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.