COMMITTEE OF PUBLIC ACCOUNTS debate - Thursday, 19 Jun 2003

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.

Chairman

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.

Chairman

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.

Chairman

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.

Chairman

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 an ex 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 German fanbriefe 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.

Chairman

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.

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.

Deputy Rabbitte

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.

Deputy Rabbitte

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

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.

Deputy Rabbitte

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.

Deputy Ardagh

I do not want to flog the infrastructure issue to death as it is a case of déjà 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.

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.

Deputy Ardagh

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.

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.

About 50% of the overhang is covered.

Deputy Connaughton

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.

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.

Deputy Connaughton

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.

Deputy Connaughton

I also hope so.

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%.

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.

Chairman

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.

Chairman

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.

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.

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.

Deputy Fleming

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.

Deputy Curran

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.

Deputy Curran

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.

Chairman

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.