the management of risk?

Dr. Somers

Yes. The problem during the years was that the Department of Finance found it very difficult to get and retain experts in the financial field. Anyone who gained this expertise tended to leave and move to the private sector. There is the extraordinary situation where the public sector has lost out to the private sector. For example, the chief executives of the two major banks started life in the public service, as did the chairman and a number of senior executives of one of the other major financial institutions. A former colleague of the Comptroller and Auditor General is the chief executive of what is probably the largest company in the country. The head of the largest brokerage firm also came from the public sector, as did many of the economists quoted daily on radio and television. The State has lost vast expertise during the years. The problem with the Department of Finance was that it was in competition but hidebound because of the restrictions in hiring and paying staff. The NTMA was set up and remains the only institution associated with the centre of government which has the legal capacity, whatever it takes, to hire and pay staff.

Given the vast amounts with which we are dealing, these functions have tended to gravitate towards us by Acts of the Oireachtas and decisions of Government. I agree with the Deputy that the projects which have come our way, by and large, have to do with managing risk, managing large amounts and, in many instances, having the capacity to analyse complex financial transactions. They have come to us because the State no longer has the few banks it had. The ICC, ACC and Trustee Savings Bank have all gone. Therefore, we are probably the only financial institution left to the Government to deal with these issues.

In terms of your original remit to manage the national debt, an improvement of two and a half points is significant in the debt-GDP ratio. As I understand it, it is largely due to good growth rates. In more wobbly times, in terms of far more minimal growth, will the picture regress in the years ahead?

Dr. Somers

In absolute terms, the national debt has not fallen to any great extent. What has happened is that the economy has grown, partly as a result of economic growth, the fall in interest rates and the better credit rating we now enjoy. The burden on the economy has dropped enormously. When we started, about 8% of GNP was being used to pay the interest on the national debt, a figure that is now between 1% and 2%. The NTMA's principal concern in more difficult times is to ensure we retain our triple A credit rating. Germany has had its triple A credit rating confirmed but with a threat from the rating agencies that it may well lose it if its debt-GDP ratio continues to increase. The NTMA regards this as an important development.

Ireland no longer has a unique product to sell to investors, as it is now part of euroland and its market constitutes about 1% of the euroland total. Most of our bonds are bought by foreigners - about 68% or 70% are now held by non-residents who do not give us their money for the love of it. We have to sell our product, talk to financial institutions and make presentations to them and ensure our bonds are fully marketable. We have changed all aspects of our bonds to bring them into line with those in Germany and the rest of continental Europe. We used to pay coupons twice per year but now pay them once per year. All the dealing is now done electronically on what is known as the Euro MTS system which provides instant quotes for those buying and selling bonds. This is still our core business as we have to get that money in order that we can ensure enough cash is available at all times to meet the Government's expenditure needs. That is our main element of concentration.

In times of lesser growth it is a big improvement to bring the ratio down to 34%. Do you believe that figure will increase if we endure low growth rates for a couple of years?

Dr. Somers

It could climb. Debt will decrease only if the Government runs a surplus, which is it has done in recent years. It will run a small deficit this year, however. It is running a huge surplus on the current budget but the rest of the money is being used for capital expenditure. The whole lot is lumped together under the Maastricht treaty rules. It is like being forced to buy one's house, in full, from one's annual income but that is the way the system works. The fact that the Government is running a small deficit means that the debt, in absolute terms, must go up. The GNP and GDP figures should also move up. The projections that have been made for the next few years show increasing deficits. We are constrained by the 3% limit all the time but if the debt goes up, it will depend on the speed at which the GNP and GDP figures go up. We think it will probably stabilise at about 34% for the next few years.

I accept the analogy of one buying one's house from one's annual income. I appreciate that Mr. Geaney has told the committee about the national pensions reserve fund's market losses of approximately €1.1 billion as a result of market conditions. In the light of these matters, what prospect is there that some of the fund will be invested in infrastructural projects, rather than having to pay for the house out of one's annual income?

Dr. Somers

I will answer the question, assuming that I am in order to do so as I do not wish to cut across Mr. Geaney. The National Pensions Reserve Fund Commission has announced that it is prepared to put up an initial sum of €200 million towards PPP-type operations. I am conscious that a huge amount is being invested, largely overseas. The NTMA has examined various investment options in Dublin. There is no point in investing in the Irish equity market as that would give an unwarranted gain to those who already hold these shares. As a chunk of the fund is allocated to euroland, fund managers have the option of buying shares here or elsewhere. It is difficult to stomach the fact that we cannot invest big chunks of the money in our infrastructure. Investment in bricks and mortar counts towards the Maastricht treaty deficit regulations. The money that goes into the national pensions reserve fund does not count for the purposes of the Maastricht treaty at present as it is not regarded as expenditure by the Government under the terms of the treaty regulations. If we buy bricks and mortar with the money, however, it is regarded as expenditure.

The money that goes into the fund does not count for calculation purposes but if we take money from the fund and spend it on infrastructure, it will be counted.

Dr. Somers

If Mr. Geaney and I purchase an office block with the money, it is regarded as expenditure for Maastricht treaty purposes. If we buy stocks and shares, however, it will not be seen in such a light. The €1.2 billion going into the fund at present is not regarded as Government expenditure under the great Maastricht treaty rules, provided that we do not decide to spend the money on infrastructural projects. The twist is that if the funds are invested in a self-financing project - one in which the commercial income exceeds 51% of the cost - they can be taken off the balance sheet for Maastricht treaty purposes. Such an investment would not count as expenditure in such circumstances but it would if the project was not self-financing. One of the issues we are examining in connection with the National Development Finance Agency is the question of whether reasonably self-financing projects can be found.

A self-financing project might be a toll road, for example.

Dr. Somers

Yes.

It could not be a hospital or school.

Dr. Somers

The Deputy is correct, as I understand it. Perhaps a private hospital might qualify if it was self-financing. Every time I think I understand this business I find another twist but my understanding is that public hospitals or schools would not qualify because they are not self-financing. If the toll charged on a toll road was set at a sufficient level to make the project economically self-financing, the project would not be included on the State's balance sheet for Maastricht treaty purposes. I gather that a project would be included on the balance sheet if the funds were used to build a road that did not have a toll.

Are there moves afoot to tweak the Maastricht treaty by matching its provisions to a given member state's stage of infrastructural development? Do you see any likelihood of such a provision? Will the arrival of the accession countries give an added impetus to maintaining the Stability and Growth Pact in its current fashion?

Dr. Somers

As I understand it, the countries which are part of euroland are particularly likely to get caught by the Maastricht treaty provisions. I am not sure when the new countries will join or what the specific rules will be in relation to them. I understand the Minister for Finance has made strenuous efforts to try to find ways of coping with this problem. It is quite frustrating that the larger countries, such as France and Germany, are also up against these limits but seem to be able to go through them. I understand Portugal undertook many projects on the understanding they were off the balance sheet but they were placed back on it after they had been examined more closely by EUROSTAT. Portugal went through the 3% limit. The Commission can, in theory, fine countries which exceed the limit and do not get their act together. It can make life very difficult for such countries. It seems the smaller the country the more it can be leant on in this game.

Does the emergence of the National Development Finance Agency change the picture in any respect?

Dr. Somers

The National Development Finance Agency will have three functions. It is hoped it will enable us to save money in respect of the many consultants employed for each project. It is looking at approximately 60 separate projects at various stages of development. The financing of every project costing over €20 million is supposed to be examined by the NTMA, assuming that it is not financed by the Exchequer in the normal way. Many public private partnerships involve designing, construction, financing, operation and maintenance. If we can receive a quote for all these aspects and another for designing, construction, operation and maintenance and provide the financing cheaper through the NDFA, we will have another option. If the project is self-financing, it can be removed from the State balance sheet for Maastricht treaty purposes, which is a further plus. The NDFA has the ability to borrow or guarantee up to €5 billion, or to set up a special purpose company which can help to ring-fence some projects and, I hope, remove them from the balance sheet.

That would not be included in the Maastricht treaty rubric.

Dr. Somers

It would be ring-fenced and self-financing. As I understand it, it would not be counted for Maastricht treaty purposes. There is no point in trying to ring-fence if it will not be self-financing because it will be included in the balance sheet.

It seems daft that we should have such a significant amount in a reserve fund. Leaving out the €1.2 billion losses, which are exceptional and will, I hope, balance out, €200 million is only a drop in the ocean. It seems daft that, in comparison to leading states such as Germany and France, we have serious infrastructural problems and money in the fund which we cannot devote to domestic projects because of the cap.

Dr. Somers

I agree with the Deputy. For years I have driven all over Europe and the United States. One can almost drive from one end of Europe to the other without going through a set of traffic lights. There are magnificent roads, bridges, tunnels and fast trains etc. I was in Lisbon when I was involved with the European Investment Bank which funded major projects. I saw an underground, a bridge about 18 kilometres long, an Expo centre, a new railway line under an existing bridge and magnificent roads all around the city being built. The authorities burst the limit. On a personal basis I would cheer them on because they now have the infrastructure. They may be under pressure from EUROTSTAT and others but at least they have the physical infrastructure. We are way behind in this area which will damage our prospects for future growth. Most other countries I have visited are way ahead of us. I agree it is frustrating that we have this cash but are constrained by the statisticians in regard to what we can do with it.

What is Mr. Geaney's view on this critical question?

Mr. Geaney

I sympathise with the concerns expressed but they relate to issues around borrowing limits set by the Maastricht treaty and so on. They relate to the complexity of what is counted as expenditure under the Maastricht treaty guidelines, whether we would consider it as expenditure or an investment and whether they would consider it the same way. I do not really understand the detail. What I do know is that we are accruing pension liabilities daily and that if we do not provide for them, we will have a huge problem. I also know that if one takes a long-term rather than a quarter to quarter view, we must get a real rate of return on equities. There must be an equity risk premium, as we have seen historically. Over the past 100 years or so that number has been 6%. Therefore, on average, for approximately the past 100 years, the gap in returns between the amounts invested in equities and bonds has been a 6% premium. Our assumption is - we are being conservative - that we will only get a 3% premium for the next 50 years. If that does not happen, there will be no capital for business and we will have a very different problem because, basically, we will have no business.

Our ability to discharge pension liabilities is also determined by growth in the economy. If growth is constrained by our inability to roll out the national development plan more speedily to address the issues raised by the Institute of Engineers of Ireland, it will affect our capacity to deal with pensioners in either 2026 or 2056.

Mr. Geaney

I am sure it will. It is true that the more GNP goes up the more money there is for everybody. However, this issue is different because it concerns the restrictions imposed by the Maastricht treaty regarding what we can spend. The liability problem will not go away no matter what we do about it.

Let us look at the figure of €200 million to which you referred. Can you give the committee any timeframe as to how long the proposition is likely to hang about? Is there a particular project earmarked or are they just in the market for a project?

Mr. Geaney

The sum of €200 million is an initial allocation from the fund. We hope it will encourage other investors to join projects. That is what we would like to see happen in order that we would have some incremental leverage on the figure of €200 million. However, we have not been overrun with projects but are eagerly awaiting them. One of the difficulties with this type of investment is that it requires a long lead-in period. As we know, it normally takes well over a number of months to go through all the hoops in seeking planning permission, designs and so on. These projects take years to develop. While we are hopeful we will see some proposals in the near term, we do not have a specific proposal to which we can say "yea" or "nay".

Can you explain that to the committee? Representatives of the National Roads Authority have appeared before it who stated the authority could not proceed with project X or Y for various reasons. Why could one of its projects not be adopted?

Mr. Geaney

There is no reason it could not.

What is required to be done to cause it to happen?

Mr. Geaney

To be honest, the National Roads Authority would have to be asked that question. We are available and open for business on this matter but no formal proposal has been made to us.

Discussions are ongoing with the Minister for Transport about the provision of a metro system. Would it be regarded as a project that would fit into the parameters of the fund?

Mr. Geaney

I do not think there are any projects with a commercial return that we could not consider. As long as they meet the requirements of the legislation - to get a commercial return on the funds allocated - we can invest in them.

You gave figures for the ratio of workers to pensioners. The number of pensioners will increase by 70% by 2026 as compared to the starting figure in 2001. You went on to say that in terms of the ratio of pensioners to workers there would be less than two workers to each pensioner in 2056. In this job I toss and turn a lot but not about 2056. May we have the figure for 2026?

Mr. Geaney

I can get it for the Deputy but from recall it is somewhere around three.

Down from five today?

Mr. Geaney

Yes, the figure is three or 3.2, down from 5.4 today.

The historical performance of the fund was outlined. What are the prognostications for the next while?

Mr. Geaney

The experience in 2002 was horrible for everybody who invested in markets. We were lucky to a degree that we were a little cautious and did not jump in at the beginning of the year. All the expert opinion and comments we received at the time were to the effect that 2002 would be an up year. The forecast, on which there was consensus, was that, on average, there would be growth of 16%. As it turned out, the figure was minus 25%. It would be a brave man who would call any short-term returns. As a commission, we felt uncomfortable about jumping in. Around the time we were making these decisions a piece published from the Irish Association of Pension Funds gave the advice to jump in. Thank God we did not take it. What I can say is that if one looks again at the long-term perspective and performances - we have done these exercises - one will always find that over a 25 year period one will outperform by investing most of one's funds in equities. We would not even put 20% in bonds if it was not for the fact that one must dampen volatility as one goes along. The rationale is - Goldman Sachs recently did an exercise on this - that there is 100% probability statistically, which does not mean it will happen, that one will outperform by investing in equities. Therefore, why would one not invest 100%? When I say equities I mean real assets which include properties and other real assets rather than just financial assets.

You are sitting on top of a little pot of gold which includes more than €6 million from the proceeds from the sale of Telecom Éireann and more than €2.5 billion by way of GNP contribution and we have to invest it in Japan, the United States, Germany and so on. You do not have any projects on your desk as we discuss this matter today.

Mr. Geaney

No, we do not have any PPP projects but our performance last year was grim. By comparison to the benchmarks, it was quite good.

Are you talking to the Department of Finance or is the Department of Finance talking to you about hustling some sensible infrastructural projects in Ireland that might be at least part funded from the fund?

Mr. Geaney

There is a lot of conversation between various Departments and the NTMA on this matter. The NTMA is in a position to see a lot of these projects because it includes the National Development Finance Agency. While there is a lot of effort, we do not have a project in which to invest.

The other point I would like to make is that there is an impression that we are spending or investing all of the money outside the country in which there is no benefit for Ireland. That is not true. It is a misrepresentation of the facts because if one looks at the matter, one will see that many of the companies which constitute the indices in which the fund is invested are those which provide huge employment in this country. For instance, we own shares in Pfizer which employs a lot of people in Cork. Therefore, it is an overly simplistic assumption to say just because it is not an Irish plc it does not generate any benefit for the economy.

Our competitiveness must be damaged by the speed of roll-out of infraÍstructural projects and the NDP.

Dr. Somers

I agree with the Deputy. We have a lot of people who come here from abroad to visit us - bankers, investors, etc. It starts in Dublin Airport and they wonder what we are at. We are falling behind which I find extremely frustrating. I hear the figures for what it costs to complete projects in other countries. I see projects that are held up here indefinitely for all kinds of good ecological reasons, perhaps, but held up nevertheless. As I mentioned, I have travelled through France where there is a roadway built down through the centre at a height equivalent to Carrauntoohil. They seem to be able to build bridges over gorges and cut through mountains. They just get on with it. However, in this country for all kinds of reasons we do not seem to be able to do this and our costs seem higher than anywhere else, of which I have knowledge. If we do not get our infrastructure right, the emerging countries in central and eastern Europe will catch up with us.

We still have certain advantages. I have spoken to a lot of investors from the United States, etc. They are comfortable coming here because the language is the same and the legal system does not hold any shocks for them. They know they can access the bureaucracy and the political system if they have a problem and talk about it. Their colleagues have made decisions to invest here as we still have a very good tax regime. At the end of the day people have to take decisions to invest and if they get it wrong, their heads are taken off. This applies particularly in the United States. When these guys are making investment decisions, they look to see what their colleagues have done and how well the investment has performed. We still have that advantage. We have good relationships with a lot of people.

If one travels to the west, there are problems with electricity supply, broadband and roads, which is not helpful. I travelled to Connemara a month or two ago and it took me six hours to get there from Dublin. I would be in New York quicker. That is the reality. We are suffering from the fact that for years we did not invest in the kind of infrastructure in which other countries invested. Now we are trying to catch up very fast. We are investing, through the public capital programme, something like 5% of GNP each year in such projects but it is still not fast enough. I get very impatient about this because I have seen what happens in other countries.

I would like to add to what Mr. Geaney said about pensions. There is a huge problem with unfunded pension liabilities of those employed in the public service and social welfare groups. This fund - even assuming it does very well - will only cover one third of the total cost. There is an issue about retiring ages. Without wanting to single out specific groups, there are groups which are entitled to retire at the age of 40 or 50 years. Most can certainly get out at 60 years. As I understand it, an Army officer can get a good pension after 21 years service and retire at the age of 40 years. His life expectancy would be almost a further 40 years. He would have worked for 21 years and draw a pension for almost 40 years. A man retiring at 50 years of age has a life expectancy of a further 30 years and will draw a pension for as long as he has worked. The associated contribution rates are enormous. For example, the figures we have given for somebody employed at 20 years of age and who retires at 40 years of age show that the contribution rate is 62.9% of his pay. This sum should be placed in a pension fund every year for him. As of now nothing is going in and we are building up these huge liabilities.

With an ageing population, increasing health care costs and a smaller number of workers per head of population, there is a huge time bomb being built. The view is that we cannot afford to do nothing. We have to start putting money aside now. It is a very real issue which has not been faced up to in the past. If one hires somebody, one should provide for the total cost, including their pension, which I am happy to say we do in the NTMA.

I do not want to flog the infrastructure issue to death as it is a case ofdéjà vu. When you were here five years ago, your hobbyhorse was that not enough money was being invested in infrastructure. Obviously, you have been agitated for at least five years. What would be the result of breaking the 3% barrier? France and Germany can do so and get away with it with impunity. All the roads about which you spoke in France are needed even more so in travelling to places like Connemara, Sligo, Limerick, Galway and Cork.

Dr. Somers

Obviously, I have not attended any of the meetings where this issue has been discussed. I know the Minister for Finance has tried to argue that because our debt is so low and we are spending money on capital etc., there should be some leeway. However, without wishing to put words in his mouth, I do not think he has got very far in talking to other countries. They are all terrified that some large country, for example, will go off the rails and run huge deficits, put pressure on the euro and the whole system will then come under strain. Whether that would mean interest rates would go up or the euro would fall in value, I do not know. Talking to the Minister, I do not think he has got much comfort. If we tried to break the rules, we would come under such pressure from the other member states and the Commission that life would become almost impossible for us.

Germany was mentioned by Deputy Ardagh. I have travelled there to visit some of the companies in which we have shares to hear their views on the world situation. The level of unemployment is of the order of 4.5 million, although some of the companies stated that was not the true figure - that it was somewhere between six and seven million having regard to various employment generating activities. They are quite pessimistic about the situation in Germany on the basis that the country is already flat. As I understand it, under the Maastricht treaty rules, it should take another €21 billion out of the economy to move towards the 3% requirement. If it does, it will get into even more trouble.

As an example of the institutions I visited, I went to the Bayerische Vereinsbank, the second largest of the so-called private banks in Germany which also include Deutsche Bank, Dresdner Bank and Commerzbank. At the time, some two or three months ago, the bank's market capitalisation, because of all the trouble it had encountered, was about €4.5 billion. The market capitalisation of Bank of Ireland is about €10 billion. One asks oneself how it has transpired that the second largest bank in Germany is worth less than half the value of Bank of Ireland. Commerzbank, also a major German bank, was capitalised at about €2 billion - a fraction of what is applicable in Ireland.

I also visited companies such as Volkswagen and BMW which are looking at markets outside Europe because they do not see much potential for growth within Germany. They are looking towards China and the Far East. If Germany tries to get down towards the 3% level, the companies in question which are already experiencing difficulties and relying largely on export markets will find their local market diminishing further. I am not sure it is in our interests to put undue pressure on countries such as France and Germany which are already experiencing considerable difficulties——

I am not suggesting we put pressure on France and Germany but rather that we look at our own needs. As has been said, we are only minions in this context, at 1% of the euro market.

Dr. Somers

That is true.

You have indicated that Germany could, potentially, lose its AAA rating. Is that in the long or short-term?

Dr. Somers

In the long-term.

Ireland currently has a AAA rating. What is the comparison in terms of interest rates? Some years ago there was a very big difference between our bond rates and those in Germany. I understand it was down to ten basis points in the last report you gave. Is the situation now reversed?

Dr. Somers

We have an exact comparison in this regard. We had a bond auction at 9.30 a.m., just before we came to this meeting. On an auction of bonds to the value of €600 million we paid one basis point - one hundredth of 1% - more than Germany and two less than France. We are up there with the big guys. In conversation with the Germans they will say: "We have huge unemployment, at 10% to 11%, and awful problems. You guys have 4% to 4.5% unemployment and the fastest growing economy in Europe. Granted, your inflation is out of kilter, so you should not be increasing expenditure. However, we are not sympathetic towards you - we are looking at our own problems." In short, I do not believe we will get a sympathetic hearing from the other countries concerned. I should add that I am not in the loop in that I do not attend meetings - I am simply repeating what I have heard.

Is it so important that we stay within the rules when others can break them. However, we need to have a certain flexibility.

In relation to the €200 million available in the national pensions reserve fund, can the fund accept some risk that would otherwise cost a PPP provider to try to give an advantage to that type of investment? The idea would be to act as a catalyst to help commercially viable investment to get going. While the fund might take a small knock, it would still be a commercial proposition - instead of 7%, one might only get 6% but it would give a boost to a PPP to get it moving. Would that approach be consistent with the 3% requirement? Is the NTMA looking at ways of trying to improve infrastructural investment in Ireland and the economy generally, or is its primary goal to maximise profit? I apologise if I am not expressing myself in the most articulateway.

Dr. Somers

I understand the Deputy's point. Under the legislation, our legal obligation is to achieve a commercial return - I presume this implies a good commercial return. Within the bounds of this, essentially we have discretion.

With regard to what might happen in relation to various projects, that is unlikely to be a matter on which the commission will spend a great deal of time because there are other agencies dealing with such matters such as the National Development Finance Agency and others. Once we get a risk adjusted commercial return, we are happy to invest. However, there is an infinite number of projects of various types involved and it is the job of others to pull them together. We are open to investment.

I will move on to other matters. The area we have been discussing is huge and there are many more questions arising in relation to it. There is a responsibility on us, as public representatives, and the major agencies acting alongside the Government to influence those concerned at Irish and European levels with a view to getting infrastructural development and investment moving.

In relation to the State Claims Agency and the State's clinical indemnity scheme, insurance constitutes a huge cost for businesses and medical professionals. Some hospitals would be without gynaecologists in the absence of insurance cover at a reasonable cost. How is the NTMA assisting in relation to liability insurance cover?

Dr. Somers

As I mentioned in my opening statement, the whole concept of the State Claims Agency arose during the period of office of the rainbow coalition Government. The then Attorney General approached me as to whether we could assist, in some way, in trying to deal with claims against the State. I believe he saw both sides of the situation. He had acted as a lawyer on behalf of people claiming against the State and subsequently, as the State's chief legal officer, saw how cases were being handled.

The approach was that each Department was dealing with its own claims. When a Minister or Department was sued, the Department concerned would not, in the normal course, have anybody with particular expertise in the area and the matter would be referred to the Chief State Solicitor's office, the Department of Finance and so on. The then Attorney General's perception was that cases would roll on without much action being taken while legal costs rolled up. There was great reluctance to take any decisions as to whether cases should be settled because there was no particular expertise in the Departments concerned. They would seek advice from senior and junior counsel but difficulties in decision-making still remained and many cases were settled only on the steps of the High Court, or in court. At that stage legal costs had already risen very sharply. Claimants' expectations had probably increased also having regard to the intervening long delay. The Attorney General felt the settlements would be lower and legal costs could be kept down if organisations could assess the cases and take decisions very quickly. After that Attorney General had departed, I asked his successor what he thought and found that he was quite enthusiastic. I spoke to his successor, in turn, who was also enthusiastic. The legislation providing for the establishment of the State Claims Agency was eventually passed in 2000. If it so wishes, the Government can transfer to the National Treasury Management Agency the obligation to deal with and settle, or not, any case on behalf of any Minister. The money in respect of the settlement can then be claimed from the relevant Minister.

I was asked what we brought to the party. The NTMA took a function from the central Government, by which I mean the Central Bank and the Department of Finance, and set up the State Claims Agency as a business. This was a business as well, essentially. We had the capacity to hire litigation lawyers and claims managers who are familiar with this business. When an incident occurred, these people were able to investigate it quickly and, hopefully, to settle it quickly. If a claim was fraudulent or too large, the courts would become involved. One had to have the courage to decide to use the courts or to settle the cases. We sent people to the Four Courts to make such decisions.

The problem was that the culture of litigation in this State had grown to such an extent that something had to be done to put a brake on it. The Army deafness cases were the main issues that caused this process to be expedited. I do not recall, from my period in the 1980s as Secretary General of the Department of Defence, that people were going deaf or that there was much deafness at all. There used to be an annual firing in the Glen of Imaal when the major artillery pieces were fired. One was not firing them every day of the week, however, as very little money was available for the purchase of replacement artillery shells. I did not hear of any great deafness issue at the time, although people were falling from jeeps or trucks. I later discovered, to my amazement, that tens of thousands of people seemed to be suffering from deafness after this culture had started. The aim of the State Claims Agency was to stop as many claims as possible. It was willing to settle genuine claims, but not to do so in the case of false claims.

The NTMA was asked last summer by the Government to produce a report on what could be done to prevent mass action claims against the State in the future and to bring down costs. A report was sent to the Minister for Finance at the end of April and I believe he intends to send it to the Government. I hope it will be published. The report is not particularly dramatic, but it mentions many small things one can do to reduce costs.

Problems have arisen in the medical area in recent times because the cost of medical insurance has gone through the roof. Anecdotal evidence suggests that the annual insurance bill of an orthopaedic surgeon is about €45,000, but that of an obstetrician gynaecologist is about €500,000. The medical insurance agencies are not anxious to do business and may be reducing their levels of activity. The NTMA has been asked to take on claims against those involved in the medical sector - hospitals, doctors, health boards and consultants. Each of these groups hired its own legal team for individual cases until recently. One of the advantages of cases being handled by the NTMA is that there will be one legal team. Consultants have not yet bought into the new system and may want their own legal teams. The State pays between 80% and 90% of the cost of consultants' insurance.

Does the 80% or 90% cover the consultants for their private patients as well as for their public patients?

Dr. Somers

I understand the 80% or 90% is supposed to cover the cost of insuring consultants' public practices and the other 10% or 20% is supposed to cover their private practices. This is my understanding of it, but my level of expertise is not total. Although consultants' insurance costs are huge, many insurance companies are not anxious to continue to insure them. The NTMA is putting in place an arrangement to ensure all incidents are reported to it on the Internet though a field system as they occur. This will ensure we will have full details of cases as they occur and, hopefully, that we will be able to pinpoint areas of particular risk or incidents that occur. The Government decided last July that the NTMA should take on this and the formal delegation order was made earlier this year. We have been notified of about 4,500 incidents of something wrong, which does not necessarily mean a licence is at risk. A few hundred of these incidents have crystallised into claims, which are being examined.

Is there a global reserve on the value of these claims at present?

Dr. Somers

I have been advised not to give a figure in relation to the claims that have come in to us, but I might as well do so because I do not think anybody can make very much of it. The reserve on the claims that are before us is somewhere between €70 million and €80 million. There are between 2,000 and 2,500 claims, in total, before us at present, when one includes claims arising from such incidents as Garda cars running into other cars and medical procedures.

How much money does the NTMA believe has been saved, or is being saved, in legal fees as a result of the transfer of powers to one agency, rather than having many Departments, health boards, hospitals, and so on, involved?

Dr. Somers

It is difficult to know because very few statistics were available before the NTMA took over this function. When he was Chairman of this committee, the late Jim Mitchell asked several times if he could be given a full account of the level of claims against the State, but it was not possible to produce such figures. We are getting them now. Legal fees are running at about 35% to 40% of the settlement at present, but I hope that figure can be decreased. We have to fight cases, as everybody will have a go at us if we are seen as a soft touch. We are frequently under pressure to settle cases in which individuals have no case, in the view of the NTMA. It is suggested that such people should be given €5,000 or €10,000 to get rid of them. We are not inclined to do that as we feel one is better off taking a case to court if we feel the person involved has no case. The judge can be allowed to make a decision, which we will hopefully win. If one adopts a policy of settling to get rid of nuisance cases, one encourages others to come along with more such cases.

I would like to ask about the increase in administration costs from €8 million to €9.7 million and then to €13.7 million, a matter that was raised by the Comptroller and Auditor General. The NTMA claims that staff levels increased to 85 and continue to increase. When Dr. Somers attended a meeting of this committee some years ago, the NTMA lost nine further people the previous year, 1997, and the NTMA had lost five people up to July 1998. How many people at the higher level were lost because of salaries in 2002?

Dr. Somers

It is probable that people were not lost at the top level. I put in place a salary review. I had to hire people at high rates of pay. We have tried every way to get people to work for the NTMA, but it is not necessarily seen as the most attractive organisation to join. We are very much up in lights and a person's career can be destroyed if anything goes wrong. We are trying to recruit from a very small portion of the population. We get candidates to visit a psychologist before we recruit them to ensure they are a good fit and that we are not taking a risk. My colleagues and I have spent a huge amount of time trying to recruit staff, but it is extremely difficult to do so. When I asked the psychologist why it is so difficult to recruit staff, he said it is because the NTMA is trawling among the top 2% to 5% of the population. Most of the people we encounter are already in well-paid jobs and are comfortable in their present positions, from which we are trying to extract them. I asked the Mercers consulting company to review the jobs in the NTMA and to determine the appropriate rates of pay. I then brought the matter to the attention of our advisory committee and changed——

The NTMA has found the correct balance if it is not losing staff in the current economic climate. During your last appearance before the committee you stated you were in favour of performance related payments and bonuses. What was the value of benchmark savings in 2002?

Dr. Somers

Some €28 million.

Given that the figure in 1997 was €57 million, the savings declined somewhat in 2002 whereas salaries increased.

Dr. Somers

The benchmark is getting tighter. Many would say it is a very good performance to match the benchmark, which is tough. I do not wish to repeat myself but our various functions are difficult, tricky operations which would not have been given to us if the Oireachtas or the Minister thought there was a cheaper or better way of carrying them out. When the issue of the NTMA arose in 1990 and the legislation was being discussed, a question was asked in the Seanad about how much the agency would cost. The then Minister for Finance, former Deputy Albert Reynolds, stated he did not expect the cost to exceed £10 million. We have only now reached the stage where we have spent £10 million.

I keep a heavy hand on everything spent in the organisation. We do not have incremental pay scales or anything like them. Everybody is on an individual deal, all of which I try to keep separate. I recruit as cheaply as possible. However, the sums passing through the organisation are such that they will prevent us from taking any risks. Therefore, I insist that we bring in the best people we can find to deal with problems.

How long must senior staff serve to qualify for a full pension?

Dr. Somers

Forty years.

A significant amount has been allocated to pension expenditure. I had expected the figure to be smaller.

Dr. Somers

Essentially, we have introduced the public service pension scheme.

The final item is the small savings reserve, to which sums of €600 million and €700 million were allocated a few years ago. The fund has obviously reached a sufficient level. How much, if anything, was allocated to it in 2002?

Dr. Somers

A sum of €3 million was withdrawn from it.

It is, therefore, at a level sufficient to cover——

Dr. Somers

About 50% of the overhang is covered.

I welcome the delegation. I am almost awe-struck by the amount of trading the NTMA does. While I do not come from that discipline, I can appreciate the vast amounts with which the agency must deal as that is its business.

In relation to Deputy Ardagh's final point, as a member of a value for money committee, I, too, was struck by the steep increase in salaries and expenses. I accept this is partly due to the remit the NTMA has been given on several fronts. Will Dr. Somers indicate the type of salary range enjoyed by the top five or ten people in the agency?

Dr. Somers

While I am happy to go into this matter——

I do not want to string out the question because I have much more important questions to ask. The salaries of Deputies and others who appear before the committee are well known. I am not asking you to go through each member of staff individually. The NTMA clearly goes to considerable trouble to recruit staff. I expect few recruitment agencies go as far as to have psychological assessments carried out on potential recruits. Levels of pay must be high.

Dr. Somers

Yes, the NTMA was set on the basis that it would pay market rates. I understand that, due to our current rates or pay, we are the only organisation outside the review group on higher remuneration. Average remuneration for the year was, I believe, between €90,000 and €100,000. I have never revealed details of salaries to staff. My colleagues who are present do not know what anybody else is being paid because I have kept the issue of pay out of the organisation. It is dealt with by PricewaterhouseCoopers. I discussed the issue with our advisory committee which reviews everybody's pay each year. Giving the committee figures carries the risk that it may create pressure to level up - there is never pressure to level down. I deal with the top grades while the rest of the staff are dealt with by the finance director.

I will not pursue this matter as you have given me an average figure. May I assume that some members of staff are earning €250,000 or more?

Dr. Somers

Yes.

That was my belief. If the NTMA successfully performed the various functions you mentioned, I would have no trouble in agreeing that the salaries he mentioned were worthwhile.

I have a question for Mr. Geaney whose impatience with regard to our infrastructure I share. I listened attentively to his remarks on the funds at the NTMA's disposal for the purposes of investment. The organisation has available to it a golden goose in terms of the money it has to invest to the best advantage of the pensioners of the future. The goose has laid a golden egg which we cannot use as it appears we cannot do anything with it in terms of infrastructure.

Public private partnerships for building bridges, roads and so forth were hailed as the great white hope for this country. The only time a private individual will get involved in such schemes is when he or she stands to make a profit. That is how life works. Thus far, people have not been lining up to get involved in such projects. My interpretation of Mr. Geaney's comments is that the NTMA will take the same cue as private individuals, namely, that unless public private partnerships offer a good return, the organisation, in line with its remit, will not get involved.

I could never understand the reason millions were being invested abroad. In some years we got a bad deal through no fault of any individual - this is how the big, bad world operates. Those operating in the financial business have measurements which can be used for periods of 15, 20 or 25 years. Surely, the availability of public private partnerships for large, new, tolled road projects as well as the imminent doubling of car ownership, which will, I understand, occur before 2020, mean the NTMA stands to make a financial gain from making greater use of the money at its disposal for infrastructural projects. If it transpires that it does not find this to be the case, private investors will adopt the same view.

I come from the west which receives about €1 million in investment for every €500 million invested elsewhere. We always get the thin end of the wedge and nothing I have heard today suggests anything is about to change. That debate is not, however, the reason we are here today. At least, money is available and in the system. Given that road use is unavoidable and the tolling system will generate significant revenue, is there not a role for the NTMA to invest significant sums in infrastructural projects to great advantage?

Mr. Geaney

The Deputy has put his finger on the point. The simple fact is that the purpose of the money in the national pensions reserve fund is to obtain a reasonable commercial risk adjusted return. It is not different from the money in other funds. If projects are put together in such a way that they will give a yield, there will not be a problem financing them, whether with money from the national pensions reserve fund, British pension funds or private individuals.

The climate here has been attractive for private investors over the past 15 years and there has been huge investment. Although it was characterised as investment at the start, it has since been viewed as evil tax breaks, on the back of which the IFSC was built, like most of the new hotels. This proves the point that if something is attractive, people will go for it. The trick is to make it attractive and there will be no problem getting money.

Many of the public private partnerships are attractive, so long as the State carries most of the risk. That is only a personal view.

Mr. Geaney

Perhaps that has been the case but it does not have to be so in the future when I hope a more intelligent and rational approach will be applied.

I also hope so.

I agree with Dr. Somers' point in regard to insurance claims. I put it to him that bogus insurance claims constitute a major part of the overall number of claims. Is his organisation capable of carrying out private investigative work to ensure people are exposed as frauds? Business people have to endure a doubling and trebling of public liability insurance costs, in part because of the increase in the number of bogus claims.

Dr. Somers

This is a business we had to start from scratch. As is the case with virtually everything we have done, we had to start these organisations. We hired people who were expert in claims management. The general practice is that when a claim comes in, they go to the site of the incident with their cameras and measuring tapes etc. to look at how the injury happened and so on. I do not think that was ever done before on behalf of the State. By the time its officers got around to looking at the evidence, it was usually no longer available. While one cannot be on the spot when an accident occurs, it is necessary to get to the scene as quickly as possible. The scene is assessed carefully and the matter looked at to see if other claims are being made by the same individual. Private detectives are also employed. Should a person claim he or she cannot walk while attending discos every night, the evidence will be presented to the other side in the case. We are determined to get a handle on this and stop what we see as a rip-off in many instances. As I mentioned, we have sent a report to the Minister for Finance which I hope will help to reduce the incentives in this regard. I can outline some of the issues that arise, if the Deputy is interested.

From my local authority connections I have a fair idea of what is involved. Everybody will be delighted if this matter can be resolved. Mr. Somers also referred to the fact that deals were made before cases went to court. Am I correct in saying that is not a policy he intends to pursue?

Dr. Somers

Not unless it makes sense. If a claimant does not have a case and we are approached to pay out €5,000 or €10,000 just to get rid of him or her from a nuisance point of view, that will only encourage others to do the same thing. It might make sense for an insurance company to do this because it is working to a different timescale and on a bigger scale but if the State was seen to be a soft touch and prepared to settle just to get rid of someone from a nuisance point of view, we would only invite more trouble. While we may lose some of the cases we take to court, for which we will receive criticism, nevertheless, we have to take a stand on this matter. I hope we will win more cases than we will lose. A judgment call is required. We have claims managers who have a pretty good idea as to whether cases are fraudulent. I have encouraged them not to back off or be intimidated in terms of making a quick settlement.

How important are Post Office savings and prize bonds in the overall scheme of things? The Post Office savings system was seen as excellent by many small investors. Why do more people not use it?

Dr. Somers

In the past year or two more money has been put into the Post Office Savings Bank, which has been automated. The response to customers is now very fast. Another factor was that in previous years the return on savings certificates was very high. This has now come down to more realistic levels because interest rates generally have fallen sharply.

Were they not reduced too quickly?

Dr. Somers

It has been suggested to me that we cut rates too fast. Subject to correction, the current rate for savings certificates is 16% over their five and a half year lifespan, which gives an annual rate of return of some 2.75% tax free. On the wholesale market I can issue bonds which will cost me between 3.5% and 4% but interest is subject to tax. The rate of 2.75% is not subject to tax. It is as good as anybody is likely to get at the moment.

Given that it was aimed primarily at small savers, one would have thought it was an ideal way to get people saving in a way similar to that which made the credit union movement attractive.

Dr. Somers

It is hard to know what motivates people in their savings habits. We have tried to keep more or less to the middle of the market for the small saving schemes without offering too much or too little. In years gone by we were criticised for crowding out the market by other financial institutions which alleged that we were scooping the whole lot and that they were short of money for mortgages and so on.

They are always yapping about something. They are never happy.

Dr. Somers

The schemes are quite expensive to administer. We have been paying a rate of 2.75% in administration costs to the Post Office every year in respect of the Post Office Savings Bank, the one which has been growing. Therefore, it is by no means cheap money. We can go out in the market and get short-term funds at rates not much more than 2% or 2.5% because interest rates have fallen so much. There is a perception that the small saving schemes are a great bargain but when administration costs are taken into account, they are an extremely expensive source of funds. Every Tom, Dick and Harry seems to be out looking for people to save and some are offering ridiculously low rates of interest. I think there is one institution which states it pays no interest.

What is the rate of return on prize bonds?

Dr. Somers

The prize bond scheme operates in such a way that we put a sum equivalent to 2.75% of the value of the bonds into a prize fund and hold a draw every week. There is a range of prizes that people can win. Under the scheme, the names of winners are confidential. Therefore, we do not get any publicity from it. We cannot state a certain person won a big prize this week.

Considerable concern was expressed on a radio programme some months ago about so-called unclaimed prizes. We were concerned because the list of unclaimed prizes was published. It is also posted on a website on which one can type in the number of one's bond to find out if one has won a prize. We actually went to the trouble of publishing a little booklet, Forgotten to Pick Up Your Prize?, because of the fuss generated. It contains a list of all the unclaimed winning prize bond numbers and asks people if they have checked their numbers. It is available in every post office.

The number of applications for unclaimed prizes was quite small and the response disappointing. There were 5,471 unclaimed prizes, many of which were very small, but only 91 were claimed as a result of our campaign. However, we responded to the concern of the citizenry that there was a vast number of unclaimed prizes.

Are prize bonds a good investment for the State?

Dr. Somers

They are not.

In other words, does the punter have a better chance than he or she has in the national lottery?

Dr. Somers

At least one's capital is intact if one purchases prize bonds which one can cash in at any stage and get one's money back, although one does not get any interest. In terms of the cost to the State, we are putting 2.75% into the fund. The figure for administration costs is nearly the same. The total cost is over 5%.

People like buying prize bonds - grannies like to do so for their grandchildren, etc. There would be uproar if we were to terminate the scheme. However, it does not represent cheap money. A tax free 2.75% is a good rate of return.

What was the cost associated with prize bonds for 2002?

Dr. Somers

Administration costs amounted to €6 million.

What was the overall cost of administration for post offices?

Dr. Somers

The overall cost, in terms of expenses, savings certificates, savings bonds, instalment savings, prize bonds, saving stamps and the Post Office Savings Bank fund, is €39 million.

Is that regarded as high?

Dr. Somers

It represents 0.62% of the outstanding debt. We pay most of this to post offices. Most of the money - 2.75% - goes to the Post Office Savings Bank fund. We have argued this point and tried to reduce costs during the years with An Post which claims it is still losing money - perhaps it is - but the risk is that it will stop providing this service in many rural post offices if we push too hard. I imagine that it must make money in some of the larger post offices and lose money in the small ones. Transactions are expensive, which is a long-standing issue. Some years ago I told this committee that my youngest son had received £5 as a birthday present which he had lodged in his local post office and withdrew at the rate of £1 per day thereafter. As the cost of each transaction at the time was about £2 or £3, he had cost the State a fortune because of the short-term saving habit he had developed. It is not cheap dealing with small amounts of money through the Post Office Savings Bank.

Regarding dormant bank accounts, I had an account with the Post Office Savings Bank in which there was over €100, approximately. I did not particularly want to close it but had to carry out some transaction to avoid this. Therefore, I lodged €2 and kept it alive for another 15 years. The cost of that transaction was high, it amounted to a lot more than the €2 I had lodged.

It is a slow return. What was increase in overall administration costs between 2001 and 2002?

Dr. Somers

They increased from €35 million in 2001 to €39 million in 2002. The main reason for the increase was that the amount invested in the Post Office Savings Bank increased. It is the greatest expense we face, apart from prize bonds, because we pay a much smaller fee on savings certificates, savings bonds, etc.

A retention fee.

Dr. Somers

Yes. There is an amount payable in respect of the sum outstanding and also per transaction. The costs associated with the Post Office Savings Bank and prize bonds are the expensive ones, particularly in the former case.

One may appreciate that I have a new found interest in international share movements. I appreciate that the figures pertaining to the national pensions reserve fund are applicable only to 2001. The figure pertaining to the increase in the fund is 3.7%, a modest increase not too far above the rate of inflation. In real terms, there was hardly an increase. We note the real decrease of 13% in 2002. I presume that the current net value of the fund is significantly below the inputs from the money raised by the sale of Telecom Éireann and the level of GNP invested in the interim.

Mr. Geaney

As of last night, the aggregate result on the fund indicated a minus value of €300 million.

I presume that was because of the recovery in international markets since March. Much money has recovered since.

Mr. Geaney

The return for the year to date is over 5.5%.

The legislation places on the NTMA a responsibility to provide for the Minister for Finance all the relevant information on the amount of the fund that can be made available and how it can be accessed - a reporting procedure is in place in this respect. To what extent is it possible for Members of the House and the public to know, generally if not specifically, the percentage of the fund being invested in particular companies and the markets in which it is being invested?

Mr. Geaney

There are various information requirements on the pension fund. The annual accounts require publication of the list of investments at the time of publication but this is a little misleading because we do not make investment decisions or choose individual shares. We have professional managers who make those choices.

The relevant information concerns the overall allocation of the fund. We have said the long-term benchmark to which we operate is to have 20% in bonds and financial assets and 80% in equities and other real assets such as property. We have not reached this ratio because we were uncomfortable about the outlook for equity markets and prices. By the end of last year we had achieved an investment ratio of 54% or 56% in equities and real assets. We were not close to the figure of 80% ordained by our long-term benchmark.

How is the figure of 80% to be invested? Having taken all the advice from the best experts we could find, we decided that 50% ought to be placed in euro equities with the remaining 50% in other equities. We have appointed fund managers who make the individual decisions. Approximately half the funds are passively managed, meaning that the fund managers just buy the indices. The fund will own every single share in the index. It is not an active decision to buy Coca-Cola or sell Colgate shares. The fund is passive. They will buy the whole index. The reason they do this is that the costs of managing, investment manager fees, etc., are substantially lower in a passive fund. There is no great deal of evidence that over a 25 year period there is likely to be huge outperformance against a benchmark. Intuitively we understand the performance of any pot is the sum of the performances of all those in the pot. Over a long period one is likely to come out with the average performance.

The report mentioned the funds the national pensions reserve fund used in various markets, which I assume were products offered by the various companies. Am I right in saying many of these advertise on the basis that they have a fund that tracks a particular number of companies without detailing what is invested in each company?

Mr. Geaney

The annual report for 2002 will contain a list of all the fund's holdings. I do not think it will be very valuable information for the Deputy as it will represent the holdings on 31 December. What is really relevant is the allocations to the different portfolios. That information will also be contained in the annual report.

Is this additional information to what was contained in the 2001 report?

Mr. Geaney

There were no investments on which to give information.

The information in the national pensions reserve fund annual report will list the funds in which it has invested but not how the funds are invested.

Mr. Geaney

No, there will be both.

But not weightings.

Mr. Geaney

Yes, that will be included. It will show exactly what the holdings are.

As this was issued on 28 June last year, I presume the report will be issued in the coming weeks.

Mr. Geaney

The report will be submitted for approval by the Government as soon as it is signed off, which I expect to be in the next couple of days.

Mr. Purcell

I can confirm that I expect to issue the audit report on all of the accounts encompassed by the management of the NTMA certainly before 30 June. We have managed to hit that deadline in previous years and I expect we will be able to do so again this year.

I also have a question about the board which has been partially answered already. I understand the board is solely concerned about overall investment strategy and that particular decisions are made by fund managers who are allocated by or working on behalf of the commission. Is the chairman satisfied not only with the composition of the board but how future members will join? It is a mixture of civil servants, people from semi-State bodies and those involved in commercial activity. Are there proper safeguards to ensure investment decisions will not affect the individuals who are members of the commission at any given time?

Mr. Geaney

What does the Deputy mean by investment decisions?

People have been and are involved in commercial companies in their own right. Decisions should not be made about how money is spent that might impact on their commercial roles outside the commission.

Mr. Geaney

We spent hours and hours, if not days and days, trying to define the appropriate governance standards for the commission, given the awesome amount for which we were responsible. The amount is huge, of which even a small portion is large in absolute terms. Therefore, we were very concerned about this issue. In the end we found it very difficult to come up with anything much better than what has already been gone through in terms of ethics in public office activities, etc. We apply these standards at any time there could be a conflict of interest for any commissioner, for example, where a fund manager is being appointed and that commissioner has an interest. For example, a commissioner might be a board member of a company which owns a fund manager. I happen to be such an example. In that situation I excuse myself and do not participate. Everything we have done has been done to be as transparent and open as possible. It will stand up to any review. I am quite happy that that is the case. I think the Comptroller and Auditor General will probably agree with me that we have been at great pains to make sure this is done properly.

I have a brief question on national debt management. The national debt now stands at €36 billion. The debt to GDP ratio has reduced because of economic growth. The cost of servicing the debt has reduced in the past five years by €1.5 billion, mainly because of reduced interest rates and the availability of competition. The share of the debt per person has been helped by the increase in the population to 3.9 million. To what extent are there strategies to reduce the overall amount which has changed little in recent years in that there is still a debt of €36 billion, from which the country needs to remove the shackles in some way?

Dr. Somers

As the Deputy said, the national debt in absolute terms has not gone down. What has gone down very sharply is the burden it imposes on the population, because interest rates have dropped very sharply in recent years, principally because of our membership of the euro. If we were not a member of euroland, I have little doubt that our interest rates would be very much higher. It is almost impossible for a small country with an independent currency to maintain any sort of low interest rate structure with the kind of economy we have.

The only way to reduce the size of the national debt is for the Government to run a surplus. For a few years we ran a small surplus - not very much - and the debt came down a little. However, looking forward, we are not going to run a surplus this year; we are going to run a deficit, which means, by definition, the debt will go up. The projections produced at the time of the budget by the Department of Finance for the next few years showed, as I understand it, increasing deficits, which means the debt will continue to go up. Having said that, I remember that in the 1980s and 1990s it was a ferocious burden on the State in terms of the amount of tax revenue used to pay interest. At the time more than one quarter was going just to pay interest alone. This is now down to about 6%. Obviously, there is still a burden and if interest rates were to go up, we would take a hit. However, apart from Luxembourg, our national debt as a percentage of GNP is the lowest in Europe, having been one of the highest. There are countries with national debts considerably in excess of 100% of GNP and they are much more exposed.

Does it make sense for us to run a surplus at this stage? Earlier we were talking about the problems with infrastructure such as trying to build roads, etc. The only way we can really run a surplus is if we stop but we are stuck with the current level of expenditure which it is almost impossible to cut. The only thing we could really cut into is capital expenditure, in respect of which, as we all know, we still have a huge amount to do. However, I am much less worried about the debt now than I was when we started the NTMA.

Having said that it requires eternal vigilance because we are in competition with the rest of Europe. We are getting the very best terms available and have a triple A credit rating. However, we are relying on foreigners to buy most of the bonds. I have little doubt that the bulk of the €600 million worth of bonds sold this morning will end up owned by people outside the country. We must maintain their confidence. It always seems very simple when matters are running well; it is only when we get into trouble that we find out what expertise we have. As long as we do this, we will be seen to run a good show, matters will be done competently and the debt will not be a major consideration in terms of the policies the Government can follow.

Everybody acknowledges that your organisation does an excellent job. However, every year - last year was another classic example - regardless of whether the nation's finances are subject to a deficit or a surplus, lo and behold, come Christmas week there is a bonanza from the National Treasury Management Agency. That is no way for it to report its information to the Department of Finance or the Department of Finance to report it to the country - I do not know what way it is done. If the agency is making savings, surely it gives a monthly report to the Department of Finance on what it is doing. While I know it cannot give a final year outcome until the end of the year, it is a kind of reserve accounting. The agency has known for months that it has a big saving and the Department knows it has this bonanza to pull out in Christmas week. Therefore, the deficit everybody was predicting becomes a big surplus thanks to the agency, yet it must have been known for months that this was coming. It would be more helpful and transparent to the public if the information was issued on a monthly basis.

Dr. Somers

I accept the Deputy's point; there is an issue involved. The Estimate is always very conservatively calculated at the end of the year. It is a first charge on the revenues of the State. The Dáil does not vote this money every year; it has to be paid no matter what else happens. Each year we prepare an estimate with the Department of Finance based on the best information we have at the time, such as interest rates, exchange rates and cash flow. There are huge numbers of variables. The estimate is then used in budgetary arithmetic. As time passes, savings may or may not appear. We have been in an environment where matters have gone extremely well for us in the last few years. We have made money on exchange rate movements and interest rates have fallen. We have undertaken bond exchange programmes and brought down the spread against Germany. Savings have emerged.

In terms of publishing I meet the Minister for Finance every few weeks and keep him reasonably well informed about how things are going. We produce a figure and have a press briefing at the end of each year - 31 December - which is a pain in the neck for us and journalists. We get all the information out into the public arena on 31 December and announce whatever savings have been made, which gets the market into a good mood, because we are facing into a year in which we must get €6 billion or €7 billion to keep the show on the road. We need good news. That good news is given at the beginning of the year and is reported widely.

I am not claiming that these savings are made by us personally as a result of the great insights we have into the market. It is a constant struggle to try to get things working properly. I am glad, however, that so far we have been able to announce that we have come in under budget because I dread the day on which I must stand up and say I am sorry but I was not able to do so. The money must nevertheless be paid, whether it comes from cutting current services or implementing extra taxation. There is not an option to defer it or fire people or whatever is done elsewhere in the public service. It must be paid because otherwise the credibility of the State is at risk. We do not have an option in this area.

I understand what you are saying but it does not answer my question. During the course of the year the Government has monthly profiles of its expenditure in order that people can see whether it looks as though we are within our projected deficit and so on. We all know that last year there was heavy expenditure; in the first six months there was a surplus of 21% but by the end of the year it came in at a figure of 13.9%. If people had a profile of how the NTMA was doing on a monthly basis, it would lead to a more real understanding among the public about how the nation's finances are doing. It would be an improvement on receiving this news only on New Year's Eve. Could the organisation not issue progress reports relevant to a particular point in time on the basis that the situation could change in subsequent months? The days of producing information once a year are over for any big organisation.

Dr. Somers

The amounts we are spending and receiving are published in the Exchequer statement, which comes out every month.

Do you understand the point I am making?

Dr. Somers

I do get the point. I keep the Minister for Finance fully informed——

Do you blame him?

Dr. Somers

No, I do not blame him at all. I keep him informed on the basis that there should be no shocks and no surprises. Sometimes the news is good, sometimes bad. For example, if the auction this morning had failed for us - if we had not got that €600 million - I would have been in serious trouble. We had no guarantee that people would bid for those bonds, although we had 2.2 times cover. In recent times Germany has failed to get cover on a bond auction. When that happens, there is trouble - interest rates go up and we must get into the short-term paper market and cover ourselves while we get further funds in. I can make larger or smaller so-called savings for the year depending on the timing of particular payments. I try to be neutral in this because I do not want to carry over costs from one year to the next. In fact, I am much happier to meet costs as they arrive and load in expenses rather than carry costs on but there is discretion in this area. Everything I do is at the direction of the Minister. I am his agent; I do not have a separate existence. Where we have made savings, we have put them into the capital services redemption account as the Minister has directed. In this way he has been able to build a little kitty which he can use in more difficult years such as this.

Do we want to put everything in the public arena? I personally do not have a huge problem with this but it is always useful to have a few bob in the back pocket because something always goes wrong.

It was a good few bob.

I wanted to make that point because, as you can understand, we are always having false debates during the course of the year. It is not your area of activity but the public at large hears of how the Exchequer outcome is doing and the debate is not based on full information. The Minister for Finance obviously has full information but the rest of us are making projections which are not based on the information within the system.

Dr. Somers

There is huge uncertainty with regard to our spending, right up to the last day. We try to close off our books at 4.30 p.m. and have a press release at 6 p.m. but at 4.30 p.m. I still do not know what I will be saying because I do not have the figures.

Mr. Purcell

I do not want to get back to my hobby horse but Dr. Somers mentioned - I suppose he is aware that this is like a red rag to a bull for me - the capital services redemption account, which is used to build kitties such as these. I have some sympathy for the view expressed by Deputy Fleming about how some of the accounts are used - they are audited but it is arbitrarily decided what goes into the Central Fund or the capital services redemption account. If one sees an account of the Central Fund at any time, one is not necessarily seeing the full position and will not until the annual accounts of the NTMA and the national debt statement are produced at the end of the year. I wanted to make that observationen passant.

Mr. Geaney mentioned that the target was to put 80% into equities, which include properties, as I understand it, and 20% in bonds, cash and so on. How much would he expect to have in properties? I am a lay person and have no investment skills but know that through the generations investment in property has been a sure-fire way of increasing one's asset base over the long-term, as opposed to equities. The risk factor must be much less. As far as I know, for many years the yields have been much higher than for equities. Would it not be beneficial to invest a lot of the fund in property? What is the target in terms of property versus equities?

Mr. Geaney

We are aiming for about 4% of the fund to be invested in properties. That is what is happening, although it may change as we go along. If one looks at and anaylses the historical data, one will not find over a 25 year period that investments in property outperform equities. I know there is a perception but if one goes back and looks at the figures, there is still a premium for equities.

That leads me to the last question which relates to the sum of €200 million being made available, if suitable opportunities arise. Can your organisation be proactive? I know what you said about roads but let us say, for argument's sake, that there is a decentralisation programme, a property based issue and that there is a need to design, build, operate and maintain offices in a variety of locations over the next number of years. Would that type of investment attract your organisation?

Mr. Geaney

Sure, as long as they——

Would your organisation not take a proactive view and say to the Government it could help?

Mr. Geaney

I have not suggested that we have not taken a proactive view. As a commission, formerly, we did not take a proactive view but each of us has been busy making it known that we are available for business and the type of projects at which we might be able to look. As I understand it, money going into the fund will not be counted as part of the Maastricht treaty arrangements. Money going out of the fund, if not very carefully managed, will be - if we do not get the right structure and project. We cannot just spend the money on infrastructure because we would end up exceeding the Maastricht treaty limit. The problem is not with the fund but the limit.

I understand.

Mr. Geaney

It is a complicated matter to put the right structure in place.

My final question is addressed to Dr. Somers. Were we not better off before we signed up to the Maastricht treaty agreement and would we not have been better off if, instead of concentrating on reducing our debt-GNP ratio from the worst to the second best in Europe, we had spent the money on infrastructure while still being able to afford to service the debt? Is it a little late to have that discussion?

Dr. Somers

The decision to adopt the Maastricht treaty was taken in the mid-1990s. The decision that could have been taken was to stay out of the single currency. There was a debate at the time on whether we should continue with the Irish pound. I lived through the nightmare of 1992-93 when we were part of the EMS and obliged to maintain certain margins against a central rate. Britain fell out of the system and we came under ferocious pressure, which continued for about six months. I think it started in the month of September. It taught me the lesson that a small country really could not maintain its own currency unless it was prepared to have very high rates of interest. We had interest rates of 100% per annum over successive weekends which the Central Bank introduced because of the fear of outflows. Thus, in one way, we have benefited enormously from the Maastricht treaty in that we are now enjoying very low rates of interest which have fuelled huge economic growth in recent times and the enormous increase in employment. If we had our own currency, not signed up to the Maastricht treaty and all the rules that go with it and had the Central Bank fixing our rates of interest, they would be a multiple of those we have enjoyed. We certainly would not have had anything like those we have enjoyed. There is always a trade off in such matters.

I find the Maastricht treaty strictures very frustrating. I can understand, if one was sitting in Brussels and wondering what 15 countries were going to do, that one would need to have some rules in place which people will always try to get around. One country, which I do not want to name, went so far as to try to securitise and sell off the receipts it was going to get from the EU Regional Fund, the ultimate form of raising capital. While the Maastricht treaty strictures are very frustrating, on balance, the benefits more than outweigh the problems endured.

I have one or two brief questions. Even if there were no Maastricht treaty guidelines and so on, if a Department or agency wanted to organise funding, be it from the national pensions reserve fund or by borrowing, there would still be a repayment involved. In many ways, the public perception is that the pension fund is not being used but that is not strictly true. In real terms, the benefit to the Government might not be very significant, whether it borrows in international markets or from its own pension fund, because no matter where it gets the money from it will still have to repay it, a point often missed. I heard one Deputy refer to it as the golden goose laying the golden egg, whereas in reality we must wait for that golden egg to hatch in 20 years' time. That is the purpose of the fund, a point sometimes missed a little.

Before I ask Mr. Geaney one or two questions, for the last couple of hours I have been absolutely fascinated and thoroughly impressed by the scale of what he is doing. He talked about a sum of €600 million. For people like me and Deputy Fleming, the figures about which he is talking are staggering. When Dr. Somers and his team were asked for some detail on post office savings and so on, I was very impressed by the scale of the information presented.

There are two points I wish to follow up very briefly with Mr. Geaney. As a committee, we look for value for money, performance and so forth. Mr. Geaney alluded briefly to the fact that his organisation's yearly return to date was 5.5%. I do not know if he has the information with him but I want to know roughly what the overall performance of the fund has been since its inception and how it has compared to the average Irish managed pension fund? Does he have that information or comparison with him?

Mr. Geaney

I am not sure about the figures for managed pension funds but I can tell the Deputy that the overall return on the fund, at the end of business yesterday, was €300 million, which in percentage terms is pretty small on a base of €8.4 billion. Given the destruction of the markets over the past two years and so on, it is actually not a bad performance which I am sure is marginally better than that of Irish managed pension funds. By December 2002 the fund had performed better to the tune of about 6%. Again, let me caution by saying that if we had fully invested the fund, which is what one should really do, we would have been worse off than the average Irish managed pension fund. We have outperformed them but with a degree of luck.

Being blunt, if it was the other way around, I would be sitting here with much graver concerns. The fact that your organisation has outperformed them is favourable. Most of those who have looked at the stock market over the last year appreciate what has happened.

There is, however, a more fundamental issue, which I am surprised was not taken up earlier but to which Dr. Somers did refer. He talked about the real contribution that we need to make and mentioned the figure of 69% of a person's salary if he or she was going to work for X number of years and so forth. I am not talking about the management of the fund but the actual contribution. Is it significantly large? Dr. Somers has forecast what the level of population will be and how many will be working. Across Europe this issue has caused considerable problems where funding has not been available. We are projecting what the position will be 20 years and 40 years down the road. Are we putting enough into the fund to achieve what we need to achieve at that point?

Mr. Geaney

We are not fully funding the liabilities we are incurring. A 1% contribution will not fully fund them, unless there are some miraculous occurrences in the financial markets which will not lead to inflation in salaries, which is unlikely because we have never seen it happen. We will be funding only approximately one third of future liabilities. There is another way of looking at this. What is the likely figure of GNP to pay for pension liabilities? As I understand it - John has the exact figures - it costs about 5% of GNP to pay pensions from current revenue. If we do nothing, that number will rise to a high 12.5% by 2056. Therefore, all the improvements in the national debt and everything else will be wiped out completely. The objective of the fund is to put a cap on the figure at 6.5% of GNP between 2025 and 2055 with the fund picking up the balance. If we do not do this, we will end up with a figure of 12.5%.

Are you on target?

Mr. Geaney

No, we are not, we are in a minus position, even if it is small. We have challenged whether it makes sense five or six times. It is hard to look back on 25 years data and see that there is a large equity premium in the context of falling markets. Joe Kennedy Snr. sold his shares in 1929 because the shoe shine boy told him to but if we said we were running the national pensions reserve fund in that way, people would not be too happy. It would be all right if we did the right thing but let us suppose it was the other way around. We have done the best we can.

Will you be happy with a 6.5% return in the long-term on the investment?

Mr. Geaney

Our calculation is that there will be a premium of 3%.

On top of it?

Mr. Geaney

No, a premium of 3% in equities over bonds. If one looks back over any period of about 25 years, one will find that the return on an investment in equities was 6% higher than if one had invested in sovereign bonds.

What is your cash holding as against bonds?

Mr. Geaney

Our cash number is 18.8% or €1,578 million.

Insurance companies worldwide are losing money on their investments. You have a deficit of €300 million. By 2025, even with a very good performance, we will cover only 30% of pension fund liabilities. The fund will be locked after that period. Is that correct?

Mr. Geaney

Yes.

Investment policies are the main concern. Do you see these as conservative in the light of the projected deficit after 2025?

Mr. Geaney

Our investment policy has been very conservative. If one was to take a more risky approach, one would put all of the money in equities because that would yield a figure of 6%. We are assuming a figure of 3% but it will probably be higher than this. The theory is good but the problem is volatility. When one goes to draw, one wants to have some money one can actually draw. One can wait through the ups and downs to yield a return over time. The difference between the fund and the average Irish pension fund, for example, is that others would have a smaller window. The French are setting up a similar fund. I do not know what numbers they have come up with but would be willing to bet a large sum that they will have a higher percentage in bonds because their liabilities fall due earlier and they want to dampen volatility. Otherwise, one would go 100% for equities, if one did not want to draw anything for 25 years.

The 2002 figures are being compiled. Have you got an updated figure?

Mr. Geaney

We announced the 2002 figures publicly.

Therefore, the figure of €300 million——

Mr. Geaney

As of yesterday, that is the latest figure I can give you. The number at the end of 2002 was approximately minus €740 million. Therefore, it has improved.

Do you have a figure for the salary given to members of the commission in 2002?

Mr. Geaney

My understanding is that commissioners get €30,000 a year. The chairman gets €45,000.

Mr. Purcell

I am looking at the audited accounts for 2002. The total paid in fees and expenses to commissioners was €328,155. I am almost positive that that is the audited figure.

Dr. Somers

That includes travel expenses. There are heavy travel expenses because there are several foreigners on the committee.

Has the NDFA been fully appointed?

Dr. Somers

It has. I amex officio chairman. Mr. Jim Farrell, also appointed by the Minister for Finance, is the chief executive. Three people from outside have been appointed as board members. There is a total of five people on the board.

Has it made any recommendations to Government on the affordable housing initiative being promoted across the country?

Dr. Somers

No. There is the risk that the NDFA will be dragged into everything. While I have heard about the affordable housing initiative, we have not made any recommendations to Government. Our function is to look at the financing of specific infrastrucutural projects rather than the wider perspective and see if there is a cheaper way of doing things. People seem to have the impression that we are involved in everything. I am trying to restrict us to looking at financial matters, difficult though that is.

Given the cutback in spending affecting the local authorities for which you are a fund or treasury manager, do you anticipate much growth in partnerships with them to meet infrastructural deficits in their areas?

Dr. Somers

Like the NTMA and the central treasury service, we wear different hats in regard to the local authorities which we can give short-term funds and, to a limited extent, long-term funds. We have given them funds for a period of up to 20 years. The Department of Finance has restricted what we can lend them to a total of €230 million which we have tried to divide among the different organisations.

Wearing our other hat, we are the funder of the Housing Finance Agency. Under recent legislation, its borrowings have increased very sharply to €6 billion which the Government and the Oireachtas have decided should be guaranteed by the Minister for Finance. We were anxious to ensure we did not have two competing State agencies borrowing in the market at the one time. We have taken over the funding of the Housing Finance Agency for which get short-term funds. We have reduced significantly the amount it previously had to pay for such funds.

As regards the National Development Finance Agency, about 60 projects have been submitted to us, many of which relate to local authorities, buildings or roads. They are at various stages of progress. We are not the decision-makers. While we provide advice, it does not have to be accepted.

With regard to the State Claims Agency, have the consultants agreed to co-operate?

Dr. Somers

My understanding is that it is still open. There is a hesitancy on their part to get involved in the scheme. While I do not wish to put words in anyone's mouth, I believe they are concerned about the risk to their reputations. They are concerned that if somebody is suing them, we will settle when they believe we should not. It is an ongoing matter in which the Department of Health and Children is much more closely involved. We will do whatever we are asked and take on whatever functions we are asked to take on.

What cover is provided for consultants working in private hospitals who have no public element to their contracts? I understand the State is providing cover for private consultants.

Dr. Somers

There are two maternity hospitals involved - the Bons Secours in Cork and Mount Carmel in Dublin. There has been a serious problem in maternity hospitals around Dublin with a great number of refugees having children and resultant overcrowding. There was a serious issue that if cover was not provided in the two hospitals in question, no work would have been done. The cost of insurance for an obstetrician or gynaecologist runs to €500,000 a year. We were not a party to this, we did what we were asked. However, the concern was that there would be no maternity facilities available if the two hospitals in question did not continue to provide cover.

Does the State Claims Agency work closely with the Health and Safety Authority? Is there co-operation between the two?

Dr. Somers

There is no necessary co-operation.

The Health and Safety Authority is a critical body while health and safety are big issues in reducing the level of litigation.

Dr. Somers

One of the functions of the National Treasury Management Agency is to provide advice for Departments and others about risks they may be taking. We also urge them to take steps to cut down on risks where we have identified them. This is one of the issues we have covered in the report we have given to the Minister for Finance. We will wait and see what the outcome is.

The NTMA has a large remit. I congratulate Dr. Somers on the outstanding work that he and his team are doing in dealing with the national pensions reserve fund, treasury management, the State Claims Agency and now the NDFA. There was never so much responsibility on so few, making critical investments on behalf of the State.

The meeting has been informative. As Deputy Curran said, the economy of scale is huge. It is important the public is aware of the work being done on the pensions fund. In terms of trends, the reduction in the ratio of workers to pensioners from 5:1 to 2:1 will place a huge responsibility on the State. The figure of 1% appears to be low. However, the indications are that the liabilities will be huge.

I thank the Comptroller and Auditor General and his team for their outstanding report. I also thank Dr. Somers and his team. On the conclusion of the examination, is it proposed that we note chapters 13.1 and 13.2 of the accounts? Is that agreed? Agreed.

The witnesses withdrew.

The committee adjourned at 2.05 p.m. until11 a.m. on Tuesday, 24 June 2003.