COMMITTEE OF PUBLIC ACCOUNTS debate - Thursday, 10 Mar 2005

Vice Chairman (Deputy McGuinness)

I welcome the witnesses. We are dealing with the National Treasury Management Agency accounts for 2003. Chapter 14.1 deals with the national debt, while chapter 14.2 is on the savings bank fund. We will also deal with the 2003 accounts of the National Pensions Reserve Fund Commission.

I remind witnesses that they do not enjoy absolute privilege. Members' and witnesses' attention is drawn to the fact that as and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 has granted certain rights to persons identified in the course of the committee's proceedings. Such 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, the rights may only be exercised with the consent of the committee.

Persons invited before the committee are made aware of these rights and any persons identified in the course of proceedings who are not present may have to be made aware of the rights 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 the legislation, I remind members 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, either by name or in such a way as to make him or her identifiable. Members are also reminded of the provisions of Standing Order 156 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policy or policies.

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

Dr. Michael Somers

I am accompanied by Mr. Donald Roth, who is a member of the NTMA advisory committee and is also a member of the National Pension Reserve Fund Commission. These are part-time jobs. Mr. Roth is based in Washington and is a former treasurer of the World Bank. He happens to be in Ireland for a meeting of the pension commission which is taking place tomorrow, so he kindly agreed to come along and educate himself in the way proceedings are carried out here. Next is Mr. Adrian Kearns, who is responsible for running the State Claims Agency, which is the body that is sued by anyone who wishes to a Minister, the Attorney General, the Taoiseach and more recently, anyone who wants to sue a hospital, a doctor or a health board. Beside me is Ms Ann Counihan, who is the head of legal and corporate affairs at the NTMA. She has the additional function as the chief executive of the National Development Finance Agency, which is another body that comes within our remit. I am the ex officio chairman of that body. Ms Counihan and I also have a function as accounting officers for the National Development Finance Agency.

Mr. Brendan McDonagh is our director for finance, technology and risk. Beside him is Mr. Oliver Whelan, director in charge of the borrowing activities of the State, which includes bond issuance, general funding and all the small savings schemes such as prize bonds. Mr. John Corrigan deals with the national pensions reserve fund, NPRF, which is a function we carry out for a period of ten years on behalf of the National Pensions Reserve Fund Commission. Finally, Mr. Donal Geaney is chairman of the National Pensions Reserve Fund Commission and also functions as an Accounting Officer for the purposes of the legislation.

Vice Chairman

I ask Mr. Purcell to introduce the accounts and chapters.

Paragraphs 14.1 and 14.2 of the report of the Comptroller and Auditor General reads:

National Treasury Management Agency

14.1 National Debt

The National Treasury Management Agency has the statutory function of borrowing moneys on behalf of the Exchequer and managing the National Debt on behalf of and subject to the control and general superintendence of the Minister for Finance.

Expenses incurred by the Agency in the performance of its functions are met from the Central Fund. The Agency incurred expenditure of €15.1m on administration in 2003 (€13.7m in 2002).

Under the provisions of section 12 of the National Treasury Management Agency Act, 1990 I am required to audit the accounts of the Agency and when making my statutory annual report on the Appropriation Accounts, to make also a report to Dáil Éireann regarding the correctness of the sums brought to account by the Agency in the year. The Agency's accounts for 2003 have been audited and the accounts, including an administration account and accounts relating to the National Debt, have been presented to the Minister who has laid copies thereof before both Houses of the Oireachtas.

I am satisfied that the accounts properly present the transactions of the Agency in 2003 and its balances at year end.

Table 64 shows the outturn for the National Debt in the five year period 1999-2003.

Table 64 National Debt 1999-2003
	National Debt Outstanding	Debt Service Cost
	€m	€m
1999	39,849	2,800
2000	36,511	2,575
2001	36,183	2,379
2002	36,361	2,169
2003	37,610	2,277

The composition of the National Debt at 31 December 2003 is shown in Table 65.

Table 65 Composition of National Debt as at 31 December 2003
	€m
Medium/Long term Debt	29,217
Short term Debt	5,788
National Savings Schemes	4,330
Less: Domestic Liquid Assets	(1,725)
National Debt	37,610

The Agency's performance in regard to its activities is independently measured by an international investment bank specifically engaged for that purpose. The rationale and basis of the performance measurement was agreed with the Department of Finance. The bank determined that, measured on a net present value basis against an independent benchmark portfolio, savings attributable to the Agency's management in the year amounted to €27.55m.

14.2 Savings Bank Fund

The audit of the Post Office Savings Bank is carried out on my behalf by the auditors of An Post subject to my right to carry out further audit tests which I consider necessary.

In 2004 they reported to me on their audit of the 2003 accounts. I accept their opinion that the accounts of the Post Office Savings Bank give a true and fair view of its transactions for that year-end and of its year-end balance.

In addition to managing the National Debt, the National Treasury Management Agency is responsible for the investment and management of funds remitted to the Exchequer by the Post Office Savings Bank. The Exchequer is responsible for the repayment to the Bank of all such funds and for meeting interest charges thereon.

The state of affairs of the fund at year-end is shown in Table 66.

Table 66 Post Office Savings Fund
	2003	2002
	€m	€m
Liability in respect of funds due to depositors and creditors	1,126	976
Value of related investments held by Post Office Savings Bank Fund (at cost prices)	1,136	983
Surplus at 31 December	10	7

Mr. John Purcell

Under the 1990 legislation which set up the National Treasury Management Agency, I am required to report to Dáil Éireann on the results of my audit of the annual accounts of the 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 have a reference to these two accounts even though there may be no critical comment, as is the case for 2003.

Apart from its responsibility for managing the national debt, the agency has been given operational responsibility over the years for severalother activities of the State, as mentioned by Mr. Somers. Among the most prominent are those in respect of the State Claims Agency, the National Development Finance Agency, and the dormant accounts fund. There are separate accounts covering all these activities and they are audited by me in conjunction with my audit of the agency itself. I am glad to report that I was able to give a clear audit certificate on all those accounts for 2003 by the end of June 2004.

As Mr. Somers mentioned, the agency also has a management role in regard to the national pensions reserve fund, although overall responsibility lies with a Government-appointed commission. Despite being appointed by the Government, this commission, as I am sure Mr. Geaney will testify, is very much independent in the exercise of its functions. Again, I was able to give a clear audit certificate on the 2003 account of the fund last June. There are, therefore, many accounts for the committee to consider but no public accountability issues arising from the financial audit process.

Vice Chairman

Dr. Somers has stated he does not wish to make an opening statement, so I ask Mr. Geaney to do so.

Mr. Donal Geaney

I am pleased to be here today to discuss the work of the National Pensions Reserve Fund Commission. The fund's objective is to meet as much as possible the costs of social welfare and public service pensions from 2025 until at least 2055, when these costs are projected to increase dramatically due to the aging of the population. Three in every four people now working are expected to benefit from the NPRF during their retirement.

The fund has come a long way since its establishment just four years ago. Last year saw the end of what one might term the fund's infancy, with the completion of the commission's averaging-in process to the capital markets and our decision to commit 18% of the fund to additional asset classes. I will discuss this diversification of the fund's investments in more detail later. First, however, it may be useful to take a brief look at the fund's performance and to recap briefly on the reasons for its establishment.

I am pleased to report the fund had another good year in 2004, building further on the strong performance in 2003. The fund's value at the end of 2004 was €11,689 million, compared with €7,426 million just two years earlier. Excluding the 2003 and 2004 Exchequer contributions, which total €2,280 million, the fund earned just under €2 billion on its investments in that period. In percentage terms, the fund earned a return of 12.8% in 2003 and 9.3% in 2004.

This strong performance has enabled the fund to recover from the bear market of 2002 and to make a healthy contribution towards meeting Ireland's future pension liabilities. The period since the fund was established in April 2001 vividly illustrates the volatility that can occur in financial markets over short timescales and the necessity of adopting a long-term approach in making investment decisions.

I would like to comment briefly on the averaging-in investment programme. On its establishment in April 2001, the fund received an initial Exchequer contribution of €6,515 million. We were then faced with a decision on whether to commit funds to the markets in one fell swoop or to average-in over time. Despite widespread expectations of a US-led global recovery in early 2002, we decided the economic and financial markets outlook was not certain. Therefore, we pursued an averaging-in approach which would reduce the fund's market entry risk by spreading its market entry over time. This enabled us to delay our investment strategy as market conditions deteriorated throughout 2002 and to purchase assets at attractive valuations as recovery commenced in 2003.

An averaging-in programme leads to a fund underperforming its benchmark in a rising equity market because it holds fewer equities and more cash than the benchmark. Conversely, it leads to outperformance in a falling market. Thus, in 2004 as equity markets rose, the fund underperformed its benchmark by 2% as the averaging-in programme was completed. However, the success or otherwise of an averaging-in programme can only be properly measured over the full period for which it was in effect. In this regard I am pleased to report the programme has seen the fund outperform its strategic benchmark by a cumulative 8.9% over the period from its inception in 2001 to the end of 2004.

There are more than five people of working age for every pensioner in Ireland. By 2030, however, this ratio is projected to fall to 3:1 and by mid-century there are likely to be fewer than two working people for each pensioner. This will inevitably lead to significantly increased pension costs, in particular in the social welfare area, as more pensioners must be supported by proportionally fewer workers. Projections prepared for the Department of Finance in 2000 estimated that, if then current levels of pension provision were maintained, costs would rise from about 4.5% of GNP to 8% of GNP in 2025, the first year the fund comes into play, to around 12.5% of GNP by 2055. The bulk of these increased pension costs will arise in the social welfare rather than the public service area. Some 80% of overall Exchequer pension expenditure in 2055 is likely to go to social welfare pensions.

Times have moved on since these figures were prepared. Increases in pay and pensions, updated economic growth assumptions and emerging demographic trends mean it is important to update projections regularly. The National Pensions Reserve Fund Act 2000 gives the commission a central role in this regard. We are required to commission independent assessments of the profiles of social welfare and public service pension liabilities after consultation with the Ministers for Finance and Social and Family Affairs. It is planned to commence this work towards the end of this year and these liability studies should help to inform future public policy-making in the pay and pension areas.

The Government invests 1% of GNP annually in the fund. No money can be taken from the fund before 2025 and, from then on, draw-downs will continue until at least 2055 under rules to be made by the Minister for Finance. The fund is intended to reduce and smoothen the Exchequer burden arising from Ireland's additional pension commitments over a lengthy period. Given that we have established the fund while our population is still relatively young and before the fiscal effects of the aging issue begin to bite, relatively modest contributions can make a real difference, enabling the fund to play a significant role in securing the Irish population's pension entitlements in the less favourable demographic climate that lies ahead.

The commission that controls and manages the fund is independent of Government in the exercise of its functions, which include the implementation of its investment mandate. This mandate requires that the fund operates on commercial lines so as to secure the best possible financial return subject to prudent risk management. The NTMA acts as the manager of the fund and the commission performs its functions through the NTMA. I would like to turn for a moment to strategic asset allocation.

Strategic asset allocation typically accounts for 90% of returns over the life of an investment portfolio. The initial strategic allocation of the fund's assets decided by the commission in 2001 was 80% to equities and other real assets and 20% to bonds. While this initial strategy-setting exercise focused on equities and bonds, we recognised at the time that other real assets, such as property and private equity, were valid investment categories for the fund and would be evaluated in due course.

During 2004, with the averaging-in process to the capital markets nearing completion, we evaluated all potential fund asset classes with the aim of exploiting potential sources of additional long-term return without substantially altering the fund's risk profile. As a result of this evaluation, we decided to allocate 18% of the fund to additional asset classes — 8% each to property and private equity and 2% to commodities. Private equity offers the prospect of substantial additional return, while property and commodities also markedly improve diversification. Taken together, the inclusion of these alternative asset classes in the fund should increase prospective return for a similar level of risk.

We also decided to increase the fund's small cap equity allocation from 2% to 4% and to allocate 2% of the fund to emerging market equities. The diversification effect of the new asset classes reduces the fund's dependence on the performance of any single asset class and has allowed us to reduce its bond allocation — its least risky asset class but the one with the lowest potential return — from 20% to 13%, while broadly maintaining the fund's existing risk profile.

The target strategic asset allocation will set out the framework within which the fund will operate over the next five years. We will invest in property and private equity on a phased basis as we seek to build up high-quality diversified portfolios in these areas. Therefore, we expect to reach the target allocations for these asset classes at the end of 2009.

The fund's long-term investment horizon and lack of a liquidity requirement, with no draw-downs before 2025, as well as its strong cash flow from the annual Exchequer contribution, were key factors in both the initial 2001 investment strategy and the 2004 diversification. They allow the fund to exploit both the short-term volatility and lack of liquidity inherent in some of its chosen asset classes in anticipation of the excess return available to long-term investors as compensation for these factors. The approach we have adopted to investment strategy is in line with international best practice and we reviewed the strategic asset allocation of high-performing peer funds in assessing the benefits in the NPRF's case.

We are also committed to investing in PPPs on an opportunistic basis. We have made €200 million available for investment in Irish projects since 2003 and will add to this should opportunities arise. While suitable projects have been slow to materialise, progress has been made recently, with the fund joining a consortium tendering for the M50 motorway upgrade. However, in future, rather than joining particular consortia in tendering for projects, we will make equity and/or debt finance available to the winning bidder, provided we are satisfied with the prospective rates of return.

Ireland is ahead of the curve in addressing the issues arising from population aging and the commission is determined to ensure that the country reaps the full rewards of the Government's early establishment of the fund. It is for that reason we have developed our investment strategy by adding asset classes that will maximise long-term performance. The implementation of this strategy in line with international best practice will set the agenda for the work of the commission and the NTMA, in its capacity as the fund's manager, over the next five years. It represents a challenging and exciting task that is central to the commission's objective of generating the maximum return from the assets entrusted to it by today's workforce.

Vice Chairman

I thank Mr. Geaney. May we publish that statement?

Mr. Geaney

Yes.

Deputy Boyle

I will start with Dr. Somers and briefly go through the administrative costs and the changes up to 2003. Perhaps I can ask a general question as regards several areas, and he might respond at the end.

I note that the costs of the NTMA's central fund rose from €9.7 million to €15.1 million between 2001 and 2003, an increase of around 55%. Salaries increased from €5.7 million to €9.7 million in the same period and have increased as a proportion of the total cost of the NTMA. Another factor is the rise in superannuation costs, which have increased from €803,000 to €1.254 million. Perhaps Dr. Somers can explain whether this is due to an increase in numbers in the organisation or in payments. If it is the latter, are such increases in payments performance-related? The savings which have been benchmarked for the NTMA by an international bank were €29 million in 2003. I presume that was a net saving, given the cost of approximately €14 million altogether, when the running costs of the NTMA are taken into account.

Last year, there were questions about who gets paid what and comparisons were made with the private sector. I am not so much interested in that. The argument is accepted that to get the best people in a given field, they must be paid equivalent salaries. I put it to Dr. Somers, however, that one difference between the public and private sectors is that there is an expectation that what people are paid from the public purse is publicly known. I would like his reaction to that, given the line of questioning in the past in this committee.

Dr. Somers

The Deputy has asked quite a number of questions and I will try to recall and answer most of them. As to why the administration costs of the NTMA have gone up, when we started in 1990, 14 years ago, the former Taoiseach, Albert Reynolds, was Minister for Finance. The question arose in the Dáil as regards how much it would cost to run the NTMA. The figure he gave at that stage was £10 million, or about €13 million. We ran the NTMA as a very tight ship, with many professional people who worked hard. I have always believed in small numbers of people, well paid and well motivated. It is only in the last few years that we have got next or near the €13 million that was announced in the Dáil in 1990.

That is in the context of a major increase in the activities we have undertaken. We were originally established to manage the national debt and try to do the borrowing on behalf of the Government at a time when the country was on the verge of bankruptcy. We had one of the highest debt-GDP and debt-GNP ratios in the world. Apart from Luxembourg we now have the best debt-GNP ratio in the whole of Europe. The debt has actually gone up since we started. That is outside our control because Governments run deficits and so be it. The debt has gone up by €6 billion or €7 billion since we started. The actual interest that we pay now compared to 1990 has dropped by €1 billion, which is an enormous saving that is available to the Government for other initiatives. If I did not have a professional team, I could not do that.

The NTMA is the only body associated with central Government that is not part of the Civil Service. I have explained this before. By law, people working at the NTMA cannot be civil servants, for all kinds of reasons. The NTMA's birth was difficult, as I was obliged to overcome massive resistance to its establishment. Since then, various Governments have seen fit to add to our responsibilities. In 1996 we were asked by the then rainbow coalition Government to securitise the State's mortgage book, as they needed funds to meet a social welfare claim. In 2000 two major pieces of legislation were passed. One of them established the State Claims Agency, among other things. Although we had no particular expertise in handling claims, the Government of the day saw fit to entrust us with the task, as they had nobody else. We were obliged to start a new business from scratch and needed to hire expertise to do so.

In the same year, the national pensions reserve fund was established and again, we had to hire specialised staff. Our expertise was in borrowing money and managing debt, rather than in those other areas. We were obliged to experience a very steep learning curve. We now have it up and running but it was a difficult business to start from scratch. In 2002, legislation was enacted empowering us to set up the National Development Finance Agency. We had to learn about venture capital and hire people. The first chief executive we had left after a year and I had to persuade Ann Counihan, who is here beside me, to take over the role as chief executive as well as doing her own job.

We run a tight ship. The Deputy asked about salaries. The issue of people's salaries is raised every time I come before the committee. I came under a lot of pressure on it last year and since then, I have consulted widely with both the Government and Opposition as to what I should do. The only thing we have going for us is that we can pay salaries at commercial rates. People within the NTMA have informed me they do not wish to see their salaries spread over the newspapers. I recently tried to recruit a fairly prominent individual who was very concerned about the prospect of seeing pay rates spread across the headlines of the Evening Herald. I must recruit people from professional organisations such as accountancy or legal firms. Pay rates for such individuals are not in the public arena. I must try to recruit people who already have good jobs because we only want the best for the NTMA.

I can go into great depth on the issue if the committee wishes, but if I start to publish pay rates, these people will not come. The Deputy stated that the pay of people who work in the public sector should be known. If one pays millions to an accountancy firm or legal practice, one has no idea what the people in such an organisation are paid. We are in a similar position. We have been charged by the Government to perform a range of functions. The throughput of cash through our organisation last year was €500 billion, or four times the country's GNP. We manage portfolios of approximately €50 billion, which is a vast amount of money. As the Accounting Officer, I am not prepared to run the NTMA unless I have the best people. If I want them, I must pay them.

Deputy Boyle

I am not arguing with the principle. However the bodies for which the NTMA is responsible find themselves in a fairly isolated position within the public service. That is the point I am trying to make.

Dr. Somers

The issue of pay in the public service and in particular the pay of the Secretaries General of Departments has arisen again. I do not know whether the Deputy is aware of how it is calculated, but I am happy to tell him, if he is interested.

Deputy Boyle

There have been benchmarking reports so——

Dr. Somers

Does the Deputy know how it is done? In my understanding, a benchmarking exercise is conducted and external professional advisers provide an idea of what the job is worth. I have done the same. In general, people get paid at the median rate of what a job is worth. One establishes the median, upper quartile and lower quartile rates for a particular job. As I understand it, the Secretaries General are not paid the median or the upper quartile rate. They are not even paid the lower quartile rate but are paid 80% of it. That is how it is done. I could not recruit anyone to the NTMA on the basis of paying them 80% of the lower quartile. I would be laughed at.

Deputy Boyle

I am not arguing about salary sizes. I am not arguing at all. I am making a point about the issue of accountability. If this committee is about anything, it is about accountability, and I am putting that principle on record. I wish to move on to the national debt but I will first finish this line of questioning. From Dr. Somers's answer, can I take it that his argument is that the increase in responsibilities due to the formation of new bodies with the consequential addition of staff has been the largest element in the cost increases?

Dr. Somers

Absolutely. I repeat that I run a very tight ship, as my colleagues will confirm. I have been appearing before this committee for 20 years and am very conscious of the necessity not to waste public money.

Deputy Boyle

Dr. Somers has already mentioned that factors outside of his control such as Government policy decisions have increased the national debt. It stood at €37.6 billion at the end of 2003. The NTMA manages the debt's configuration in terms of the mix of short-medium and long-term debt and decides how much debt is held within or outside the State. Has the agency been concentrating on short-term debt? Is it managing the additional debt by trying to acquire new money that can be repaid in a shorter time period than was previously possible? Is the NTMA not trying to increase the amount of long-term debt in existence?

Dr. Somers

The opposite is the case. I have been at this game for a long time and have never seen such low interest rates. When rates drop to a certain level, they can only go up and currently, there is much speculation that they will do so. Interest rates, including fixed rates, are currently at 3% or 4% for medium to long-term money. We have been trying to lock as much money in as possible at these very attractive rates. I stated earlier that the interest bill on the debt has fallen by €1 billion compared to when we started out. This is due to the fall in interest rates and our increased professionalism.

The certainty of locking the money into fixed rates provides enormous advantages. It leaves the Exchequer much less exposed to a future rise in interest rates. One knows what one must deal with. Many countries got themselves into a difficult situation by borrowing short-term funds. Interest rates can rise and one's budget can receive an almighty belt. In addition, one may not always be able to raise the cash. When we were really strapped for cash in the late 1980s and 1990s, we always ensured that we never had a large amount of debt maturing in any one year. If a bank thinks that one is unable to pay off a lot of money in a particular year but must re-finance the debt, it puts the screws on and one pays dearly. We have always been careful to ensure that we never faced a credit crunch. The committee might recall the appalling situation we faced at the time of the currency crisis in 1992-93. Even then, we had a war chest containing approximately €4 billion in case a raid was launched on us. One should never fall too far into the hands of the banks.

This is why we have locked in much of the debt at very attractive interest rates. It is also all denominated in euro although we borrow a certain amount in foreign currencies. Recently, we did a deal which has received some publicity as it was our first dollar bond deal for approximately ten years and was for $500 million. Our basis for doing it was that we would swap it back into six months EURIBOR, or, in other words, a six-month interest rate applying to euro performed through various financial mechanisms. Compared to our normal bond auction business, that saved us approximately €3 million. We take opportunistic action when we can and that deal involved floating-rate debt.

We also have all the small savings schemes in the Post Office Savings Bank which were mentioned earlier, such as prize bonds, savings bonds and instalment savings. All of this is essentially short-term money, as anybody can come any time and ask for their cash back and we must give it to them immediately. It is not really a risk because not everyone asks for the cash at the same time. However, the fact that interest rates have fallen so much means that we have seen massive encashment of items such as savings certificates and savings bonds. I get regular complaints that we are not paying the same high rates as before.

Deputy Boyle

I have two questions on that area. Regarding the question of interest rates, the cost of servicing the debt increased for the first time in ten years, which must be a worrying signal although it was not a large amount. What would be the effect of a 1% increase in interest rates in the eurozone on the servicing of the national debt?

Dr. Somers

Given that so much of it is fixed-rate, an increase of 1% would not have a major impact in the short to medium term. Based on the short-term material we have, the figure is €26 million for a 1% rise, which is insignificant in terms of the amount of cash we are talking about.

Deputy Boyle

Has the fact the climate has changed and that there has been an increase in servicing the debt for the first time in a decade made a difference?

Dr. Somers

The interest bill is down €1 billion from what it was in 1990. Just to make sense of the question of timing of interest rates, generally the trend is down. The interest bill is decreasing.

Deputy Boyle

Is this a continuing trend?

Dr. Somers

It all depends on whether the Government runs deficits or surpluses. We thought we were facing into a series of deficits over the last few years and that has not happened. In 2004, when we were preparing the debt service estimate, we expected to face a deficit of €2.8 billion. We ended up with a surplus and there was a huge surplus of cash throughout the year. That all reduces the cost of debt servicing. The fact that we have locked so much into fixed-rate areas means that even if there is a rise in interest rates, the impact on the Exchequer will not be great. If the Government was to suddenly embark on a spending spree and run huge deficits, it would add to the servicing cost but then it would be caught by the famous Maastricht limits. I remember a time when we were running deficits of 15% or 16% of our GNP.

Deputy Boyle

We are nowhere near the Maastricht levels; we are only halfway there.

Dr. Somers

Not at all — we are less than 1%. We are nowhere near the Maastricht limits so there is plenty of leeway there.

Deputy Boyle

I would like to ask a brief question on the Post Office savings fund. Perhaps the Comptroller and Auditor General could also answer the same question. There is a management fee paid by NTMA to An Post for the work done by An Post in holding this money and administering it. The amount is something in the region of €25 million. The chief executive of An Post recently reported that NTMA was asking that this be cut by 33%, approximately one third or €8 million. Would there not be a case that the fee should increase for An Post, since it is continuing to provide a service?

Dr. Somers

An Post would say that. The fee that we are at present paying An Post on the Post Office Savings Bank is 2.75%. The interest rate NTMA is paying is in some instances as low as 0.1%, so most of the money is going to pay fees to An Post. The amount of money placed with the Post Office Savings Bank has been increasing, so we reckoned that there were at least economies of scale involved in this.

I asked a former colleague, Jim Farrell, who was formerly the head of Citibank before he joined us after his retirement, if he would carry out a detailed examination of the fees we were paying to An Post. His brief was to find out if we were paying too much or too little because this issue has surfaced before. He concluded that An Post was probably making a profit of approximately €15 million on what we were paying it. We decided that we should claw back some of that money. We wrote to An Post but found it very difficult to get replies from it because I think it feels it has some kind of right to run this fund. That was all right when it was the Department of Post and Telegraphs but An Post is now a public limited company, which could be hived off.

There is also doubt about the legal ownership of the Post Office Savings Bank fund because this goes back to Victorian legislation. We wrote to the Department of Finance urging it to place beyond doubt that the ownership of this fund would rest with the Minister for Finance. I think the Department is still considering our request. We have been arguing with An Post and my colleague, Oliver Whelan, has had some very difficult negotiations with it. Due to the fact that it was not even prepared to negotiate with us over a new fee, I was prepared to cut back the fee to 2.2% from the beginning of 2005. I raised it with the NTMA advisory committee, which felt that I was possibly being too precipitate, so we postponed it for three or four months to see if we could reach agreement with An Post. This is quite expensive money and there is a political risk that An Post could get into considerable financial trouble. It appears to have major difficulties.

Deputy Boyle

My question for the Comptroller and Auditor General concerns the fact that NTMA is responsible for several external funds — I think the number is approximately seven. The only fund that is audited by the Comptroller and Auditor General is the fund relating to the Post Office Savings Bank, as far as I know. There are other schemes that appear to be audited elsewhere. In terms of administration and public accountability, does the Comptroller and Auditor General consider this to be a satisfactory state of affairs, and could it be better done?

Mr. Purcell

Perhaps I gave the wrong impression in my introduction but I also have responsibility for all the accounts administered by the NTMA. In the case of the Post Office Savings Bank, it makes sense to rely to a great extent on the work of the auditors of An Post itself. Even in that case, we have a separate agreement with the auditors of An Post to do this work on our behalf and we review the papers and discuss the audit approach with them. In the case of the other accounts, I am not sure to which accounts Deputy Boyle is referring.

Deputy Boyle

My understanding is that there are a number of external funds or savings schemes like the Post Office Savings Bank. I think there are about seven in all.

Dr. Somers

We are responsible for a considerable number of funds but, as far as I know, the Comptroller and Auditor General audits all of them because he is an almost permanent presence in our office.

Deputy Boyle

That is good to hear. For my final series of questions, I would like to move on to the national pensions reserve fund. I am not too sure whether Dr. Somers or Mr. Geaney will be answering these questions.

Dr. Somers

Mr. Geaney looks after the policy end of it.

Deputy Boyle

We are not supposed to talk about policy but we will see what we can do about that.

Deputy Ardagh

Is that a promise?

Deputy Boyle

In terms of performance up to the end of 2003 and perhaps the 2004 review, Mr. Geaney in his introduction referred to the fund standing close to €12 million. Is it fair to say that direct funds in that since the inception are in the region of €9.5 million to €10 million? That would be money that the State has given directly to the fund.

Mr. Geaney

Yes, the total earn is approximately €2 billion, so the rest comes from the State.

Deputy Boyle

So it is €2 billion over €9.5 billion?

Mr. Geaney

Yes.

Deputy Boyle

Is that less the cost of maintaining the scheme?

Mr. Geaney

Net, yes.

Deputy Boyle

The most recent review in 2004 talked about the benchmark for 2004 not being reached. The benchmark from 2001 was exceeded. Is there concern at failing to meet that benchmark?

Mr. Geaney

One must understand the components of the benchmark versus the actuality of where the investments were in the period. If one developed what is known as a customised benchmark — a benchmark for the way the funds were held during the period — we would be marginally below that benchmark. We were 2% below the benchmark relating to the 80:20 allocation of equities and bonds. The reason for that was that we were holding cash throughout this period. If we had been fully invested, we would have been close to the benchmark. We might have been a point or two above or below it, depending on which mandates one was in. One would inevitably have a situation in a rising market where if there is any return on the market, if one has cash compared to equities, there will be a slippage. We considered it wise to do an averaging-in process throughout this period, given the volatility of the markets, and we concluded that we outperformed the benchmark over the time period by 8.9%, which shows we made a wise decision.

Deputy Boyle

Is that benchmark set on an annual basis?

Mr. Geaney

We have a cumulative annual benchmark as well.

Deputy Boyle

That is added to as time progresses?

Mr. Geaney

Yes. We look at each year's performance in context.

Deputy Boyle

When the stock market performed poorly I assume there was a low benchmark.

Mr. Geaney

The benchmark would have been much worse than our performance in that period, as we were not in it. This is the point about trying to make wise decisions on where we go.

Deputy Boyle

Hypothetically, there may have been a 4% benchmark one year but 6% was achieved, while last year only 9% was reached in respect of an 11% benchmark.

Mr. Geaney

The benchmark is a function of the various indices. In simple terms, if there is an allocation of 50% of the equities to England and 50% to continental Europe, the FTSE index would form part of the benchmark while the Xetra-DAX index and its counterparts on the Continent would form the other part. In this case one judges oneself against the market.

My personal view is that benchmarking is irrelevant to what we are doing. Most benchmarks are dreamt up by consultants to justify the performance of managers or others. In my view, the appropriate benchmark is the cost to the State as opposed to the returns to the State of having these funds in this particular category. Our overall objective is to produce a substantial additional return to the State over and above its opportunity cost, which is an important benchmark.

Deputy Boyle

In terms of the National Pensions Reserve Fund Commission's investment strategy, and unless the figures for 2003 have changed significantly, they show that the goal of 80% in equities, 20% in bonds and nothing in cash is close to being achieved. I think it is 71.72% and 14.07% at present. Of the equities invested, 41.86% is in Europe. What percentage of European investments are based in Ireland?

Mr. Geaney

It is approximately 1%.

Deputy Boyle

Of the European?

Mr. Geaney

Of the equity portion of the fund, which is in line with the Irish market's weighting in Europe.

Deputy Boyle

With regard to that particular policy of equities against bonds, the fund has gone through two periods of stock market cycles. It dipped in one quite significantly and seems to have returned to pre-1997 levels in the other. Would it be safe to say an uncertain period lies ahead due rising oil prices, currencies and commodities in particular? If so, is this a safe strategy to follow in the medium term?

Mr. Geaney

That is the point of diversifying the fund and why we are examining additional assets status and so on, which is to maintain the same level of risk tolerance more or less. If I knew what the markets were going to do, I would be able to retire immediately. Nobody knows what the markets will do but the general prognosis for the coming years is that equities are not expected to yield much more than 7% to 9% cumulatively. Bonds could well be negative in that period.

If one examines our 2004 performance as in our annual review, one would see a yield of 11.2% on the bond portfolio. If one earns interest at roughly 3.5%, from where does the rest of it come? It comes from an appreciation in the price of the bonds and the only way this can happen is by falling interest rates due to the factor of the interest rate compared to the fixed rate on the bond.

Deputy Boyle

Is that likely to happen?

Mr. Geaney

The opposite is very likely to happen. As soon as the economic conditions of France and Germany recover we can expect to see a rise in European interest rates.

Deputy Boyle

I shall move on to an area you spoke about the last time you came before the committee, that being the pension fund as a provider of investment funding for infrastructure work. The fund became part of a consortium with regard to the M50 project and has since stated it will not involve itself in any such consortium in the future, becoming a funding body only. Given that there is a conflict of interest in the first place, is it wise to continue with the existing consortium?

Mr. Geaney

The pension fund does not have any conflicts of interest but the NTMA may have one since it has other functions. We recognise there is a potential for people to perceive a conflict of interest should we be part of bidding consortia and we took the decision to provide equity or debt to any infrastructure PPP projects as long as they make commercial and sensible returns. This was a public statement and we informed other consortia that approached us on our position. If they will give us a reasonable deal, they can rely on the availability of the money but we will stay out of the bidding process. Our role is one of providing finance rather than any other aspect of the bidding process. We do not have much expertise in how much per mile something should cost or what we could build it for. That is someone else's expertise.

Deputy Boyle

The issue of a conflict of interest applies mainly to the National Development Finance Agency, as it removed itself as an adviser to the M50 project. Can Dr. Somers envisage difficulties with this approach in the future?

Dr. Somers

It created a problem for us. We have been anxious to invest some of the pension fund's money in Ireland because much remains to be done in terms of infrastructure, etc. We wanted to examine how to get involved. The Pension Commission agreed it would earmark €200 million for PPP-type projects. However, virtually nothing came our way and these projects have not moved with the speed expected.

Deputy Boyle

How much of the €200 million has been expended so far?

Dr. Somers

Nothing. The pension fund joined a consortium and decided to put €20 million into a bid of €100 million, in which we may or may not be successful. The commission is an independent body and I have an ex officio seat on it, but the decision was taken to try to do something on the PPP front, such as joining the consortium for widening the M50. We had our own ideas about how it could be funded, as we thought another way of doing it would have been to secure ties to the State’s share of the tolls on the M50. We believed this would produce €400 million or €500 million and might require a PPP project on the funding side. However, our advice was not taken on this. The moment Ms Ann Counihan discovered the fund’s involvement in August 2004 she wrote to the National Roads Authority and told it that we should not advise on the M50 project. The contract will not be in place for another year.

This posed the dilemma of what we do in the future if we wish to invest some of our money in Ireland. There was a long discussion in which we decided we were conscious of the risks of conflicts of interest. The only option available to us is an offer to join the winning consortium. However, they may not let us in because we did not join at the time when the risks were taken. The European Investment Bank does this in connection with providing loan finance at cheap rates through a winning group.

Another possibility for us would be to try to fund a total project. We made soundings with the relevant authorities about the possibility of funding the Dublin Port tunnel. We would not pay the costs of construction but would buy the tolls and shadow tolls on it, freeing money for them to build other projects if they so wish. This remains at an early stage, though we have mentioned it on and off. I am also quite happy to make a proposal to the commission if the port tunnel construction authorities wish to build the eastern bypass. Similarly, we could fund a second terminal at Dublin airport. The money — €12 billion — is there, and we are investing most of it outside the country at present. It may be that the conflict of interest will block us from getting involved in any PPP projects in the future, but that is outside our remit.

Deputy Boyle

A recent newspaper article written by Philip Lane pointed to other possible areas of conflict of interest, or at least public perception that even removing the fund from involvement might not be enough. Involvement in PPP projects, or State-run ventures — such as the tolls — might lead to public opprobrium. However, it was considered that it was not a serious area of conflict of interest. In his article, Philip Lane also pointed to a second area. If you were involved in a consortium, and other elements in it were involved in minimising their tax liability, that would be a very serious role for a State agency in which to involve itself.

Dr. Somers

This idea has arisen over the years — that one should be purer than pure. For years we borrowed money on the euro-dollar market. That was a tax avoidance mechanism where foreigners bought these bonds for us, through offshore funds, and we benefited financially from it. If one can find ways within the tax code of minimising one's tax bill, and we can get part of it, that benefits the people.

When PPP started, we inquired about rates of return in the United Kingdom. In the initial PFI projects in the UK, there was an annual return of 25% on equity. More recently it fell somewhat, but it was still very attractive at just under 20%. When the pension fund was being established, we tried to get some of this for the fund, for the benefit of the taxpayers. The officials in the Department of Finance began to pay attention when they saw that we were interested in generating money for the pension fund through PPP projects, rather than borrowing. The mandate that we have is to maximise the return for the taxpayer, within an acceptable level of risk.

Deputy Boyle

That brings me to my final area of questioning.

Vice Chairman

I am anxious to bring in Deputy Ardagh. The Deputy has gone well over the time.

Deputy Boyle

Could the Chairman give me some latitude — five minutes at most? I realise there has been a lot of latitude today.

Deputy Ardagh

The Deputy has already stolen some of my thunder already.

Deputy Boyle

I am not going to reopen the debate we had last year on ethical standards — they are determined by statute. The issue of what the pension fund can or cannot invest in is something I intend to raise in the House. There have been a number of issues that have arisen in the last year, and I would like a response in terms of how these standards are being applied to this relatively new body. Mr. Geaney was investigated by the Securities and Exchange Commission in New York. No charges were brought forward. I am sure that matter is settled. In such a situation, what standards apply, and should people absent themselves from membership?

Fund managers are challenged by underperformance, and one such underperformer recently has been Bank of Ireland asset management. Do conflicts of interest arise where members of the commission and members of the pension fund may have outside interests, such as directorships of such companies, and how do NTMA and pensions fund address these issues?

Mr. Geaney

This investigation concluded by effectively vindicating the individual concerned. There were no changes made to those financial statements at the request of the SEC. In other words they were perfectly fine——

Deputy Boyle

I am not asking about political——

Mr. Geaney

Where there is a material issue that is likely to be damaging, individuals would stand down but when one knows that there is not going to be something damaging, then there is no reason why one should do that.

Deputy Boyle

There are two courses of action: a resignation where one does not come back, and a temporary resignation until the situation is clear.

Mr. Geaney

It was clear to me and to others who knew what was going on. That may not be what the press would say.

On the question of conflicts of interests, Bank of Ireland is one such example, and there are many others. Inevitably, if we have a commission that has the necessary international and investment experience, we will have people with conflicts of interest. In those circumstances, the individuals concerned declare their conflict of interest and absent themselves from any further discussion. That has been our practice and policy. For example, if an individual has 500 shares in company A, and that company is to be discussed for whatever reason, then the individual absents himself or herself from the entire discussion and decision-making process. That is the policy with which we comply.

Deputy Ardagh

I welcome Mr. Roth, who, as Dr. Somers said, is coming along to seed the process. As former treasurer of the World Bank, what is his opinion of the view of Ireland at the World Bank over the past ten years?

Mr. Donald Roth

I left the World Bank in 1992, so I have not been associated with it in the last ten years, but I am sure that its opinion of the way Ireland manages its economy is extremely high, on all counts.

Deputy Ardagh

I wish to comment on the National Development Finance Agency, and the PPP investment. Mr. Geaney mentioned that rather than joining the consortia, the agency will wait until the winning bidder is announced. Dr. Somers has suggested that the return may be diminished as a result of that. It tends to dramatically reduce one's options. That was because the National Development Finance Agency was involved, and Ms Counihan correctly raised the matter. Could certain sections of the National Development Finance Agency or the pension fund be split, so that significant investment could be made, at a competitive rate, in the Irish economy? Then there would be the option of joining consortia with the type of expertise that Dr. Somers has said he has brought to the NTMA, but on an engineering, construction, and finance basis. Were you forced into the decision?

Mr. Geaney

The decisions as to how the matters are organised are not made by us. They are made by the Oireachtas and the Government. They decide who has what functions. We did not ask for this mandate; we were presented with it. With respect to the PPP situation, I must emphasise that the problems we have here with infrastructure do not relate to a lack of finance. They relate to a slow planning process. As Dr. Somers has pointed out, we will not have a conclusion or final bid until a year from now for widening the M50. This must be an entirely obvious thing to do at this point in time and I am not sure why anyone would doubt this is necessary. I think we joined the consortium last June or July. We are talking about the guts of two years to get to the point of making a decision as to what is going to happen. That has nothing to do with finance. There is plenty of money for projects; the problem is projects to do. That is the issue.

Deputy Ardagh

A decision was made that the NDFA would not join the consortia at the tendering stage, but that it would wait until the bid was given and there was a winning bid. In Mr. Geaney's answer, he stated that the Oireachtas dictates this to a great extent. Did Mr. Geaney go to the Minister and explain this conundrum that we have a national development finance agency which has stated it would have a problem continuing to advise the national roads authority because it is part of this consortium, and ask the Minister for his opinion?

Mr. Geaney

First, I shall answer the second half of the first question. As far as we are concerned, if we can be, we want to be involved in the whole infrastructure development, so long as we get a good reasonable commercial return. This is a matter for negotiation and deal-making when somebody comes to us. We have made it clear publicly, and all the people in the PPP area know that if we are approached with a project that has a commercial rate of return with reasonable risk-sharing arrangements, we will participate. The €200 million allocated was an initial allocation. We are happy to allocate more if the correct return is in place. There is no particular reason why another country or body should have the return rather than the Irish people, for whom we are investing the money.

On the conflict of interest issue, that is not a conflict of interest from the pension fund's point of view; it is only a conflict of interest from the NTMA's point of view. I did not personally discuss the conflict of interest issue with the current Minister for Finance or his predecessor at any point in time. Generally speaking, the Minister for Finance is made aware of what the commission is planning to do and how it is planning to do it in broad strategic terms. The Minister is not involved in any management or execution decisions that are taken. That has been the practice. The Minister would say that it is one's job to do and to go do it.

Deputy Ardagh

Is it that a decision was taken by the commission on the basis of a conflict problem that the NDFA had?

Mr. Geaney

It was more than that. Our interest is to try to support the infrastructure programme. We say to people that we do not have expertise on how to build a road. I might have an opinion as to what should be done, but I have no expertise to justify that opinion. In fact, I have quite strong opinions on what should be done but they are not based on any expertise. We say to go through the bidding process, and when that is complete we are available to provide capital to whomever wins, should capital be required. That is how we can participate. From our own point of view, as a pension fund it means we do not need to recruit expertise and carry costs for which there is no certainty of any return being achieved. There is no return until there are projects. Putting in a team to evaluate tenders and contracts does not make sense from our point of view.

Deputy Ardagh

The original strategy on this matter involved companies with expertise such as NTR. It was felt that by investing in that consortium there would be a significant return to help exceed the benchmark overall. Now that strategy has been changed.

Mr. Geaney

Yes, because we consider with hindsight we would be better off with a new strategy rather than the old strategy. That is a learning experience. Our objective is to try to facilitate the PPP process on the basis of getting a reasonable return. We do not think there will be a material difference in the return we get for joining after the bidding process rather than before. There may be a small difference. The risk to us of being involved or not involved, in terms of costs and expenditure, is higher than any marginal decrease we might get in return.

If you want to characterise the first decision as not the wisest decision in the world, that is fair. We have changed that point of view. Our objective is not to choose one participant or another participant. Our objective is to contribute as much as we can to the infrastructure projects and to the process.

Deputy Ardagh

Is Mr. Geaney implying that the conflict that arose for the NDFA was not a contributing factor to the change in its strategy?

Mr. Geaney

I would say it was an informing factor. Yes, it made us look at it again. I do not think we came out of that badly. I think we came out with a better conclusion than that which we had in the first place.

Deputy Ardagh

On the additional asset classes, Mr. Geaney is suggesting now that the amount of money to be invested in private equity is to increase substantially to 8% by 2009. What value does Mr. Geaney project that will be?

Mr. Geaney

I shall explain the background to those decisions. Our pension fund, while it is not unique, is unusual in so far as it does not have short-term liquidity requirements. We are not expected to pay out money before 2025. It is a sizeable pension fund. We are in the upper category of pension funds. We are nowhere near the top end but we are not small fry any more. We have the ability to participate in particular types of investments that do not require immediate liquidity. Other investors may require much earlier liquidity. There is a premium to be had in the marketplace for size and not requiring short-term liquidity. The application of that particular circumstance brings one to private equity and property. These are the two categories where there is a premium to be had.

Looking at the returns over time from both of these asset classes, the private equity asset class, at the upper decile managers, had extremely high returns over the past 25 years. The returns are in excess of 20% and in many cases 30%. That is compound over that period of time for upper decile managers. The problem for other funds is that they cannot access those investments because they are not big enough and they do not have the clout to get in. We have that. That is why we are doing it.

Deputy Ardagh

How much do you expect will be invested in these private equities by 2009?

Mr. Geaney

Somewhere in the order of €2 billion.

Deputy Ardagh

Will it be in private equity funds?

Mr. Geaney

They will have managers. That is how it is done; the agency enters funds that are run by KKR, or Citibank or Max Stone or——

Deputy Ardagh

There is a group in America, the Carlyle Group.

Mr. Geaney

Yes, that is another one.

Deputy Ardagh

Would the agency invest in that?

Mr. Geaney

It has not yet invested in it, but if the group met the criteria, it would.

Deputy Ardagh

Has the agency examined it?

Mr. Geaney

: We are examining many areas. The investment process in private equity takes place over time. A commitment is made to a fund and that is generally drawn down over a five-year period. It is paid back, usually starting in year four. By year four, one starts to see realisation and it is paid back over the next five years.

We have not had a due diligence process on Carlyle specifically, but we are in the process of examining the business entry plan and how we will access upper decile managers. We have the advantage of being able to do that, where others do not. These managers look on the agency as a very attractive investor, particularly because of the firm cash flow of the fund. We would expect to see a substantial contribution from this asset class, outperforming the 80:20 benchmark over time.

Deputy Ardagh

I have a query on a minor detail, on investment return. There seems to be a difference of approximately €3 million in administrative expenses between Dr. Somers's final report and the report here. The investment return is the same in both, but the administrative expenses are different. Is there a reason for that? Fees and expenses on the last page of the return are €18 million, whereas on the pensions fund — I cannot locate the page now——

Dr. Somers

This is the difference, Deputy, between the two figures for the value of the fund.

Deputy Ardagh

On page 26, the return states that there was an appreciation of €948 million but the report states that it was €951 million. Was there an error in the investment income or change in the market value, or was it in the fees and expenses? If it was the fees and expenses, then it represents 20% and is a significant item.

Mr. Geaney

It is a minor issue. This particular document was published at 6 p.m. The international markets did not close until 9 p.m. and there was a €3 million difference in that time period.

Dr. Somers

The other point is that the year-end document, if this is what we are talking about, which is the press release document, contains preliminary figures, or estimates.

Deputy Ardagh

That is fine, yes.

Mr. Geaney

The issue arises because the markets were not closed. The figures are generally correct, but——

Deputy Ardagh

At what time do you produce your document?

Dr. Somers

At 6 p.m. on 31 December, much to annoyance of journalists, etc.

Deputy Ardagh

At 6 p.m. you have figures and it is printed then?

Dr. Somers

: We try——

Deputy Ardagh

Both exchanges are closed then?

Dr. Somers

The American exchange is still open. To get figures by 6 p.m. for a press briefing is a major operation.

Deputy Ardagh

Well done and congratulations. The agency is the most influential body in Ireland. This was exemplified by the social event in Dublin Castle before Christmas, which was packed. When I was leaving, there was a long queue for the cloakroom and on the queue were two former Taoisigh. There appeared to be thousands of people there. The attendance was greater than anything the agency could possibly have wished for. It was an indication of the importance of being at that event and of the influence of the agency. The agency is doing well and is performing well. Was the event oversubscribed? Did more people attend than expected?

Dr. Somers

No. I will explain how it all began. It started when we set up the NTMA. We have close relations with international banks etc., and when we moved into the new treasury building, we invited people to the opening, which was held in the hall. There was a large attendance and the event gradually grew. Many influential foreign bankers would arrive and we had to try to put on a good show for them. We ran out of space in the hall of the treasury building and wondered where we would go. We tried the National Gallery one year, which was not a great success. Then we tried Dublin Castle. People are extremely impressed at being invited to Dublin Castle and particularly to the State apartments, because most people have never been inside the door of the place. We invite over 2,000 people and if more than 600 or 700 turn up, we are in serious trouble. I am not sure how many turned up at the last event but we managed to fit them all in.

Deputy Ardagh

It is an indication of the influence that the agency is perceived to have. Is that influence a reality?

Dr. Somers

I do not know. The agency is carrying out very important functions on behalf of the Government, which has seen fit to give it these functions. The functions can be withdrawn at a moment's notice because the authority is delegated to us by the Government. The agency is not like a semi-State body, which has an ongoing function. It has its function at the will and pleasure of the Government.

How influential are we? We do not see it in terms of being influential; we see it in terms of doing a good job and providing a service. My view is that we do it as well, if not better, than anybody else could. That is thanks to the staff that we have recruited. The agency started out in a small way, but the fact that it has such a wide-ranging remit, which continues to grow, is a tribute to the people working for it. They have delivered. If we are given something to do, then we do our best to make sure that it is done and done properly. I think that we have made a difference in the various areas that we have tackled.

Deputy Ardagh

On the issue of accountability to the Oireachtas and to the nation, apart from your appearance at the Committee of Public Accounts Committee, what other form does that take?

Dr. Somers

Direct reporting, on most issues, is to the Minister for Finance. I met the former Minister for Finance, Mr. McCreevy, every three or four weeks. We used to meet for breakfast because that was the time when he was least likely to be interrupted. I told him everything that was going on, so that there were no shocks or surprises. I meet the Taoiseach every so often and I also meet other Ministers. I meet Deputies of all parties.

I have always had an open door for anybody who wants to see me. I have invited the Committee of Public Accounts to come to the agency to see what we do and I am happy to issue that invitation again. The committee is more than welcome to come and meet the experts in the agency and discuss issues with them.

I meet people from political parties, both from the Dáil and the Seanad. The agency has also appeared before the Joint Committee on Finance and the Public Service, chaired by Deputy Fleming. The agency gives regular press briefings to journalists. I am happy to talk over the telephone to any known journalist. The agency is completely accountable and I am happy to talk to anybody about what we do.

Deputy Ardagh

I appreciate that. I am sorry for jumping back and forth, but I do not have the research facilities available to the spokespersons on finance. I have a question on pensions, population and the need for all of this money by 2025. The immigration statistics reveal 40,000 immigrated into Ireland since 1 May last, many of whom are young, well-educated and make excellent employees. There is no reason why this will not continue if the economy continues to develop. We are discussing a population projection of 4.8 million people by 2020 or 2025. Are these factors taken into account, and do you re-examine them on a regular basis, or is the management of finances the first priority for the commission?

Mr. Geaney

A significant study on the demographic issue was carried out by the Departments of Finance and of Social and Family Affairs prior to the establishment of the commission in order to quantify the possible future liabilities. Those numbers are out of date for a number of reasons. The population assumptions are probably wrong and likely to be understated, as are most similar estimates. The investment climate and the returns available on investments are fundamentally different to when the study was carried out. The proportion of social welfare dependants to non-social welfare dependants may also change over the projected period of time.

We will begin another examination of the issue this year so that public policy may be properly informed on the matter. The pension issue is not a problem faced solely by the State. Companies' current annual reports reveal that massive problems with pensions exist throughout the developed world. Although our pension situation is probably better than that of other countries, we too have a major problem. The major PLCs which publish their accounts here reported surpluses when the original population survey was completed but have since reported major deficits. We have read about the ESB's problems in the press but these are common to the semi-State sector for two reasons. Interest rates have decreased, making the cost of annuities much greater. There has also been a substantial rise in real incomes during this period, causing an increase in both the discount rate and the absolute quantum of liability, whereas investment returns have not come through.

Deputy Ardagh

The Government's generosity in increasing social welfare and old age pension provisions is also a factor.

Mr. Geaney

The Deputy may make that point but the private sector faces the same problem, whether people decide that sector is mean or generous. I am deeply interested in this issue, which has been discussed extensively and will be a matter for public debate.

Deputy Ardagh

I have a final question on the State Claims Agency. Recent newspapers reported extensively on radon gas, its measurement and the influence it has on the incidence of cancer. I ask Mr. Kearns what actions he has taken on the matter.

Mr. Adrian Kearns

We have held seminars for the main State agencies and we have met them on an individual basis to tell them about the dangers of radon gas. Through a seminar held with the Radiological Protection Institute of Ireland we also emphasised the risks involved. An instrument to measure radon gas in barracks, billet or other accommodation may be purchased for little cost and we have been pushing with some success for this to be done. The programme may take three years but it is already under way and all are very familiar with the dangers that exist.

Deputy Ardagh

Does Mr. Kearns expect more cases to be reported to his agency and more costs to be incurred?

Mr. Kearns

There have not been many claims in this area. We have been drawing attention to risks which could give rise to claims or fatalities. The purpose of risk management is to alert people to dangers before they occur. For example, if a hypothetical risk manager had during the 1970s remarked upon the need for ear defenders, the Defence Forces' deafness claims might have been avoided. Risk management is about the anticipation of risks of which people are not conscious, convincing the authorities concerned that there could be a serious danger and encouraging them to take the necessary measures. We would outline these measures, including the purchase of appropriate equipment such as instruments to record radon levels.

I am sure the Deputy is aware that certain parts of the country carry more risk than others. Radon can infiltrate accommodation such as in Garda stations and Army barracks. The authorities are now aware of the danger and it is for us to remind them persistently.

Vice Chairman

I am on a learning curve. As the Chairman, Deputy Noonan, is not present I wish to avail of the witnesses' expertise to ask them about some minor matters. The NTMA is responsible for managing the dormant account fund but I ask whether it has any say in determining its eventual destination in the context of capital or current funds. If so, would Dr. Somers comment on the liability that this might give rise to in the context of current funding of future projects?

Dr. Somers

Functions are conferred on us by different statutes. Our only role is to receive and manage moneys so as to earn a return. Our remit does not extend to their disposal. A special disbursement board exists for dormant accounts and the Minister for Community, Rural and Gaeltacht Affairs, Deputy Ó Cuív, decides how to spend the moneys. Apart from managing the fund pending the board's use of it we have no interest on where or how it is spent.

Vice Chairman

The total value of the different prize bonds schemes in 2003 was €7.46 billion. Does the NTMA have any say in the promotion of prize bonds? One often hears about the national lottery, the numbers for which are displayed in post offices and elsewhere. This is not so with prize bonds, although they were extremely popular in the past. Is there any means to allow them greater prominence?

Dr. Somers

Prize bonds received significant attention earlier this year because under an extraordinary EU directive which was copied into last year's finance Bill it seemed that the scheme would no longer exist. Under the directive a passport, utility bill and tax number would have be furnished in order to purchase prize bonds worth €25 in a post office. This was unrelated to money laundering. The prizes on prize bonds do not have to be declared for tax, but if a foreigner such as a citizen of the United Kingdom happened to win money on a prize bond, usually to the value of €75, his or her winnings should, in principle, have been reported to the appropriate national tax authorities. That was to make sure that if somebody in the UK won a prize bond, he or she would be caught for tax. Joe Duffy got two long programmes out of this issue, with irate people phoning in.

Vice Chairman

Yes.

Dr. Somers

Are you familiar with this?

Vice Chairman

I am familiar with Mr. Duffy.

Dr. Somers

He got a huge audience for this issue. I went to see the Secretary General of the Department of Finance about the matter. I told him this practice was ridiculous and that no other country did it. This was supposed to be an EU-wide directive. We were the only ones who saw fit to be purer than pure in terms of this particular carry-on. I asked the Secretary General of the Department of Finance if he could do something about it. He held a meeting and nothing happened. I spoke to the Minister for Finance and then wrote to him about it, telling him that this provision was absurd but even he had great difficulty in trying to move officialdom on it.

We eventually got a solution under which if someone won a prize, they would write to the winner to tell them. At that stage one was supposed to send in one's passport number, utility bill and everything else. I am told that while they will do that, they will not follow up too stringently if one wins only €75 but if someone wins one of the big prizes, they will continue to write to the person until they do that. The whole thing is crazy. The prize bonds scheme got great publicity out of that, most of it negative. We tried to counteract it by getting rid of what I thought was a ridiculous provision.

Vice Chairman

Is that the NTMA's only role in it?

Dr. Somers

No. We are responsible for it.

Vice Chairman

Does it promote it?

Dr. Somers

It is done through the Prize Bond Company, which is a joint venture between An Post and FEXCO in Killorglin. The administration of the scheme is done by FEXCO. It keeps the records and pays the prizes. We provide it with a fairly substantial marketing budget every year to market this scheme and we pay it a fee of approximately 2% of the amount outstanding. It is not a particularly cheap scheme because the prize bond fund is over 2%, but many people want to do it. They buy prize bonds as presents for people and so on.

Vice Chairman

They do but, without labouring the point, it appears there was more promotion of prize bonds and the beneficiaries are the winners, as is the case with the lottery. More people would purchase prize bonds and it appears the schemes are widely supported if €7.46 billion are in them. I am simply making that point.

In regard to the post offices, a point was made earlier by Deputy Boyle about Mr. Curtin's attendance at the Oireachtas committee and the issue that arose since concerning the reduction being paid to them and so on. What stage are the negotiations at now? Are they ongoing? Is the NTMA engaged in negotiations with An Post? Will this issue be resolved and is it a two-way flow of information? You said earlier it was not. Has that improved recently? I ask this because of Mr. Curtin's appearance before the Oireachtas committee and the fact that he will be before it again.

Dr. Somers

I did not see his appearance before the committee and I am not sure what he said. We found it very difficult to get them to respond to us until we told them we were serious about this and that we intended to cut the expenses we were paying them from 1 January. I was prepared to do that. There was a threat of a strike at the time and there is always the question about how hard one goes in on the post office. I was warned off this years ago by a former Minister who told me to make sure I am not blamed for closing down rural sub-post offices, which provide a social service there. There is an issue in terms of how hard we would go in but we could not get a response from them. They eventually woke up to the fact that we were serious and we are now in negotiation with them. My colleague, Oliver Whelan, has had regular sessions with them. We have given them three to four months to come up with some sort of deal that we can live with because we are subsidising them in terms of the profit they are making out of this scheme.

Vice Chairman

I am glad you have clarified that, Dr. Somers, because the impression was given at the other Oireachtas committee meeting that your agency was the bad guy in this negotiation. What you said here this morning needed to be said because of the impression that was given. Perhaps you should keep this committee briefed on the negotiations whenever you——

Dr. Somers

I am quite happy to do that. We have a detailed report on this, which my former colleague produced, in which he considered all the payments we are making to the post office. We are trying to reduce what we are paying them.

Vice Chairman

The report states that the agency's performance on the national debt is measured by an international investment bank and the bank determined that savings of €27.55 million were attributable to the agency in terms of its management in 2003. Can you explain that?

Dr. Somers

This was a mechanism that was put in place when the NTMA first came into existence. The people in the Department of Finance were anxious to know if there was any value added by having the NTMA and they came up with this idea of measuring us against a benchmark. I should say that this measure applies to the debt and a few associated funds. What they do each year — the Department of Finance, my people and outside advisers — is decide the optimum way of managing the national debt and the other funds over the period of the year. They run a computer programme every day to monitor the transactions — we do a huge number of them. I mentioned earlier that the amount of money that went through the agency in 2004 was over €500 billion, so there are vast amounts of cash running through the system. The question is whether we are making or losing money on all this dealing in money and when all these programmes, etc., were run, the end result was that we outperformed the ideal benchmark. This is supposed to be an ideal benchmark. It would be a good performance to match that ideal benchmark. Thankfully, we have succeeded in outperforming it. That is what is involved in that.

Vice Chairman

On the funding and debt management and the debt service costs, there were sinking fund payments of €480 million. Can you explain that?

Dr. Somers

This is a type of circular movement of money. When old loans were established years ago, a sinking fund would be established which would, over time, allegedly repay the loan. More recently it has referred to something called the capital services redemption account, which is an old favourite of the Comptroller and Auditor General; he used to raise it with me every year at one stage. This goes back to the late 1940s or early 1950s. The idea was that a sinking fund should be charged every year against voted capital expenditure. In other words, if money was spent on, say, a school, a sinking fund would be charged against the current budget every year so that at the end of the 30 years enough money would have accumulated to pay off borrowing to build that school.

That process is still ongoing. The original rationale for it has probably long since been lost but the fund — the Comptroller and Auditor General has reservations about this — does provide certain other facilities for us in terms of managing the debt. It is a circular movement of cash. It is charged on the current budget and it comes in as a receipt on the capital budget. It is charged as a so-called debt service item but it is not really that. The only debt service item is the amount of interest we pay. The rest is a type of red herring.

Vice Chairman

In the context of debt service costs, fees of €17 million were paid. I do not wish to go into salaries or anything else, but to whom are those fees paid?

Dr. Somers

Sorry, the——

Vice Chairman

There is a reference here to fees of €17 million under debt service costs.

Dr. Somers

That is part of the money we pay An Post because we have to pay it——

Vice Chairman

It is part of that money?

Dr. Somers

Yes. It is only part of it because in total we pay it over €40 million a year.

Vice Chairman

Is that part of the €40 million?

Dr. Somers

That is part of the €40 million, yes.

Vice Chairman

That total of €17 million?

Dr. Somers

Part of it is charged against the Exchequer and part of it is charged against the Post Office Savings Bank fund in terms of the fees we pay An Post. We outline in our annual report the total amount we pay An Post. Page 49 of the 2003 annual report outlines that we pay it €41.5 million in total. Given the accounting process, part of that is charged to the Exchequer and part of it is charged against the Post Office Savings Bank fund.

Vice Chairman

To return to the accounts, in terms of the notional market value of derivative contracts, is that similar to what happened in Elan? I read an article on this in which Warren Buffett was reported as stating, ". . . derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal". I read the line on them in the accounts. Can you explain that, as I am trying to understand those contracts?

Dr. Somers

These are largely swaps where we would close off exposure to foreign currencies and such like. If we borrow dollars, we will engage in a swap transaction to convert them into euro to eliminate the exchange rate risk for the State from movements in the US dollar.

Vice Chairman

It is part of the future movement of shares?

Dr. Somers

No, it relates to the debt. It a way by which we try to make sure we do not maintain an exposure to foreign currencies. It is a hedge. The other thing we sometimes do is borrow at the fixed rate and swap into the floating rate.

Vice Chairman

I thank Deputies Boyle and Ardagh for their questions. Would Mr. Purcell like to comment on this?

Mr. Purcell

I would like comment on one or two points, particularly regarding pensions. Mr. Geaney was right to refer to this mini-pensions time bomb in the corporate sector and, as an extension of that, in the semi-State sector. I suppose part of the reason for that in the semi-State sector is that, traditionally, the people who were employed in those organisations had defined benefit schemes which bore no relationship to their contributions. I understand that with most pension schemes nowadays the tendency is to opt for defined contribution schemes where, in a sense, one takes one's chances. That traditional practice has been responsible to some degree, allied with the reasons mentioned by Mr. Geaney, for that large overhang in the semi-State bodies. Financial reporting standard 17, is leading to disclosure of these amounts up to 2005, but after 2005 there is a requirement to show the pension charge which was incurred in respect of the staff in the annual account. That is causing some problems and is an issue on which we have had discussions with the Department of Finance.

I was intrigued, although it is not up to me to point this out, how one can get almost the same return investing later in a PPP project with a successful consortium rather than being part of that project. I imagine that one of the main elements in choosing a particular consortium is to be satisfied with the financing package one has put in place, that it is sound and so on. However, with all the expertise available in the NTMA and among the fund managers, I have no doubt they have worked this out. I can discuss with them at another time outside this committee how an investor could almost get the same return.

Dr. Somers

From my point of view I am not sure that will work. I think I mentioned this earlier. It is a case of the race having been run and then we try to back the winning horse, but those concerned may not let us in. That is why I would prefer — although I am only the manager of the pension fund — if we funded a total project rather than trying to do so on a consortium basis. However, that is a matter for others.

Mr. Purcell

The Vice Chairman mentioned dormant accounts disbursements and as Dr. Somers correctly said he is concerned with the custodial function in regard to those moneys. There is an issue concerning the disbursements, to which he partly alluded, and to what degree they build up other commitments. Another concern is the extent to which moneys being disbursed from the dormant accounts fund can be met from other sources. There is a remarkable similarity about some of the disbursements and some of the schemes administered by the Department of Social and Family Affairs and even sport activities under sports and recreational facilities. However, that is a matter for another day. It is not within the remit of the NTMA. These are the only observations I have.

Deputy Ardagh

In regard to that, would it be possible to have some variation of FRS 17, perhaps on a three-year or a five-year basis, in regard to what the costs would be actuarially calculated for the period after 2025? Some people say that 1% of GNP is too much and that the rate should be zero. If there was an indication of what the potential costs are, it might allow more for reasonable contributions to be made.

Mr. Geaney

If I may, I will respond briefly to that. With respect to FRS 17, it is a very artificial standard, as the Deputy is probably aware. Its main advantage is that accountants do no have to make judgments, in that, there are fixed rules, whereas actuarial valuations take into account the general circumstances of what one is looking at.

Deputy Ardagh

The other is a variation of that.

Mr. Geaney

They take account of the long-term outlook, whereas FRS 17 does not do that; it simply gives a snapshot at a point in time and it can change dramatically from one period to another.

In terms of the semi-State sector, the biggest problem going forward is that many existing defined pension benefit schemes tie the pensions of future pensioners to current employees. When one pays for productivity, one gets a huge jack-up in pension liability, where there is no productivity. There is a double-whammy effect from that in terms of the semi-State sector. We have seen significant improvements in productivity in many companies in the semi-State sector but it directly impacts on the pensioner. If one retired happy with a pension of €50,000 a year and one was receiving inflation increases and so on, and one's colleagues agreed to a reduction in workforce, an increase in productivity and they got a 20% rise for that, the pensioner would also get a 20% rise in pension terms, although the pensioner would be contributing to such productivity by work in his or her back garden. That is a big problem from the point of view of semi-State companies going forward. It is not relevant to this session, but it is something the committee might consider.

Vice Chairman

We have now concluded our examination of Chapters 14.1 and 14.2. Are they to be disposed of and accounts noted? Agreed.

I thank Dr. Somers, Mr. Geaney and their colleagues for being here. I also hope that Mr. Roth enjoyed the session.

Under any other business, there is no meeting next week. Our next meeting will be on Thursday, 24 March, when we will deal with the 2003 Annual Report and Appropriation Accounts for the Department of the Environment, Heritage and Local Government.

Dr. Somers

I reiterate the invitation to the committee or any of its members to call to visit us at any time in the NTMA.

Vice Chairman

I will take up that offer with the Chairman on his return.

Dr. Somers

Members will be more than welcome.

Vice Chairman

I am sure we will take you up on that.

Dr. Somers

That will be fine.

The committee adjourned at 1.20 p.m. until11 a.m. on Thursday, 24 March 2005.

COMMITTEE OF PUBLIC ACCOUNTS debate - Thursday, 10 Mar 2005

National Pensions Reserve Fund Accounts 2001.

Dr. Michael Somers

Mr. John Purcell

Mr. Donal Geaney

Mr. Geaney

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Mr. Purcell

Dr. Somers

Dr. Somers

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Dr. Somers

Dr. Somers

Dr. Somers

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Donald Roth

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Mr. Geaney

Dr. Somers

Mr. Geaney

Dr. Somers

Mr. Geaney

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Mr. Geaney

Mr. Geaney

Mr. Adrian Kearns

Mr. Kearns

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

Dr. Somers

COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 10 Mar 2005