National Pensions Reserve Fund Bill, 2000: Second Stage.

I move: "That the Bill be now read a Second Time."

In common with other industrialised countries, Ireland is set to experience a significant ageing of its population over the coming decades. The resulting increased dependency ratio will give rise to serious budgetary issues. In particular, it will put severe strain on the capacity of future Governments to continue to fund social welfare and public service pension liabilities on a pay-as-you-go basis. The purpose of the Bill before the House today is to put in place a mechanism to address this issue. It aims to meet part of the escalating cost of pensions by providing for the establishment of a national pensions reserve fund. The Bill marks a radical departure in the management of the public finances and introduces a new strategic long-term element into budgetary planning. It will help to ensure that the fruits of the economic success we are now enjoying contribute to the long-term well-being of our society.

Due to increased life expectancy and declining birth rates we are set to experience significant ageing of our population over the next half century. Today we have a ratio of one person aged 65 or over for every five persons of working age. By 2016, this ratio is projected to increase to one person aged 65 or over for every four persons of working age. This trend will continue and by mid-century it is projected that the ratio will have risen to one person aged 65 or over to every two persons of working age.

It is obvious that this greying of the population will have profound implications for Exchequer spending on pensions, health care and other services. The social welfare pension issue was considered in the National Pensions Policy Initiative, a report by the Pensions Board to the Minister for Social, Community and Family Affairs in May 1998. That report recommended the partial pre-funding of the projected growth in social welfare pensions. This issue and the wider budgetary issues posed by ageing were considered by a number of groups in my Department, principally the Budget Strategy for Ageing Group, whose report was published in July 1999. Taking the work of these groups together and updating conclusions to take account of the most recent data, the position in which we are likely to find ourselves can be summarised as follows: the current Exchequer cost of public service and social welfare pensions is 4.7% of GNP; by 2026, the Exchequer cost of broadly maintaining this level of pension provision will rise to 8.1% of GNP; and by 2056, this cost will have risen to 12.4% of GNP. This increase is merely to maintain the existing level of service. Any relative improvements that might occur in pension provision would, of course, add further to the cost.

The prospects of funding the increased expenditure, which I have outlined above, for economic growth are not bright. As the population ages, we will not be able to fuel growth through an expansion of the labour force as we have done over recent years. In this changed scenario, growth will have to be sustained by productivity gains alone and levels are likely to converge to the norm for advanced industrial societies.

Of course the issues raised by the greying of the population are not unique to Ireland. They are common to other industrial societies as the post-war baby boom generations reach retirement age. Awareness of the fiscal and economic risks implied by these developments has led to debate about the structure of the pension system in other countries. For example, Germany, which is set to experience a more immediate and severe demographic problem than we are, is currently considering plans for pension reform. The plan includes a reduction of benefits from the pay-as-you-go system, support for private pension funds and more support for company pensions.

I have tried to illustrate the magnitude of the task facing the country. Fortunately because of our predominately young population and the economic boom, we have both the time and the capacity to prepare for the burden. Indeed, our young population and the resultant increase in the labour force has been a significant contributory factor to our current strong economic performance. These favourable conditions are set to continue into the next decade and we can expect to achieve significant budget surpluses over the next few years. The consolidation of our budgetary position through the running of surpluses and the consequent decline in our level of indebtedness will, of themselves, improve our capacity to deal with the issues posed by ageing. However, we have the opportunity to go further – to take advantage of these favourable economic conditions and to provide now for more normal circumstances as the growth in the economy tapers off when the bulge in the young population passes through.

Up to now, the Exchequer costs of social welfare and public service pensions have been met as they arise – that is, like many other countries Ireland operates a pay-as-you-go approach to funding these costs. If a pay-as-you-go system is to be stable, there must be sufficient workers, who are sufficiently productive, to finance the cost of pensions for those who have retired. In the past, this requirement has been met in this country and it will continue to be met into the medium term. However, we now know that it will not be met in the long term. If we do nothing to anticipate that development now, the consequence will be either that taxes will have to rise dramatically when that time arrives or else the value of pensions in real terms will have to be reduced. This Government does not want to leave future generations of pensioners in a position where maintenance of the current level of pension cover could be put at risk.

The purpose of the Bill is, therefore, to move from complete reliance on pay-as-you-go and introduce part-funding of our future liabilities. Put simply, the Bill involves setting aside some of the revenues generated by the strength of the economy and our favourable demographics, investing them and drawing them down in the future when growth rates are likely to be slower and the age dependency burden very much increased.

However, given the magnitude of the prospective costs involved and the many other competing demands on the State's finances, it would be unrealistic to expect the Government to fully fund the increased costs of ageing in advance. The budget strategy for ageing group estimated that about 3.5% of GNP would have to be set aside annually to equalise the Exchequer burden of health and pension costs over the next 50 years. This is simply too much to expect of any generation.

What I am proposing in the Bill is more modest but also more achievable. It involves the setting aside and investing of 1% of gross national product annually to meet part of the cost of future pensions. The Bill will also allow the Government to make additional contributions to the fund. We have already decided that the net proceeds of the sale of the former Telecom Éireann are to be paid into the fund. This money has been lodged to the temporary holding fund for superannuation liabilities under the control of the NTMA. Once this legislation has been enacted, it will be paid into the reserve fund.

The assets of the reserve fund will be drawn down by future Ministers for Finance commencing in 2025. The size of these drawdowns will increase in line with the growth in the percentage of over 65s in the population. In this way, the fund will help to smooth over a very long time the Exchequer burden arising from our additional pension commitments.

The extent to which the fund will contribute to the increased cost of pensions in the long term depends on a number of factors, principally the extent of the additional payments into the fund on top of the annual 1% of GNP and the return the fund achieves on its investments.

While we know that the contribution will be substantial, it is impossible to forecast exactly how large it will be. The Bill provides in section 6(1)(h) for the regular assessment of the State's long-term pension liabilities and of the capacity of the fund to meet these liabilities. It will be a matter for future Governments to monitor this relationship and to take appropriate action.

I should stress that in earmarking such substantial moneys for the fund, the Government is in no way neglecting the current needs of our society. Contributions to the fund are not being made at the expense of other goals and commitments. Due to our economic success we are in the happy position of being able to prefund within a sustainable budgetary strategy which will also allow for substantial infrastructural and other capital investment under the national development plan, for continuing the implementation of the Programme for Prosperity and Fairness, for further improvements in public services and for ongoing reduction in the national debt. In short, the economic success which we have worked so hard to achieve allows us to make provision for future pension liabilities without compromising on our more immediate economic and societal goals.

While making an annual 1% of GNP contribution to the fund poses no difficulties for the Exchequer at the moment, I recognise that Deputies may have concerns that the contribution could cause problems in more adverse economic circumstances. However, it is the Government's opinion that any short-term difficulties that the payment may cause the Exchequer are more than offset by the long-term gain. To leave discretion in the making of the 1% contribution in times of economic difficulty would, I am convinced, undermine the whole basis of the fund. I do not need to remind the House of the straits in which prioritising short-term interests over the longer-term sustainability of the public finances has left us in the past. I believe that a 1% of GNP contribution is a prudent and sustainable commitment. Once built into the multi-annual budgetary structure it should not cause undue difficulty. To put it into perspective, the contribution is slightly less than our annual contribution to the EU budget and less than one third of the interest payment on the national debt in 1999.

I wish to set out a few of the key principles which I have enshrined in the legislation establishing the fund. I am extremely conscious that it is the people's money that is being invested in the fund and I have, therefore, purposely structured the fund in a manner which will enable it to match the returns achieved by private pension funds. This is reflected in three key features of the Bill.

The fund will be managed by commissioners who will be independent of Government. They will control and manage the fund with discretionary authority to determine and implement an investment strategy for the fund. Given the responsibilities to be placed upon the commissioners, it is essential to ensure that those appointed have the ability and expertise to make a constructive contribution to the management of the fund. To this end, the legislation specifies that appointees must have acquired substantial experience at senior management level in relevant areas.

This investment strategy will be based on a commercial investment mandate with the objective of securing the optimal return over the long term, subject to prudent risk management. On this point, I should state that given its large size in comparison to the size of the Irish market, it is inevitable that most of the fund will be invested abroad.

In this connection, Deputies may ask if the commissioners should be required to take other national objectives into account when determining an investment mandate for the fund. It is my firm view that any dilution of the commercial nature of the investment mandate, for example, by requiring the commissioners to maintain a certain level of investment in the Irish economy, could seriously compromise the returns achieved by the fund. The purpose of the fund and the justification for asking the taxpayer to make a contribution to it of 1% of GNP each year is to provide, as far as possible, for the costs of future pensions. I believe that the State has a solemn duty to do everything it can in accordance with prudence to maximise the return on this investment. The use of fund moneys for any other objective, no matter how laudable, should not be countenanced. Such objectives, if worth achieving, can be attained in other ways.

In order to ensure that the fund cannot be raided by future Governments for any other purpose besides the meeting of pension costs, I have provided for a prohibition on drawdowns prior to 2025. Drawdowns after that date will be determined under ministerial rules by reference to projected increases in the number of persons over 65 in the population.

Having highlighted these key features I wish to set out the main provisions of the Bill. In sum mary it provides for the establishment of the fund to provide towards the Exchequer cost of social welfare and public service pensions from 2025 onwards; a statutory obligation to pay a sum equivalent to 1% of GNP from the Exchequer into the fund each year until at least 2055 – provision is also made for the payment of additional sums into the fund from time to time; the establishment of an independent commission to control and manage the fund – the commission will have discretionary authority to determine and implement an investment strategy for the fund; a strictly commercial investment mandate for the fund with the objective of securing the optimal return over the long term, subject to prudent risk management; a prohibition on drawdowns from the fund prior to 2025 – drawdowns thereafter will be determined under ministerial rules by reference to projected increases in the number of persons over 65 and with a view to avoiding large fluctuations in the net Exchequer balance; the appointment of the National Treasury Management Agency as manager of the fund to act as agent of the commission – the appointment of the agency will be for a period of ten years, following which there will be the option, at five yearly intervals, to extend this further or to appoint an alternative manager; and the appointment by the commission of investment managers to invest and manage portions of the fund and custodians to ensure the safekeeping and security of the assets of the fund.

Provision is made for the accountability of the commission to the Minister for Finance and to the Dáil. This includes provision for detailed annual reports and for the appearance of the commission chairperson and the chief executive or manager before the Committee of Public Accounts. The Bill also provides for the transfer of the £4.8 billion currently in the temporary holding fund to the reserve fund and the winding up of the temporary holding fund.

The Government decision of July 1999 to part prefund future pension liabilities envisaged the setting up of two funds – one for social welfare pensions and one for public service pensions. However, for the sake of simplicity and to minimise administrative costs, the Government decided to proceed with legislation that provides for a single fund to cover both sets of liabilities.

This Bill does not pretend to address all the issues or to provide a complete solution to the budgetary problems posed by the ageing of the population. However, it makes a start. It ensures that we begin now to provide in a systematic manner for the inevitable increase in the pension liabilities which the Exchequer will be required to meet as the population ages. It will significantly ease the impact of this burden on the taxpayer and increase future Governments' capacity to respond to the other needs which will undoubtedly arise. The Bill is sensible and forward thinking legislation and I commend it to the House.

The National Pensions Reserve Fund Bill seeks to enact proposals for the partial funding of social welfare and public service pensions. The proposals are radical, the policy implications are signficant and the consequences for future pensioners and taxpayers are important. It is surprising, therefore, there has been so little debate about the content of this Bill since its publication. It is particularly surprising that the debate has been so muted when £4.8 billion has already been put aside in the temporary holding fund, ready for transfer to the pensions reserve fund, and the annual commmitment to the pensions reserve fund is in excess of £600 million per annum, based on the current level of GNP, and will rise as GNP rises. We often debate minor issues but issues of major consequence, such as this Bill, seem to pass without any debate.

This proposal would not have been made if the Exchequer had been in deficit. This country has no experience of handling budgetary surpluses and I have no doubt that when the proposals contained in the Bill were first mooted, at least part of the motivation of the Minister and his officials was to put part of the budget surplus beyond the reach of persons who either had plans or might devise plans to spend it. That is a prudent expedient but it is not sufficient in itself to justify the Bill.

Until now public service and social welfare pensions have been operated on a pay-as-you-go basis and have not been funded. The contributions made to their pensions by public servants have not gone into a pension fund and pensions of public servants have been paid from general Exchequer funds, usually through the pay and pensions Votes of individual Departments. While there is a social welfare fund into which PRSI contributions are paid, it is not a pension fund in any real sense. The drawdown, until recently, exceeded the level of contribution and had to be topped up by the Exchequer. Now, when contributions exceed the payout, balances accrue to the Exchequer and are not retained for investment purposes within the fund.

In future a sum equivalent to 1% of GNP will be paid into a pensions reserve fund. Payments will continue until at least 2055, that is, 55 years hence, and any drawdown from the fund will be prohibited until 2025. The case for proceeding in this way is based on an estimate of an increasing proportion of pensioners in the population between 2025 and 2055, leading to an increased burden on the taxpayer. The nub of the Minister's argument is that the greying of the population will add to the burden on future taxpayers to service pensions.

A number of questions arise from this. What are the demographic projections on which the case is based? The Minister gave the result of these projections and drew attention to the projected cost if these projections are correct but he did not refer to what the projections were. Is the case based on the number of pensioners in the population or on the proportion of pensioners to taxpayers? Two different results arise from the second rather than the first equation. It is difficult to make the type of demographic projections made by the Minister.

Since the time of Malthus, projections that are extremely wide of the mark have been made and, with due respect to the Minister and his advisers, their attempts to estimate annual inflation this year have been wide of the mark. They have had to change their opinion three times. That does not inspire great faith that they will be able to give an estimate of the population in 2055 and to assess the number of workers who might be supporting an ageing population in 55 years. The Minister could be right or wrong but he is tying the hands of his successors in a way that has never been attempted before. He has not produced the evidence or sufficiently made the case to justify the proposals he makes.

It is self-evident that the bulk of people now in their 40s will survive to claim pensions in 25 years. It is not at all clear, however, whether the additional number of persons on pensions will be an additional burden on those paying tax in 25 years. In the last six years, the number of persons at work has increased from 1.1 million to almost 1.7 million. Nobody projected that. Nobody suggested that we would see a more than 50% increase in the labour force over a short period. If this trend continues and if either through an increase in the number of births or immigration the number of people at work increases significantly between now and 2025 and between 2025 and 2055, the difficulty in paying for pensions envisaged by the Minister might not arise.

This is not simply an academic or statistical argument. In times of surplus, one might as well put surplus funds into a pension fund as pay off the national debt or put it in the post office or into a financial reserve fund. It does not matter in times of surplus but it does matter in times of deficit. What is being proposed is that the current generation of taxpayers will continue to pay pensions on a pay-as-you-go basis but will also contribute, through their taxes, 1% of GNP each year to fund pensions after 2025. The Minister's proposal envisages that the current generation of taxpayers will be obliged to pay twice.

While the budget is in surplus the 1% contribution will cause no grief. However, if the Exchequer again dips into deficit the choices being made will be stark. It is not so long ago that the expenditure of an additional few million pounds or cuts of a few million pounds led to lengthy and controversial Cabinet meetings. When the Exchequer goes into deficit, as it inevitably will, the real significance of the 1% contribution will be seen. A large amount of money might be set aside for the pension reserve fund against a background of cuts in sensitive areas of public expenditure such as health, education or social welfare.

It is inevitable that a future Minister for Finance will come to the House to propose tax increases, perhaps swingeing tax increases, to deal with an eventuality which we cannot now foresee. However, this Minister will tie the hands of that Minister by legislation so that, regardless of the circumstances of the Exchequer or the pressure which expenditure together with a downturn in the economy might put on it, the first payout will have to be 1% of GNP into a pensions reserve fund. I do not believe the Minister has made the case that this is necessary in current circumstances.

Much of the research on which the 1998 report is based relates to figures for a few years prior to that year. Considering what has happened in the labour force since then, I would like an up to date projection based on the current level of the labour force and labour force projections to see if the Minister is still right. It is clear everyone is getting older; that is not the issue. The population is greying; that is not the issue. The issue is, will the proportion of pensioners who have their pensions paid by the State be greater in proportion to those at work in the future? I do not think the case is made. I do not know the Government's intentions in terms of immigration but a feature of booming economies throughout the world is that they tend to suck in workers, particularly for the service industries. A modest net immigration to this country over a 25 or 55 year period would throw the Minister's projections out the window. However, we will take the proposal on its merits.

The Bill proposes that the fund will be operated under a strictly commercial investment mandate. A fund investment manager operating under such a mandate at present would not invest more than 1% of the fund in Irish investments. The mandate would require him to spread his risks through Europe, the United States and Japan. This gives rise to a further problem for the Irish taxpayer. He or she will not just be paying twice and making double contributions for pensions but no indirect benefit will arise to that taxpayer through better infrastructure or through the opportunities which investment from the fund and the domestic economy, particularly employment opportunities, would give. There is a huge infrastructural deficit in Ireland and, as the economy expands, the deficit is increasing rather than decreasing. We need investment in infrastructure, yet the mandate under the provisions of the Bill will prohibit investment managers from investing in infrastructural projects in Ireland as the Minister has effectively admitted this in his speech this evening. The vast bulk of investment from the fund will be in other economies and jobs generated by this investment will be in Magdeburg, Manchester or Miami rather than in Ballymun, Bohola or the Burren. I use the alliteration just to illustrate that not only can the scriptwriter of the Minister's colleague, the Minister for Arts, Heritage, Gaeltacht and the Islands, Deputy de Valera, alliterate with placenames and quite clearly put his signature on it by doing so, but we can do it on this side of the House also.

While the current economic boom continues, the type of decisions which are implicit in the Bill will pass without comment. Everyone knows there is money to burn. There is plenty of money for the national plan; there are huge surpluses. Therefore, what does it matter if fund managers must invest abroad rather than at home. There will be more money also for the private sector through the public private partnership, if this ever takes off the ground. That is how the song goes. The superfluity of Exchequer funds available for everything we want to do is a very unique experience in Irish public life and not the experience of those of us who have been here for quite a while. Neither is it the experience of any Administration since the foundation of the State. Over the 55 year period envisaged, there will be downturns and shortages of money. Not only will 1% of GNP be taken every year but the commercial mandate will ensure that, regardless of the needs in schools, hospitals, roads or public transport, that money will have to be invested abroad and cannot be used in the Irish economy.

I have no doubt posterity will pay great tributes to the Minister and all of us in this House to be so farseeing. However, while we have some duty to posterity, I do not agree with the Sir Boyle Roche argument that we should forget about posterity on the grounds they never did anything for us anyway. I think we should have a more farseeing view, but a difficulty arises. The commercial investment mandate of the fund also gives rise to another difficulty to which the Minister did not refer. Does the Minister envisage that the commercial considerations on the rate of return will be the only considerations taken into account by those who manage the fund? Does he envisage investments from the fund being made in what would be considered to be unethical or ecologically unfriendly companies? Will the regulations indicate that such investments will not be countenanced and, if so, will this be a departure from the commercial mandate which the Minister has announced? If the rate of return is good, may investments be made in the armaments industry, nuclear energy or in logging companies cutting down the rain forests in the Amazon Basin, for example? How will the Minister deal with these issues or will they be ignored? Will he leave the actual investment decision totally in the hands of investment managers to operate as they see fit, all decisions being made purely on the rate of return whether by way of dividend or capital gains?

There is one omission in the Bill which I find difficult to understand. When the Minister originally announced two pension funds for public service workers' pensions and PRSI contributions, I thought he intended moving from the pay-as-you-go system to the funding of pensions. It now seems very anomalous that while he is setting up a pension reserve fund into which 1% of GNP and the proceeds of the sale of State assets will be lodged, the actual contributions made by public servants for their pensions will not go into any fund. Surely this is anomalous if one is moving towards funding. Surely the first line of contribution which would go into any fund would be the contributions being made by teachers, gardaí and civil servants throughout the country. It would stand to reason that in times of high employment, when the PRSI fund is in surplus, that surplus would not be transferred to the Exchequer for expenditure elsewhere but would be retained within a fund and invested by the fund manager of that fund to ensure that pensions were secure in the future. It does not make sense to take legislative power to withdraw from the Exchequer the equivalent of 1% of GNP and put it in a reserve fund while at the same time contributions which put the social welfare fund in surplus are being spent elsewhere and not being used for pension purposes. To continue to operate a pay-as-you-go system up to 2025 and treat the new fund as something which kicks in in 2025 for the eventualities which the Minister foresees arising from an ageing population is not a sufficiently radical measure if he intends departing from a pay-as-you-go system to a fully funded system.

I now wish to comment on the provisions of the Bill. If we accept the principle of it, it is fair to say that the Bill is well constructed. There are issues which will arise on Committee Stage and I will signal some of them now. However, this is not meant to be a conclusive list. It is difficult at times to understand why there is need for a commission and a manager. At the end of the day all the functions of the commission, which will be an eight person body with the chairman being one of the eight, may be delegated to the manager and carried out by the National Treasury Management Agency for the first ten years. While the commission is not obliged to cede all its powers under the Bill, the manager may do so. In practice it seems this may be the practical solution to its problems. Would it be simpler to say that the NTMA will supervise this fund, hire investment managers from the private sector either by tender or some other appropriate way and run the fund? Why is this extra layer needed when it does not seem to be of any great advantage? When setting up the fund did the Minister consider allowing discretion to his successors to vary the contribution as time goes by against a background of changing Exchequer circumstances? For example, instead of making it mandatory to pay 1% of GNP into the fund, why did the Minister not say that the Minister of the day will pay in a sum in the range of 0.25% or 0.5% of GNP to 1.5% or 2% of GNP, depending on circumstances, with some overall controlling notion that it will have to average 1% over a particular cycle? A better result would be achieved that way.

Debate adjourned.