National Pensions Reserve Fund Bill, 2000: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

A momentous demographic transition is currently under way in most industrialised countries. Low fertility rates compared with those which prevailed in earlier decades combined with increasing life expectancy will soon lead to populations that are older and more dependent on transfers than ever before. At the same time lower rates of population growth and declining productivity are likely to result in slower rates of economic growth. Maintaining the real level of pensions and other social transfers in these conditions holds out the unpalatable prospect of either substantially higher tax burdens on the economically active population, substantially worsened public finances, severe restrictions on non-pension expenditure, or some combination of all three unpalatable options.

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 Ireland, is currently considering plans for pension reform. Their plan includes a reduction of benefits from the pay as you go system, support for private pension funds and more support for company pensions. Other options which have been mooted internationally include raising the age of retirement, cutting back on pension entitlements and linking pensions to the age of retirement so that the older one retires the larger the pension received.

Ireland is not immune from these trends. In common with other industrialised countries, we are set to experience a significant ageing of our 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 the current pay as you go basis. The purpose of the Bill before the House 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.

The position in Ireland is slightly better than elsewhere but the longer term trend towards an older population is similar to that in other countries. Almost uniquely in the industrialised world our age dependency ratio will actually decline a little over the next few years. Currently we have, and will continue to have for most of this decade, about five people of working age for each person over 65 years. However, the position will begin to change at the end of the decade. By 2016 it is projected that there will be about four persons of working age to support each pensioner. This trend will continue and by mid-century it is projected that there will be only two people of working age for every pensioner.

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 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 prefunding 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, BSTAG, 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 from 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 the last few 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. I have tried to illustrate the magnitude of the task facing the country. Fortunately, because of our predominantly 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 – 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 in 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 con sequence will be either that taxes will have to rise dramatically when that time arrives or the value of pensions in real terms will have to be reduced. The 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 this 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.

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 GNP annually to meet part of the cost of future pensions. The Bill will also allow the Government to make additional contributions to the fund. As Members are aware, we have already decided that the net proceeds of the sale of Telecom Éireann, now Eircom, 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 Bill provides that drawdowns from the fund will commence in 2025 and will continue to at least 2055 in accordance with ministerial rules. These rules will require draw downs to be calculated by reference to the number of persons over 65 years of age in the population during the period from 2025 to 2055 or later, with the aim of avoiding extreme variations in the net Exchequer position from year to year. This will link withdrawals from the fund to increases in the pension bill while providing for a smoothing of the budgetary impact of ageing over the period. 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 the contribution will be substantial, it is impossible to forecast exactly how large it will be. The Bill provides in section 6(1)(f2>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. Because of 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 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 Senators 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.

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 match the returns achieved by private pension funds. This is reflected in three key features of the Bill.

First, 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 experi ence at senior management level in relevant areas.

Second, 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, Senators 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. Placing a statutory obligation on the commission to give priority to investment in Ireland could expose the commission to pressure to make commercially sub-optimal decisions.

It is worth repeating that 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 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.

Third, 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. As I have already said, 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 summary the Bill 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 gross national product 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; 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; accountability of the commission to the Minister for Finance and to the Dáil – this includes provision for detailed annual reports and for appearance of the commission chairperson and the chief executive or the manager before the Committee of Public Accounts; and the transfer of the £5 billion currently in the temporary holding fund to the reserve fund and the winding up of the temporary holding fund.

It should be stressed that the fund is intended to be an instrument of long-term budgetary sustainability. It will lower the peak of pension payments to be met from the Exchequer in the second and third quarters of this century and thus bring about a smoother pattern of change in the Exchequer pension bill during those years. Starting now it enables us to set aside revenues from our favourable demographic position and our strong budgetary position.

The fund does not provide a complete solution to the budgetary problems posed by population ageing but it makes a start. It will allow us to begin preparing on a systematic basis for longer-term budgetary problems facing us in an ageing society. It marks a radical departure in the management of the public finances by introducing a new strategic long-term element into budgetary planning and I commend it to the House.

I welcome the Minister to the House. The run-up to the budget must be a very demanding period for the Minister. I am pleased he has taken time off this morning to come into the House and present this Bill.

Most European countries face serious concerns about the future funding of pensions for the ageing population. Given that the proportion of older people in Europe will increase dramatically in the near future, Governments must consider how they can continue to fund pensions, to say nothing of improving them.

In preparation for this debate I requested from the Department of Finance a copy of the progress report to the ECOFIN Council on the impact of ageing population on public pension systems. I thank the officials in that Department for forwarding a copy of that report. The analysis of the working group on the implications of the ageing population suggested that the demographic developments will soon result in pressure on public expenditure. However, the intensity of these effects will vary across member states. These differences reflect both the different impact and tim ing of demographic pressures and the significant difference of pension regimes in Europe.

The report went on to recommend that member states should adopt appropriate measures to make sure that such pressures do not undermine the long-term sustainability of their public finances. I believe this Bill is endeavouring to do just that. It was interesting to read in the report what is happening in Europe. By 2050 the overall population in Europe will decline by over 3% and the number of people aged 65 and over in proportion to the working population will roughly go from 25% to 50% over 20 years.

While we face these issues along with our European partners, we are in a more advantageous position for a number of reasons. First, our population, which is increasing, is one of the youngest in Europe. I read recently that we have the lowest death rate in Europe. We have also returning emigrants and refugees. A serious shift in the balance between the working and older population will not occur until approximately 2020. We have an advantage of 20 years over our European partners in this area. Second, we have a well constructed pension system. However, I have learned from the report that social welfare has three pillars, the first relates to the social welfare pensions, the second to pension funds originating in an agreement between employers and employees and the third pillar covers individual pension schemes.

More importantly, the economic growth we are enjoying gives us the opportunity to put in place sound pension systems for the future. While the population is still comparatively young, it is just a matter of time before the age profile changes. The Actuarial Review of Social Welfare Pensions, published in 1997, highlights that a proportion of people over pension age will increase dramatically in this century. While there are now five people at work for every retired person, by the middle of the century there will be one pensioner for every two people at work. While at present there are approximately 400,000 people over the age of 65, it is estimated that this will double by the year 2031 and will go over the one million mark by 2056. This will lead to a major increase in the cost of funding these pensions if people are to enjoy a decent level of income in their old age.

The traditional approach of Governments in Ireland and elsewhere to pensions has been a commitment to the PAYE arrangement. In the case of social welfare, this was achieved by successive Governments topping up the social insurance fund, which was always inadequate to meet the cost of social welfare benefits. I was pleased to discover recently that this fund has a surplus of £630 million which reflects the economic growth we are enjoying. More people are in employment and are contributing to the fund. Given the sharp fall in unemployment, there is less demand on the fund. I do not understand why the Minister has not made provision in the Bill for the surplus in this fund to be included in the pension reserve fund.

It is clear from demographic projections that the proportion of people aged 65 and over will rise significantly after the year 2020. For this reason, I believe it prudent that we should make provision for our pension schemes in the future. If we fail to do so in the years to come, people will have to pay higher taxes to meet the pensions of the aging population.

The Bill provides for the establishment, financing, investment and management of a reserve fund aimed at meeting part of the escalating Exchequer cost for social welfare and public service pensions up to the year 2025. The reserve fund will get a kick start with an investment of £3.6 billion raised through the privatisation of Telecom Éireann. In addition, it is proposed to add 1% of GNP until the year 2055. There will be a provision on any Government accessing the fund before the year 2025 when the first pensions will be drawn down. In his reply the Minister might explain what will happen after 2025, for what purpose will the drawdown be made on the fund and how will it be limited.

While I support the principle of the Bill, I have some difficulty in supporting the concept that 1% of gross national product should be set aside each year for the fund. I understand this currently amounts to approximately £600 million per year. It is fine to set aside this kind of money when there are budget surpluses, but I am sure the day will come when we will be in deficit. It seems strange that we are committing ourselves and future Governments for a long period to such a generous commitment to this fund. Our economy is very strong at present. I am sure the Minister will agree that the weakness of the euro has led to our economic trading with England, America and other parts of the world being of great advantage to Irish producers. However, this wealth in the economy will not continue forever. Has the Minister considered any other mechanism for varying the rate of contribution to the fund, for example, a higher amount if the finances of the State are higher or a smaller amount if the finances of the State are weaker? It is all right to provide for a 1% contribution at a time of prosperity when the State can afford it.

I now want to turn to the management of the fund as this is a crucial issue in relation to the legislation. The Minister in his wisdom has appointed the National Treasury Management Agency to be the first manager of the fund. It will manage the fund for the first ten years. The Bill also provides for the setting up of a commission to be comprised of people with great experience in financial and legal matters. I have some difficulty in understanding the function of the first manager of the fund and the commissioners. Will the first manager of the fund be the executive manager and will the commission, to use the analogy of a private pension fund, be the trustees of the fund? Will they have any function in the appointment of fund managers? Can the Minister assure me that he is satisfied there will be no conflict between the role of the manager of the fund and the independence of the commission.

The Bill provides for a strictly commercial investment mandate for the funds with the objective of securing the ultimate return over the long-term, subject to prudent risk management. While the Bill prohibits the commission or its fund managers from investing in Irish bonds, nevertheless, I hope some of the funds will be invested in the Irish economy with a view to improving our infrastructure. I realise the Irish economy is far too limited for a fund of this size. As a result the major portion of the fund will be invested abroad.

The fund managers will have the responsibility of deciding to invest in funds that are actively or passively managed. I have read that passive fund managers who follow the index got a better return over a period than active fund managers. This was borne out by a study carried out by Chase de Vere, an independent financial adviser. They studied 474 funds investing in Britain, 109 in Europe, 110 in America and 19 in Japan over five years. It used the appropriate index in each country as the benchmark and compared returns before fees. Only two of the 474 British investment funds have consistently beaten the FTSE index in the past five years. According to the survey the overwhelming majority of unit trusts are seriously under-performing and investors are missing on thousands of pounds as a result.

When investing overseas, active fund managers have a better record and the survey revealed that five of the 109 European funds beat the FTSE European index every year for the past five years. However, not a single American fund beat the index in that time but an impressive 80 of 110 funds managed to beat the Dow Jones in the past three years. The Japanese fund managers are the most consistent with the majority beating the index most of the time. The survey concluded that there are simply too many funds and too much dross but that active management will be better in the future.

It is crucially important for the managers of this fund to get a good return. The return on the fund is crucial to its success. It must achieve a rate higher than the rate of interest being paid on the national debt. If the fund earns less than the rate which is being paid on the national debt it will fail because it would be better to pay off the national debt.

It is disappointing that more publicity has not been attached to the proposed measures in the legislation. I am pleased that one commentator described the measures proposed as a crucial new strategy. He stated that it is not just imaginative but in a way it is very brave, it represents a fundamental departure from the time honoured ways of providing State pensions and, critically, from traditional methods of Government accounting, which are often limited to very short-term views. Given the reservations I have expressed, I would have difficulty disagreeing with his comments.

I was reminded this morning by Senator Ross that I will not be a beneficiary of the fund. I had already realised this as I am unlikely to live until 2025. Nevertheless, it is important that we provide for the future and for that reason I welcome the Bill.

I welcome the Minister to the House during this busy time. I am sure we will see him in the House more frequently during the next month. I wish him well for his fourth budget and I hope no banana skins lie in his path, as happened last year. The more successful one is the more trouble one draws on oneself.

This Bill represents the Minister's and the Government's delivery on the commitment made in July 1999 partially to prefund the Exchequer cost of social welfare and public service pensions. This is a major step forward from procedures operated by Governments in the past when all expenditure was provided on an annual basis from the income of that year. That procedure was described by the Minister as a pay as you go system. There was a continued liability and commitment that State employees and social welfare recipients would receive their pensions at retirement age. This Bill provides the process to provide partial funding now for expenditure in the future. The present system is based on the assumption that sufficient workers will be there with sufficient productivity to provide funding for the day to day running of the State and to finance the cost of pensions for those who are retiring. Demographic trends show this will not be the case in the future.

The new national pensions reserve fund is probably one of the most important initiatives in economic policy undertaken by any Government in the history of the State. Few other countries have such a fund in place. The fact that we are able to embark on such a road is a reflection on our strong fiscal position which has come about through record economic success, unprecedented growth and prudent management of the economy leading to large budgetary surpluses over the last four years.

I congratulate the Minister on the steps he has taken to move away from providing for old age and public service pensions from current revenue, as has been the case in the past. It is a natural progression to regulate for such pensions, providing at least for partial funding and managing the situation by budgeting and projecting into the future. In the past many private companies provided for the pensions of their employees out of current revenue. Such companies got into financial difficulties and when liquidated, employee pension funds were denuded of funding. Were funding difficulties to arise because of a large increase in the pension payments for State employees and social welfare recipients in the future due to an ageing population, the State could provide for this by increased taxation.

We do not wish to return to the old days of the 1970s and 1980s, now that we have succeeded in reducing the standard and high rates of tax so spectacularly. The Government acted in relation to private pension schemes by the introduction of the 1991 Pensions Act and the setting up of the Pensions Board. Private pension schemes are regulated to ensure that employees' pensions are funded properly and not from current revenue. This Bill is an attempt to provide at least partial funding for future social welfare and public service pensions so that we do not face difficulties in the second quarter of this century.

Despite the Pensions Act, there are difficulties regarding the fund management of private pension schemes. One of the main functions of the Pensions Board is to monitor the operation of pension schemes to make sure they comply with the requirements of the 1991 Pensions Act. In the last three years there have been difficulties in relation to compliance with the requirements of the Act. Shortcomings pinpointed include delays in registering schemes with the Pensions Board, delays in producing annual audited accounts and actuarial valuations and failure to notify members that documents, such as annual reports, are available.

The widespread inability to comply with a ten year old law can hardly inspire confidence in the pensions industry or in its monitoring authority, the Pensions Board. The 1991 Act requires pension schemes to submit annual funding certificates showing they are investing enough money to cover the pension liability they have built up since 1991 and they have until 1 January 2001 to provide adequate funding to cover liabilities built up before 1991. While the National Pensions Reserve Fund Bill provides only a partial funding of future State pensions, some lessons can be learned from private company pension schemes. Some aspects of the Bill may need to be improved on. The Government is committed to setting aside 1% of the gross national product each year. This figure is currently £600 million per annum.

Last December interim legislation was passed to establish a temporary holding fund for these superannuation liabilities while the National Pensions Reserve Fund Bill was awaited. While many of us purchased Telecom Éireann shares and felt aggrieved at their purchase, we see that the Government acted prudently by investing part of the proceeds of the sale of Telecom Éireann in that temporary fund. I congratulate Senator Ross on standing up for the ordinary investor. Shares in Eircom have recovered in value in the past few months and investors may recover their initial capital. A sum of £3 billion was invested in the interim fund before the end of 1999 and a further £1.8 billion has been lodged in the current year. This is made up from the proceeds of the sale of Telecom Éireann and £1.2 billion of Exchequer funding. The temporary holding fund is being managed in short term deposits and financial instruments by the National Treasury Management Agency until the national pensions reserve fund is established. Moneys in the holding fund will be transferred to the new fund and the temporary fund will then be closed.

Social welfare and public service pensions have increased dramatically in recent years. It is the Government's intention to provide this reserve fund with annual contributions, at least until 2055. From 2025 onwards the fund will partially assist in meeting the cost of State pensions. The legislation will enable the Government of the day to lodge additional sums to the fund from time to time, by resolution of the Houses of the Oireachtas.

The Bill will allow for the establishment of an independent commission, to be known as the national pensions reserve fund commission, which will control and manage the fund. It is hoped this commission will adopt and implement an investment strategy based on good commercial principles. While adopting the objective of achieving maximum possible returns, the commission will also be prudent in its dealing with risk management decisions. The fund is structured to match returns in private pension funds. The National Treasury Management Agency will act as agents for the commission in managing the fund for the initial ten years. Matters will then be reviewed and other fund managers may be appointed. Detailed annual reports will ensure the commission is accountable to the Minister and to the Houses of the Oireachtas. Provision is also made for the chairperson of the commission to appear before the Committee of Public Accounts. Given the events of the past year, this will, no doubt, encourage prudent management.

The Bill enables the period for the provision of 1% of GDP for the fund to be extended beyond 2055 or for such payments to be tapered off after that date. Payments to the fund will be made in equal quarterly instalments. Drawdowns from the fund will be prohibited until 2025 and drawdowns after that will be determined with reference to the projected increase in our population over 65 years of age. Fluctuations in the net Exchequer balance from year to year will be avoided.

It is a wise decision to provide funding now for future expenditure. We are going through a period of unprecedented economic growth, but this may not last indefinitely. The budget surplus of today may not last in the future and we could go back to the deficits which, in the past, required borrowing to provide for current expenditure such as social welfare and State pensions. Such expenditure in the 1970s and 1980s led to large increases in our national debt.

This Bill provides for a radical change in the management of public finances. The fruits of economic success enjoyed by the State in recent years and which will be enjoyed in the immediate future will contribute to the long-term well-being of our society, particularly our pensioners in the future. At present we have a ratio of 5:1 in terms of the number of pensioners to the number in the workforce. This is projected to rise to 2:1 by the middle of the century. Demographic population trends show that we will face a significant ageing of our population in the coming decades.

The Minister is to be complimented on moving now with the windfall of funds at his disposal and for setting up this fund. Others would have used the funding to satisfy the many demands on Ministers for Finance or to increase public expenditure. The fund cannot be raided for other matters or demands. It is purely to meet the cost of pension provisions arising from the ageing of the population.

Growth levels cannot be achieved in future through expansion of the labour force. Our present young population and sustained economic growth guarantee us the time and the capacity to provide the funding for future high levels of pensions. The present labour force has been a significant factor in the strong economic performance experienced over the last number of years which is projected to last at least in the short term. A reduction of the national debt has been tackled and this will ensure additional funding is available to provide funds for pensions in the future for both public service and contributory and non-contributory pensions. The Minister has gone further by providing funding to the pension reserve fund.

The proposals in this Bill are radical and innovative and the policy implications are significant with important consequences for future pensioners. Present pensions have been funded on an annual ongoing basis. Contributions to date by public servants towards their pensions have not gone into a pension fund and payment of pensions has been from general Exchequer funds. PRSI contributions have gone into a social welfare fund and, until recently, withdrawals from that fund exceeded the levels of contribution and excess payments had to be funded by the Exchequer. Many of us in the financial area have always regarded PRSI payments as an additional rate of income tax due to the set up in place.

I note the Minister has not amalgamated the present £630 million surplus in this national pension reserve fund. He explained to the Dáil the reasons for this. Because of this, it will be necessary to draw on the social fund reserve before 2005, the date that drawdowns commence under this legislation.

The Bill may be divided into six parts which clearly outline the role of the national pension reserve fund commission and the administration of the actions of the national pension reserve fund. The Bill deals with the national pension reserve commission which will control and manage the pension fund. The primary function of the commission will be to determine an investment strategy. This will include decisions to be taken in relation to assets and allocations and will set appropriate benchmarks in regard to the overall performance of the fund and of particular assets in which the fund is to be invested.

The Bill provides that the fund cannot be invested in Government securities. This restric tion ensures that funds may not be used at some future date to support Government borrowing. The Minister said the Bill does not prevent the fund investing in infrastructural projects on a public private partnership basis. What the commissioners must do, however, before investing in any assets in this country or abroad is have regard to the commercial investment mandate of the fund. The mandate will prevent pressures being placed on the commissioners to make commercially devious investments, but time will tell.

I am not sure if the legislation is strong enough to insulate the fund from future improper demands. The manager of the fund must be given a clear mandate. Nobody wants the fund to hold totally speculative shares. If there are to be ethical constraints on investment policy, these should be specified from the start. To avoid the temptations to raid the fund on the part of future Ministers for Finance, it might be wise to have the law preclude the fund from investing in any Irish assets.

Future generations will remember this Minister for Finance and, I am sure, pay tribute to him for what he has done in this Bill long after the rows and troubles in relation to individualisation and the credit unions have been forgotten. He has been able to provide £2 billion in tax cuts in his last three budgets. The PPF and tax cuts in next month's budget will highlight the prudent way he has managed the economy. The provision of this national pension reserve fund through budget surpluses and prudent investment of funds from the sale of State assets will ensure that the Minister will be remembered as the best Minister for Finance in the history of the State.

The Minister has made many other changes during his term in office in relation to pensions and social welfare, particularly for the elderly. The Government has always supported the implementation of tax breaks to encourage people in the private and public sectors to invest in pension plans during their working life. Changes in the last two budgets in relation to the increased contribution rules, depending on age, and the freeing up of funds and maturities will be of great benefit to many professional and self-employed people.

The Minister has also made other changes in relation to pensions. I hope we will see the old age contributory pension increased to £105 in the next budget – £5 more than what was committed to when the Government came into office. I would like to see non-contributory pensions, which are lagging slightly behind, brought up to in excess of £100 per week as well. The Minister and the Minister for Social, Community and Family Affairs have provided medical cards to all those over 75 years of age and many other improved social welfare schemes.

There are many other changes which could be made even to something simple like the fuel allowance for the elderly and the provision of better health care facilities for the elderly. I refer, in particular, to the carer's allowance. I know this is a very difficult matter and the Minister for Social, Community and Family Affairs has made huge improvements in the carer's allowance, but we have to move away from the situation we have faced and plan for the future. We need to provide for carers more on the basis of need. Many of us come across very difficult and sad cases but due to means testing, etc., no additional help can be given. Each case should be looked at on its merits and on the basis of need and incapacity rather than on the basis of the structure in place today.

Between now and 2056 there is likely to be a fall of approximately 5% in the working population and an increase of the order of 160% in the population over 65 years of age. The partial pre-funding of future pension liabilities through this national pension reserve fund is a prudent step which will go some way towards easing the budgetary burden for the next generation. What is perhaps unusual in this country is that our relatively favourable demographic position gives us a little more time than other countries to do something about the problem. A relatively favourable budgetary position also gives us the capacity to do something. I commend the Bill to the House.

I am suspicious of unanimity and reluctant to joint in any unanimity about a financial Bill. I find the lack of criticism of this Bill from all sides of the House strange. I do not quite understand it. It is very sensible to be provident about the future, particularly given the demographics in this country and elsewhere. While the principle of providing for pensions in the future is good, the practice is flawed. I understand the reluctance of the Opposition to vote against it, although I am not sure what is the view of the Labour Party on it. The Bill, when one examines it, contains many flaws which should be considered and criticised.

I agree with Senator Bonner's praise of the Minister for Finance. As a Minister, he has courage and guts. He has been prepared to stick to his ideology through thick and thin despite the barbs thrown at him by the media and others. It is time the country had a Minister for Finance with such courage who is prepared to pursue sometimes unpopular or temporarily unpopular measures through to their logical conclusion. In that regard, I refer to the reduction in capital gains tax, the reductions in income tax and other measures he took in the face of opposition which have not done him any good in terms of popular opinion.

However, with regard to the Bill, although the Minister's instincts are probably reasonably good, the practice is flawed. Senator Joe Doyle touched on the reason for this in his contribution. I do not understand how a huge fund can be set aside while there is still a national debt. It is simple, but it is totally questionable. It is similar to an individual, a Minister of State or I, having money on deposit in the Bank of Ireland or AIB at 0.5% or 1%—

We all put money aside.

—but borrowing the same amount at 11%. It does not make sense.

It does.

I do not understand why the first priority of the Minister, although his instinct is to do it, was not to decide that 1% of GNP would be put aside every year because the country can afford it and that the money would be used to service the national debt. However, that did not happen.

The national debt is approximately £30 billion. People say that is not a very large amount and that it is a tiny percentage of GNP compared to what it was in the past. They are correct, but it is a tiny percentage of GNP today. It was not a tiny percentage of GNP a few years ago—

—and it could be a large percentage of GNP again in the future. We also have the advantage at present, although it is temporary due to the nature of economics and economic cycles, that the national debt costs much less to service than it did in the past because interest rates are so low. I am not making any foolish predictions because people who predict interest rates are inevitably wrong, but that will not last forever.

Interest rates at some time, certainly within the period mentioned in the Bill up to 2025 before which money cannot be taken out, will rise to levels which are unacceptable today. We will find, if we do not pay off the national debt at some stage in that period – the Bill extends to 2055 – that interest rates are very high, the national debt has become a problem again and we will be forced to borrow again. Borrowing is out at present, but it was not out ten years ago. We lived on borrowing ten years ago but the global and mobile environment in which we are living now assumes that the current circumstances will last forever. However, that is not the case.

It is as sure as night follows day that if the national debt is not paid off, it will rise at some period in the next 20 years and the cost of servicing it will increase in the next 20 to 25 years, which is the period of the Bill. Before the Minister puts money into the reserve account, the first thing he should do is decide that the money should go towards servicing or paying off the national debt, if that is possible. The national debt will become a problem again unless we get rid of it. The idea that we will never borrow again for current or capital expenditure is unrealistic. It appears unrealistic now, but ten years ago it was inconceivable that we would be living in the world of today.

The first priority should have been to get rid of that millstone around our neck which we now pretend does not exist. To save money when one is borrowing money at the same time does not make any sense. If the national debt had been paid off, it would have been reasonable to decide to open this massive fund.

How will the fund work? I am suspicious of the appointment of people known in the fund as commissioners. According to the Minister and the Bill, commissioners are independent of Government. I remind the House that there is no such thing as people who are independent of Government or Government appointees who are independent. That is nonsense. Various Ministers have introduced various Bills in the House to establish semi-State bodies or to appoint people to them or to set up Government agencies and I asked them – the Minister of State was one of them – if there would be any political appointees on the boards of the companies. The answer is "yes"—

We do not do it.

—and then I get assurances that these people will have no loyalty other than to the particular organisation to which they are appointed. However, who comes out of the raffle? The answer is people who have a coincidental loyalty to Fianna Fáil or Fine Gael or the Progressive Democrats. There is coincidence after coincidence.

People are loyal to their parties.

That is what happens; none of them is independent. I understand it in some incidences in the case of semi-State bodies because there is a very dishonourable tradition, which is exercised by all parties, that such bodies are filled with party hacks. This is what happens and we see the result of it in the semi-State sector which is a shambles. It is obvious in CIE and elsewhere. The sector is a shambles partly because political hacks are appointed to those boards and their loyalty is to a political party and not the board.

Ireland Inc.

Exactly. That is how it operates and it is wrong. That is bad enough, but it is unacceptable that a body as responsible as this is supposed to be will have a board appointed in exactly the same way as all the old rotten semi-State bodies. I do not suggest any individual Minister has a weakness of that sort, but it is endemic in the political system and the culture of the country that the people appointed to these boards are seen to be "safe" by the Government in power. Safe means that they do what they are told when the chips are down. This is a very serious charge, but it is a very serious problem.

It does not happen.

That is ridiculous.

The integrity, the independence and the commitment of the people, individually and collectively—

Senator Ross without interruption.

I will give a specific example if the Minister of State wishes. Four out of five of the non-executive directors of Aer Rianta were Fianna Fáil directors of elections. Presumably, this is a coincidence.

Highly intelligent people.

They also happen to have been appointed by Fianna Fáil Governments. I wonder why that is the case. Perhaps it was a coincidence, but they did not appoint anybody who was a Fine Gael director of elections, many of whom—

If they were in Tallahassee, there would be no problem.

—are extremely capable and intelligent.

The point is well made because this is a serious fund. It will grow into billions and billions of pounds and it will be in charge of people's pensions. This is a serious business. I have no doubt that two things will emerge as a result. First, political hacks will be appointed as commissioners. Second, they will be under pressure from various Governments less scrupulous than our own to do certain things with those funds which are not, as the Minister said in his speech, in accordance with a strict commercial mandate. That is the problem. The Minister knows and I know that semi-State bodies in this State are called commercial semi-State bodies. That is the great misnomer of all time. They are not commercial; they are the opposite. They have been run like private fiefdoms by some Ministers in order to give jobs in the past decade to solve the unemployment problem. That is not commercial. It may be a very worthy social objective and it may have achieved that and it may be right, but they are not commercial.

The real danger here is that the commission and the commissioners appointed by various Governments will act in the interests of that particular Government and not in the interests of the underlying pensioners. I was shattered when I saw that there was no provision or attempt in this Bill to appoint truly independent commissioners. One day between now and 2055, and there cannot be drawings before 2025, there will be pressure for two things. There will be pressure to raid this fund in some way at a time of economic crisis and that may mean a change in legislation. There will be a crisis between now and 2025. There will be a great temptation for the Minister or future Ministers to raid this lovely fund. It is in danger of becoming a slush fund for current expenditure. Even the Labour Party, Fianna Fáil's next partners in coalition—

After 2025.

—if it gets its way, has indicated that it thinks this fund is too big. What will the Government do about that? They already want some of that money back to spend on current expenditure and to buy votes. That is what they are looking at. They say the Government has given too much. They want to borrow it back to buy votes for a general election. That is what will happen in the future. Every party and politician seeking power will look at this little honey pot and think they have a whole pile of cash, we do not need it until 2055 so let us spend it on buying votes. This is very dangerous.

It is not traditional to my party.

If we have commissioners who are malleable, flexible or subject to pressure they will bend to that pressure.

As if that is not bad enough, an earlier section of the Bill deals with the appointment of a manager. Who will be appointed to manage the fund? Our old friends in the National Treasury Management Agency.

They have done an outstanding job for Ireland.

I know. The Minister's interruptions are full of platitudes and generalisations. They are what my friend, Deputy Alan Dukes, calls in the Dáil "assertions". Lots of statements and no evidence to back them up.

The problem with the NTMA is this. It has organised the national debt. Perhaps the Minister could wait for my comment because it is an interesting point. He interrupted me and said it had done an outstanding job for Ireland. He could be right but he could be wrong. I do not know how he measures its performance. There is a problem with the NTMA. It is impossible to know whether it has done a good or bad job because it measures its own performance. Goodbye Minister, it has been nice seeing you.

Acting Chairman

To whom is the Senator referring?

I said goodbye to the Minister of State, Deputy Treacy, and I welcome the Minister of State at the Department of the Marine, Deputy Byrne. The Minister of State, Deputy Treacy, was very polite to wait for my reply and I am grateful to him for that.

The NTMA is the only judge of its own performance. It is an extraordinary organisation. I do not know about it and no one here knows about it. The NTMA is judged by a benchmark. It is the most complicated benchmark I have ever come across. I do not really understand it. A benchmark, as everyone will know in the next few weeks, is a means of measuring yourself against someone else in the world. That is what will happen in the private sector here.

The NTMA which managed the national debt – I suggest not with the applause that it has been given but I give it the benefit of the doubt – is judged by one thing, a benchmark set by itself. Every year, since the NTMA was set up over ten years ago, it has beaten the benchmark and everyone believes, as the Minister does, that it has done very well. But anyone could beat a benchmark if they set it every year.

The NTMA, which the Minister said had done so well, had to suspend the benchmark at one period because it got it wrong. It got devaluation wrong. This was an exceptional case and it was a difficult period but the NTMA got it wrong. The benchmark was suspended because its performance would have looked dire. That is what happened. The NTMA which is meant to be impartial, and presumably it is meant to be impartial in this case, was one of the foremost organisations leading the charge against devaluation at the time. Are we going to have the NTMA playing that sort of political role while at the same time being in charge of investments? It would have a clear conflict of interest. It will want Government decisions on things like the currency, and the currency will not have to be decided upon, to be made in the interests of those investments of which it is in charge. That is a clear conflict of interest. The NTMA has a great deal to lose or gain on this.

Giving the NTMA the right to manage this fund for ten years is absurd. The real truth is that the NTMA does not have an awful lot to do anymore. The Government had to find it a toy to play with and it thought it might as well give the NTMA this reserve fund to look after as give it to anyone else. The NTMA will do this. The evidence that it is qualified to manage funds is very limited. I do not know whether the NTMA has ever managed equity funds which I presume is the main purpose of this fund. I do not see any evidence for it. The NTMA has been involved in international bonds and debt. It has not been involved in managing equities but it will suddenly become the overall supervisor of this fund. It is not qualified to do that. It is very convenient to give it to the NTMA because it has not enough to do. I am not sure that that is the right way to go about it.

Finally, I would like to say that at the time of devaluation—

Acting Chairman

The Senator has one minute.

I am only starting.

Acting Chairman

I thought the Senator said finally.

Senator Ross has confused me.

Give me a minute to pick out my important points.

Let me move on from the NTMA. They will sub-contract this investment to various investment managers. I was very interested in what Senator Doyle said about investment managers. He produced an extremely forensic examination of some of their records. I would put it much more strongly. Investment management is a completely bogus science. Investment managers have worse records on the whole than a blind monkey in beating the indices which they are expected to beat. Time and again, if you look at the record of investment managers in Ireland alone, they completely fail to beat the local index let alone anything else. They will not judge themselves by the local index. They refuse to use it as a benchmark for themselves. Do you know why? It is not just that they could not beat it but because they came in way under it. We have a fund which would be far better called a passive investment fund, as Senator Doyle referred to it. That is really to do nothing. It can be run by a computer. Consensus funds just invest all the other funds and charge, or should charge, far lesser fees.

The idea that this massive fund will be given to selected investment managers at huge charges is ridiculous. These people do not know any more than you or I about how to invest funds. That is a matter of record, not a matter of projection. The NTMA is in the investment management loop of friends who move around Dublin and Ireland and look after each other. We should think very carefully before we allow these funds into the hands of these people, who have very little skill but earn huge amounts of money. They charge 1% or 2%. What size will this fund be? Massive amounts of commission will come to investment managers from these funds. This is pensioners' money.

I do not like the sound in this Bill regarding the money coming from the Minister, to the commissioners, to the NTMA and then down to the investment managers. It is a layer of unsatisfactory peeling off of pensioners' money, with politicians getting kudos for it and investment managers getting undeserved cash.

I was quite clear in my thinking on this issue yesterday but Senator Ross has created confusion this morning. I wonder if that is a good or bad thing. Perhaps he was playing the part of devil's advocate just to bring in an element of criticism. I did not see anything like that in the Bill. It is a visionary Bill and its concept is to plan for the future.

I congratulate the Minister for Finance on being so visionary in bringing forward this Bill. I wish him well with his forthcoming budget in two weeks' time. He is a Minister with guts and has been subjected to ridicule during his term of office.

By his own backbenchers.

I hope this budget will have a smooth transition. I also welcome the Minister of State to the House.

In common with all industrial countries, the ageing of our population will become a major problem over the coming decades and will put huge strains on future Governments to fund social welfare and public service pension schemes on a pay as you go basis. The purpose of this Bill is to set up a mechanism and to establish a national pensions reserve fund. This is a radical departure from the traditional method of funding. The Bill will introduce a new strategy for long-term planning.

With our present economic success, it is wise to prepare for the long-term well-being of our society. Better standards of living, increased life expectancy and declining birth rates will lead to an increase in the ageing population. This will have huge implications. The forecasts suggest that over the next decade there will be one person over 65 years for every five people of working age. By 2050, there will be one person aged 65 years for every two people of working age. That shows how important it is for us to plan for the future and to think of the implications of not putting a system in place to cater for such an elderly population.

While we have an economic boom, we should cater for this trend. This is the time to put this mechanism in place and to prepare for the future. With the increase in our young population, the resulting increase in the labour force – which I hope will continue into the future – and significant budget surpluses, we must deal with the aged. We must set aside some of the revenue generated by our economic boom.

The Minister proposes in the Bill to set aside 1% of GNP to meet the cost of future pensions. The Bill also allows for the Government to make additional contributions to the fund. We already have an example of this, where the proceeds of the sale of Telecom Éireann are to be paid into the fund once the legislation is enacted. In this way, the fund will relieve the burden on the Exchequer, which is the traditional source of funding. The fund will be monitored very closely to ensure necessary reserves will always be available to meet the requirements.

The Bill also points out that there will be no neglect of current needs. Concern has been expressed that we might dip into this fund if we had problems in adverse economic circumstances. We heard examples of that over the past two weeks, when our Labour colleagues said this will be a handy fund to dip into when we are in economic decline.

That nasty Labour group.

I was shocked that people over 65 years of age could have their fund and pension schemes threatened in this way.

I am glad this fund will be managed by a commission which will be independent of the Government and that there will be a body of people with the ability and expertise to manage this effectively. They will ensure there will be optimum return on the investment and that it will not be raided.

It worried me to hear Senator Ross talking about the composition of the board that will be set up to manage the funds. One sentence in the explanatory memorandum, which might alert the Minister to the need to look at this aspect again, states, "The Bill contains two important safeguards to ensure that, short of amending legislation, the Fund may not be used for purposes other than meeting the cost of pension provision arising from such ageing." I would like the Minister to look at that sentence again. I do not like that way of putting it – it is a bit soft. We need to tidy that up to ensure that this fund will not be raided. After 2025 it will become more flexible, but we must ensure it will not be in a vulnerable position between then and 2050. I would like the Minister to look at that aspect of it. I welcome the statement by Senator Ross that he had reservations about this. I also have reservations about that aspect of the Bill.

A very important point is that there will be a prohibition on drawdowns prior to 2025. We are quite happy with it up to 2025. The Minister is also saying that after that date the composition of the fund—

This is a very grey area in the Bill.

I am aware of that. I will ask the Minister to look at that again. The whole arrangement is a bit loose for the years between 2025 and 2050. I would like the Minister to refer to that section of the Bill again on Committee Stage. It states that it will be determined by the Minister, whoever the Minister of the day is after 2025 – I do not know where we will be at that stage of our lives – and—

I know pretty well.

I hope I will still be around, although I do not know. We will do our best. It concerns me that the Minister of the day will determine it only with reference to the number of people over 65 years in the population. That is very loose.

Another aspect we should take into account is that this should not be just about pensions. In approximately ten years the concept of retirement will require new thinking. We are already being asked to redefine the meaning of the word "retirement" and to raise the retirement age, which is becoming a feature in other industrialised countries. Other issues will have to come into play in the years 2025-50. Other concepts will have to be analysed, in addition to the Minister's reference to the number of people who will be over the age of 65 years at that time.

I congratulate the Minster on his vision for the future. This legislation will ensure an increase in the pension fund as the population ages. It will ease the burden on the taxpayer and will increase the capacity of future Governments to respond to other needs when they arise. The Minister rightly calls it a sensible Bill. It is also forward thinking.

Nobody can determine the future, we can only plan for the care of society. In this regard, our party, Fianna Fáil, has always been to the forefront in expressing a caring approach. This vision for those aged over 65 years is another example of how we can deliver on this.

We all acknowledge the importance of this legislation. It is a bold move by the Minster for Finance to take an initiative on establishing a retirement fund. Successive Governments have expressed concern that pensions have been funded from Exchequer receipts rather than a specifically reserved pension fund. I support the proposal in the Bill in principle, although there may be problems affecting implementation and practice.

The Minster's initiative in creating a temporary fund containing a substantial sum of money was the first movement in this direction. This legislation puts that fund on a statutory footing. It also looks a long way into the future – to 2055. It bypasses the next generation. Those retiring in the period 2000-25 will be contributors but not beneficiaries from the fund. The legislation also forbids the taking of money from the fund before 2025. I see the Minister's logic here because a study of the age profile of the population shows that it will remain relatively youthful until then. It could be said the Minister is preparing for the rainy day and is taking a practical approach to it. I congratulate him on the initiatives he has taken.

In the broader context there will be a sense of security in that the present generation of working people will at least feel that with substantial money being invested on an annual basis there will be security when they become pensioners. Not long ago, in the 1980s, there was concern that public sector pensions would not be paid because the Exchequer was so deeply in debt. Thankfully we have gone beyond that. The Exchequer is flush with money.

Other issues regarding the quality of life in society today must be considered before we start looking ahead to 2050. The health services have never been in more of a shambles. Waiting lists are going through the roof in every sector. Anybody attending casualty departments can expect to wait between six and 24 hours to receive medical attention, at a time when they are at their most vulnerable. The Government may have put money into addressing the problem, but the management needs to be reformed.

Last year there was an expectation that funding would be allocated to the child care services. Parents are under a huge burden to provide a decent pre-primary school and health service up to the age of four or five years because there is no State system of pre-school education, crèches or child care. The matter has not been addressed by the tax system or by any other mechanism.

Again, the Government has approached this issue from the wrong direction. The Minister for Justice, Equality and Law Reform allocated £0.25 billion in capital investment, which the Taoiseach followed up with an allocation of £40 million. It was all directed to the capital investment side. As a result it has not been of much benefit to dealing with the problems and the costs experienced by parents who must still pay for their child care.

We are not addressing outstanding problems correctly in terms of the Exchequer funding available. The transport system is in a total mess. The infrastructure is in bad shape. There is also chaos in terms of industrial disputes. The country is under siege because the workers feel they have been given short shrift in terms of the benefits of the booming economy. On the one hand it is proposed to set aside 1% of GNP every year for pensioners in the future while, on the other, we are not paying workers sufficiently. A small coterie of people are benefiting disproportionately from the booming economy. The benefits are not being spread equally. Air and rail transport has been affected. I will not elaborate on the taxi drivers. Teachers are in dispute; last year it was the nurses and the Garda. This sense of inequity must be addressed.

There is not much sense in trumpeting a booming economy while those who created it are totally dissatisfied with the manner in which it is being run and with the benefits they are receiving from it. While I am pleased to see the Minister providing for future liabilities, we must also deal with the present. I am pleased to note the Minster has returned to the House. He is looking into his crystal ball, seeing what is required for 2055 and is making provision for it.

We have a very young population, which is getting younger by the day with the influx of ex-patriots who are returning and a youthful population from other countries coming here in search of work. The Minister's figures will be further out of line as the years go by. Ireland has a very strong age profile; we are ahead of Spain in terms of the numbers of families with children and Germany is further down the line. There is no point citing Germany as an example which we should follow because Ireland and Germany are not comparable. Germany has been industrialised for 150 years whereas Ireland has not been industrialised even for ten years.

The national pensions policy initiative proposed the establishment of this fund to boost pensions. It was also suggested that people should be able to transfer their pensions from one job to another as this would ensure a stronger return from pensions. I have not seen any progress being made on this idea which I believe could be very usefully explored and enshrined in legislation. We should debate this matter to see how we could introduce an automatic system of pension transfer from one type of employment to another. We hear of the huge movement within the economy and there should surely be equal scope for movement in terms of pension transferability.

Representatives of the Senior Citizens Parliament made a presentation on Tuesday to the Oireachtas Joint Committee on Family, Social and Community Affairs in which they stated that their members would like to be encouraged back into the workplace but that some incentive should be offered in order to facilitate this. There is not much sense in older people returning to the workforce if they will immediately be taxed on their incomes and pensions. It was suggested that a back to work allowance could be provided to older people returning to the workplace. A back to work allowance could be tailored to meet their specific needs and people should be assured that they will not lose any supplementary or ancillary benefits, such as medical cards, to which they are currently entitled by returning to work. Such measures would boost the income of people who have retired or are nearing retirement and it would also supplement the workforce. Many older people would welcome the opportunity to return to work.

People's life expectancy has increased greatly in recent years. Not very long ago, people barely reached pension age and, if they did, they could only expect to live for another five or six years.

The Senator is being very depressing.

Few people lived past their mid-70s in the not too distant past but it is quite common now for people to live and have good health well into their 80s and 90s. With our booming economy, better diet and the better lifestyle which the Minister will ensure through his forthcoming budget, people's life expectancy will probably increase even more.

Hopefully, political life expectancy rates will also increase.

We hope the Minister will retain his current life expectancy until 2002 and, in spite of my suspicions, I look forward to his introducing another budget in the autumn. Perhaps the Minister could meet with representatives of the Senior Citizens Parliament to discuss their views.

I want to make a suggestion to the Minister. Our national debt currently stands at approximately £30 billion. The debt is not increasing but neither is it decreasing. The Minister envisages contributions being made to the fund from now until 2055, with moneys being drawn down from 2025 onwards. I do not know exactly how much money will be put into the fund this year but I believe it will be in the region of £650-£700 million on the basis of 1% of GNP. If we were to devote £1 billion to debt reduction each year from now until 2025, we would effectively eliminate the debt. The Exchequer take will obviously increase as the years go by. Our current interest payments are in the region of £2.5 to £3 billion. If we were to invest the interest saved on the debt each year, which will progressively decline as the premium reduces, into the fund, we would have a sizeable figure by 2025. On the one hand, we would eliminate our debt and on the other, the interest saved would supplement the fund. I am aware that the Minister is interested in finding a mechanism to eliminate the national debt and I believe this would be an excellent way to kill two birds with the one stone.

Senator Ross waxed lyrical about bogus investment funds. He does not regard investment management as a proper science. Like economists, the funds invariably get it wrong and blame factors outside their control for their faults. What will be the channel for investment in regard to the fund? Will it be the National Treasury Management Agency or will it be a range of investment managers and funds? A lot of taxpayers' money will be stored away in some fashion, for better or for worse, and we do not know what kind of returns to expect or how the system will work. One might secure a fantastic deal by putting the money into the post office without touching it until 2025. That would probably provide a better yield than anything investment managers might offer.

The money might be invested in companies such as Eircom, for example. Senator Ross lost a great deal of money in the recent past in this regard because he listened to the advice offered by the investment managers and believed the shares represented a good long-term investment strategy. There may be mechanisms whereby the fund could be used by the State and the private sector, or where public-private partnership arrangements could use the fund for infrastructural and development purposes at a reasonable rate. We could have some long-term investments in it as we would be keeping the fund intact.

I agree with the proposal in principle. However, it is necessary to more closely examine it and to review it as the years go by to ensure we are getting a good return on the money invested, to examine the profile of those we are dealing with and to ensure we are providing the necessary short-term services as well as preparing for the rainy day in the long term. I hope we do not have to draw on the fund too early, that the economy will continue to boom and that the proportion of young people to elderly will continue to grow. I hope we do not go down the road of some of the more industrialised nations which find they have a huge dependent population in relation to the working population.

I would like to address some of the general points made by Senators who will have another opportunity on Committee Stage to give their views in more detail. Senator Doyle raised the issue of investment in Ireland. The Bill does not prevent investment in Ireland, but the commissioners, before investing in any asset in Ireland or abroad, must have regard to the commercial investment mandate of the fund. This mandate will prevent pressure being placed on the commissioners to make commercially dubious investments and provide capital to companies or projects which would otherwise have difficulty in attracting private sector investment. If one assumes a conservative return on the fund investment of 1% over the return on Government bonds, the fund is projected to reach 42% of GNP by 2025, the year drawdowns commence. In view of the magnitude of the fund relative to the limited outlets of the economy and the need for a well diversified portfolio of investments, it is clear that most of the fund will have to be invested abroad. However, this does not prevent investment in Ireland and I stress that any decision in this regard is totally a matter for the commissioners who will be appointed under the Bill.

Senators Doyle and Bonner also raised the social insurance fund. I would like to set out why I decided not to add the assets of the social insurance fund to the fund. The social insurance fund holds the proceeds of employers' and employees' social insurance contributions and is used to pay all social insurance benefits, not just pensions. In previous years the fund income was not sufficient to cover the cost of these benefits and it had to be subvented by the Exchequer. Largely due to the remarkable increase in employment contributions, income has grown steadily in recent years to the point where there is currently a surplus in the fund. This surplus is projected to reach £630 million by the end of this year and should increase further over the medium term. Under the terms of the Social Welfare Act, 1993, the Minister for Finance is required to invest this surplus for the benefit of the fund.

Using some or all of the social insurance fund surplus to augment the national pensions reserve fund is an obvious possibility. However, I decided not to proceed in this way for two reasons. First, the liabilities of the social insurance fund are more short term in nature than those of the national pensions reserve fund. Hence, it is likely to become necessary to draw on the social insurance fund reserve long before 2025, when drawdowns commence from the national pensions reserve fund. Second, it will be necessary for the social insurance fund to meet all the social insurance contingencies, such as disability and unemployment benefit, as well as contributing to pensions. It would be impractical to try to apportion the surplus to these various demands. I made an attempt to do so in drawing up this Bill, but it became so complicated to arrive at what proportion of the social insurance surplus should go to the national pensions reserve fund and in deciding the amount left over for pensions as distinct from unemployment benefit, for example, that I gave up on the idea. That does not preclude the matter being addressed at a future date.

The 1% contribution was also raised, as were the drawdown arrangements. I do not want to go into too many details given the time available, but I have tried to take the money and place it as far as possible out of the hands of future Ministers for Finance and future Governments. It is not meant to be a jar in which one can dip one's hand.

Hear, hear.

Despite advice from across the floor of the House and from others, including those in my Department, that perhaps I should provide some escape, the Bill reflects my own thinking and I decided from the outset to go as far as possible to prevent any dipping into the jar, although I cannot preclude a future Parliament from amending the Bill.

Members in the other House asked about what might happen if things go bad and suggested that we should not have to invest the 1%. This sums up one of the principal differences between myself and others in this regard. If a person knows a liability is accumulating in their personal or business life they should provide for it and it should become part of their normal budgetary strategy each year. We know we are building a future liability for pensions and consideration of this should form part of normal budgetary arithmetic. It is the same as deciding that we must make contributions towards repaying the national debt each year. I know people such as Deputy Joe Higgins have a difficulty with that as he would argue we should not pay off the national debt, but that is not realistic and most of us would not agree with that position.

The 1% should become part of the normal budgetary arithmetic. I have opposed amendments which would allow me vary it at any time. It has been said that the good times will not always be as good as they are now, and that is true, but the 1% of GNP should still be put aside as part of normal budget arithmetic. I have precluded the discretion of lowering that amount, but the Minister can invest more by bringing an ordinary resolution before Dáil Éireann and having it passed. All figures show we should be investing considerably more than 1% of GNP to meet the expected liabilities in the future. That is why I have structured things in the way set out in the Bill.

Senator Doyle also asked about the role of the NTMA and the commission. I know Senator Ross also raised the role of the NTMA and I have in the past read his comments on it. Senator Costello also asked about the management of the fund. For the first time in any legislation that I am aware of, I have set forth the type of persons who can become commissioners. This has not been done in any other Act—

It was done in the Planning Act in terms of An Bord Pleanála.

Yes, but there can be nominations to the board from representative bodies. In this Bill, the Minister for Finance can only draw people from certain listed areas of expertise. Therefore, while a Minister for Finance might like a particular person, they must adhere to the provisions of the Bill. On Report Stage, following a suggestion by Deputy Noonan on Committee Stage, I deleted the words "in his or her opinion" from the relevant section in the context of the Minister appointing commissioners as it could have been interpreted as the Minister having the right to appoint people who were not objectively from the areas of expertise specified. While the Minister for Finance might like to appoint a particular individual, the commissioners will readily be recognisable as experts in their own field.

The commissioners will be appointed by the Minister, will be in charge of the fund and will have the functions assigned to commissioners. For the first ten years the manager of the fund will be the NTMA. It has expertise on the liability side of the balance sheet and I decided to avail of that body of expertise. The National Treasury Management Agency will not be managing the funds but has been described as the ring master in all of this. The commissioners will set the investment policy. I have given a strict commercial mandate about the investment policy, in that they must secure the optimal return. I have precluded amendments about taking into account other considerations, national interests, ethical investments. Various pressures were put on me to change that in the other House. It will be the same as any private investment fund in which Senator Ross has invested where there must be optimal return.

The National Treasury Management Agency will invest the best part of £5 billion in this fund by the end of this year. It is being held by the NTMA in a normal reserve account and is accruing a small amount of interest. Following the setting up of the commission, the commissioners will decide the optimal policy. Presumably the NTMA will advertise not for people to be directly employed but for people to compete for slices of this fund. I envisage the NTMA as having 20 fund operations. At the end of the year an annual report will be presented to the Minister and laid before the Houses of the Oireachtas and the commission chairman and the chief executive of the NTMA will have to come before the relevant committee to explain. The report will set out all the investments the fund managed or used throughout the year and people will have an opportunity to make any comments they wish.

As with every investment fund, not every year will be a plus. If the fund had been up and running earlier in the year and invested in the markets in, say, March there would probably have been losses in these investments because the markets took a downturn for a period.

The National Treasury Management Agency will be the first manager of the fund for a period of ten years. After that the position will be open to tender.

We have already paid it.

The NTMA envisages engaging only a small number of extra people of high ranking expertise. It will not make the investments. I envisage that the £5 billion will be parcelled out to Irish, UK, European and, probably, United States investment fund managers for the best rates of return. A small additional group of people will be taken on by the NTMA to manage that particular activity.

The NTMA will probably also tender out the custodianship aspect of the fund. That is a monstrous operation. The NTMA will not set up a whole custodian department which could have hundreds of thousands of people working in it. Perhaps that will alleviate the concerns of Senator Ross. The extra expenses that relate to the NTMA will be charged against the funds but the amount will be fully transparent. The NTMA will not have an extra couple of hundred people working for it as a result of this Bill but it may have a small number in the low double digits who will be there as ring master and will parcel out a couple of hundred million pounds. We had better not name the funds around town or in Europe but that is what I envisage will happen. That should alleviate some of the concerns. It will not be an excuse for the NTMA to acquire a large number of additional staff.

Senators Costello and Ross said we ought to run down the national debt faster. I am going to do that. This is the third consecutive year in which we will have an overall Exchequer surplus. The previous Exchequer surplus was 51 or 52 years before – nobody is quite sure when. An Exchequer surplus automatically goes to run down the national debt. The national debt is quantified every month and I could get the figure today if the Senators want it, but 31 December is usually when the figures are published. In recent years it has been around £30 or £31 billion, even though we had a surplus in the previous two years as well. I restructured the tradability of the debt in the past two years. That had a technical effect of putting up the nominal value of the debt in 1999, even though the market value was the same.

At the end of the year the exchange rate of the Irish poundvis-à-vis other currencies will be taken into account. I could check the figure but it is approximately 90% in euros. All German debt and French bonds are denominated in euros, a small percentage is left over in dollars and sterling. Therefore, all bonds denominated in Euro currencies are regarded as domestic and euro debt. Say, the surplus this year, as projected in last year's budget, is £1.6 billion, that surplus will automatically bring down the national debt. If one thinks about it, the only way to reduce one's own indebtedness in business or personal life is when one's income for the year exceeds outgoings and one can either put it into savings or reduce some of one's debt. That is what most people do.

If there is an overall Exchequer surplus it will automatically go to reduce the national debt. The Exchequer surplus this year will be in excess of the amount of £1.6 billion I prognosticated on budget day. That will automatically bring down the national debt. That £1.6 billion excess surplus is after putting aside £1.8 billion this year into the national pension reserve fund. Some £1,139 million of the £1,850 million going to the reserve fund was the money I received in January as the balance of Telecom money and the other sum of money was equivalent to 1% of GNP. Even though there was no legislation I provided for that in last year's temporary Bill which allowed me to put £1,150 million into it this year.

Senators Costello and Doyle asked why not pay more off the national debt as against putting it into the fund.

We will get a higher return on the investment fund.

That is exactly the point. If the cost of the debt to the Exchequer is, say, 5% or thereabouts, the rate of return from pension investment funds would be considerably greater than that.

How does the Minister know it would be considerably greater than that?

Perhaps we can look at it in this way. If one takes a survey published every quarter by the pension fund over the past three years one will see the annualised return on pension investments has been in double digits for the past ten years or more.

It does not mean it will be so in the future.

That is what I am coming to. If after putting the 1% aside one wanted to do something with the rest of the surplus or whatever, a Minister would have to make a decision. If the cost of the debt had risen in the meantime due to higher interest rates and the rate of return on investments was lower, the sensible thing to do would be not to put any additional money into the pensions reserve fund but to pay off the debt. On the other hand if the position remained the same and there were specific surpluses, a Minister would prudently decide in relation to the 1% to put more in the national pensions reserve fund because he would get a better return. That is when a decision would be made.

Will the Minister—

Acting Chairman (Mr. T. Fitzgerald): It would be more appropriate to hold the argument for the next Stage.

But the 1% is sacrosanct. The 1% of gross national product is statutorily being put aside. This is the additional money that a Minister might have in his coffers at the end of the year. He could then make a decision on the basis outlined in reply to Senators Costello and Doyle.

I have dealt with the independence of the commission. I was not present to hear Senator Ross. However, I can assure him that the structure I have set up is as far as it is possible for anyone to go to take the people's money and hand it over to somebody else and have no control by the Minister for Finance.

I referred in the other House to a leader article in one newspaper after the Bill was published. Following the publication of the Bill, I held a press conference which was reported accurately. However, a leader writer wrote an article in a newspaper stating that this would come under the control of the Minister. I have tried to ensure in as far as is constitutionally possible that the Minister for Finance or the Government agency cannot deviate from the provisions in the Bill. I was advised to allow the Minister some leeway but I have done the opposite. If there is any ambiguity in this regard in the Bill I will change it. I have scrutinised the Bill to ensure this will not be possible.

The commission will be completely independent as will be recognised from the members I appoint. They will probably include people from Ireland and abroad and their suitability will be readily recognised. They may have political affiliations, but they will not be friends because, under the Bill, I can only appoint members from seven categories. Neither I nor any future Minister will have flexibility in this regard. These people must come from professions such as investment management, actuarial backgrounds and so on.

Senator Ross referred to the NTMA as being judge and jury in relation to the termination of the debt management benchmark and the measurement of the industry's performance against that benchmark. This is grossly unfair to the agency and wide of the mark. The debt management benchmark is approved by my Department on advice from an firm of investment bankers and the advisory committee of the NTMA, the members of which are appointed by the Minister for Finance. Furthermore, the measurement process against debt management benchmarking is independently audited by a major firm of commercial auditors.

Since the NTMA was set up, successive Ministers for Finance believe it has done an outstanding job in managing the national debt and the basis on which it has performed evaluations. Other countries, including major European countries which are ten times the size of Ireland, are investigating the possibility of having their debt agency modelled on what this country has done. These are countries in which we would have considered investing in the past. These countries will now copy what we did more than 11 years ago.

Question put and agreed to.

Acting Chairman

When is it proposed to take Committee Stage?

On Wednesday, 30 November 2000.

Committee Stage ordered for Wednesday, 30 November 2000.
Sitting suspended at 1.15 p.m. and resumed at 3 p.m.