Dáil Éireann díospóireacht -
Wednesday, 11 Oct 2000

Vol. 523 No. 5

National Pensions Reserve Fund Bill, 2000: Second Stage (Resumed).

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

Mr. Noonan:

I had almost concluded my remarks when I moved the adjournment last week. I want to set out briefly my position on this Bill. While I am attracted to the underlying concept of setting up a pension fund which would supplement both public service and social welfare pensions, at a time in the future when it seems that there may be a difficulty in funding such pensions and a particular burden on the taxpayers, there are elements of the Bill which the Minister must clarify before I would be prepared to even support it on Second Stage.

There is now a reserve fund in place, arising from legislation we passed in this House a year ago, in which the bulk of the proceeds of the sale of Telecom Éireann have been lodged. That reserve fund also contains the first two tranches of 1% of GNP, which is the formula being used to decide how much money will be lodged annually in the fund. The amount in the research fund is in excess of £5 billion and that will be added to each year by way of 1% of GNP being lodged in the fund.

Those are enormous amounts of money, amounts about which an Administration, even five years ago, could have only dreamed. While we are blasé now in times of surpluses, that has not been the financial pattern in this State. I was in Cabinets where Ministers debated and argued for a long time on the expenditure of £0.5 million or a few hundred thousand pounds on some occasions. Dealing with an amount of £10 million was a big decision. If one of those Cabinets was deciding on £10 million in cuts, that was a major decision. We are now making a decision that will tie our successors for the next 25 years by initially putting £5 billion into a fund and then requiring our successors to supplement it by annual tranches of amounts in excess of £600 million and rising as GNP rises. This is a decision of import. While there is no problem now in deducting £600 million from a surplus heading for £3 billion, if we return to balanced budgets or if when the business cycle changes we go into deficits, the setting aside of such a vast amount becomes a serious political decision as well as a serious financial one. The choice in the future may be between putting £600 million into a pension fund or closing down a hospital to provide that money, having no social welfare increase or cutting back on child benefit or have further lengthening waiting lists in hospitals or not building a school that is required. I have no doubt those hard political choices will face a future Government. The formula being used by the Minister is far too inflexible. He, as a Minister, like all of us were and hope to be again – birds of passage in Administrations that pass – purports to tie his successors for 25 years in respect of some aspects of the Bill and for 55 years in respect of other aspects of it. The timeframe is very long.

The Bill is based on demographic projections made by the Minister, which he assures us will turn out as he predicts. All projections of any sort are based on a premise. I have seen the type of projections on which the Minister is basing his predictions. It is a given that, because we know what the population is now, we have a fair idea of the number of people in excess of 65 years of age there will be in the population in 25 years' time. We can make a rough estimate of that, but that is not the calculation on which this should be based. It must be based on the number of persons on social welfare pension and on public service pension in proportion to the active taxpaying labour force. That is the only way it makes sense. It is not possible as we enter the fifth or sixth year of an economic boom to project that with any accuracy. One would have different inputs and a different premise than applied in the case of calculations made four years ago.

The most astounding development in this economy and the factor that explains almost everything else is that seven years ago there were more than 1 million at work, now 1.7 million are at work. A little over an extra 600,000 people are now in the labour force. They are trying to establish a stake in the country. They are building houses, buying cars and getting credit because they are coming from schools or colleges or off social welfare or are immigrants and do not have other resources. That explains a good deal of the consumer boom and much of the pressure in the economy. Given that is happening, there is a large base of young workers paying tax. That is evident from PRSI receipts and tax receipts. Much of the additional tax and PRSI receipts do not accrue because people are paying extra tax and PRSI but because substantially more people are paying tax and PRSI.

Our population has increased by approximately 40,000. Immigration is running at the level of 26,000 or 27,000 people a year. If one takes an immigration figure of 30,000 people a year and projects it forward for 25 years, that would give a figure of 750,000 people. Because of the nature of immigrants, they come into the labour force at a young and active age. I would like the Minister to justify his projections when what he is proposing puts the handcuffs on subsequent Administrations and will force them into positions where they will have to make very difficult decisions if we enter a phase of deficit budgeting. The choice may be to close a hospital or reduce the efficacy of the health service because we decided to put away money for the rainy day. The rainy day may come but there may be no rainy day. I would like to hear the Minister's argument on this point.

The formula is far too tight. I would much prefer a formula which gave discretion to the Administration of the day to put a sum of money into the fund over a range of contributions in accordance with fiscal circumstances if, for example, there was an absolute obligation to put 0.25% of GNP into that fund and that amount could be increased to 1.5% or 2% of GNP in times of major surpluses. At present there is no reason we could not put 2% of GNP into the fund. There is surplus revenue and it might as well be put into such a fund as used to clip down the size of our debt or for some other purpose. The surplus, effectively, is not being used at present. The requirement to make stated investments in this fund will be a very serious issue for subsequent Administrations. I know that anything that is passed by the Dáil can be repealed by it, but it would take a Minister for Finance with an awful lot of bottle to say he or she was standing down the pension fund because the revenue is needed elsewhere. That is the type of political decision that is nearly impossible to make. I would much prefer if a range of options were given in respect of the contribution.

I have no problem about future receipts from the sale of State assets being put in the fund. That is a good idea. Such proceeds could be used for that purpose or to pay off our debt. The receipts of State assets should be considered to be spending money for pet projects as such receipts are the value of the asset owned by the people realised by the Exchequer. The value of that asset should be used for the people in general rather than for one project in one constitutency or for one item of current expenditure or capital investment. That is not the way to proceed. We should proceed along the lines suggested. I have no difficulty with that. I would like the Minister to justify what he is doing.

Another area of difficulty is the prohibitions against investing any of the fund in Ireland. It is not put that way in the Bill, but the Bill stresses and the Minister reaffirmed that the investment must be made on strictly commercial criteria. I am advised by fund managers that investing here on the basis of strictly commercial criteria at present would mean that not more than 1% of the fund would be invested in Ireland. We are talking about a fund of £5 billion that would be increased in tranches each year having to be invested abroad. Two points arise from that. Investment of that fund in Japan, in the United States or elsewhere in Europe will provide jobs for persons of other nationalities. It will help to build up their infrastructure and capital stock, but of all the OECD countries and particularly of all the European Union countries, Ireland has the most depleted and run down infrastructure. These enormous amounts of money would be set aside in a pension fund and could not be spent in Ireland. The Minister has to re-examine this. I would like to hear his reflections on what regulations he intends to put in place to ensure that the fund is not invested in companies which the majority of our citizens would regard as being engaged in non-ethical practices. Irish pension fund money should not be used in the armament industry or in manufacturing land mines which blow people apart in sub-Saharan Africa. The Minister should clarify this in his reply and if I am not satisfied with the clarification I will seek a division.

Mr. McDowell:

This is an enormously important debate, not just in the context of the House but of the broader public. It is a great pity we have not had greater public debate in the past year or so since the Minister announced his intentions. We have set aside almost £5 billion, which would have been our total GNP approximately 15 years ago, towards this fund and we are proposing to set aside over £600 million this year, with increasing amounts in future years. This is more than we spend on education, social welfare or the health services every year and it is an enormous amount of taxpayers' money. It is a pity we have had almost no public debate regarding the wisdom or otherwise of this proposal.

I am sorry the Minister has not consulted more widely with the other political parties regarding the specific proposals in the Bill, as the Bill is obviously unique in its structure and in what it seeks to do. The Minister is making a statement of policy and putting legislation in place which binds not just his hands but the hands of Ministers for Finance for at least a quarter of a century and arguably up to half a century – 55 years. To that extent the Bill requires more than just a decision of the Government, it requires something close to consensus in the House and there is no such consensus.

I supported the principle of the Bill when the temporary fund was set up last year and I still support the principle of the Bill today, but I do so with serious reservations. I will expand on some of those today and others on Committee Stage. Much of what we say in Opposition does not count for a great deal. Often we make debating points or oppose for the sake of opposition. However, my party and I wish to make clear that we will not be bound into the future by the specific provisions of this Bill. Some of those provisions are inadequate and others are plain wrong.

It is a good idea. The principle of making provision for future liabilities is a good idea, but I am not prepared to say that in ten years time we will not see other priorities. I am not prepared even now to stand over a position where pensioners are living in poverty, yet we are taking taxpayers' money to ensure that in 25 years' time we will be able to make provision for pension liabilities. We have to strike a balance here. At present the choice is not a difficult one – we can make this provision and current day provision. However, in five, ten or 15 years, circumstances may be different. We will attempt to work this Bill and work the structure. We support the principle of the Bill and we wish to make provision for future liabilities, but if hard choices have to be made in five, ten or 15 years' time I am not making a commitment that people in the roles of the Minister or Deputy Noonan will be able to say that my party bought into this. We bought into this with reservations and on conditions which I will spell out today and on Committee Stage.

So far the creation of this fund has been relatively painless. We have taken £650 million out of Government revenues this year and will take more next year, with the figure increasing as GNP grows. Just what that money would have been spent on this year is difficult to tell, as the Government is ideologically committed to capping investment in services. As I said, I accept the principle of provision for future liabilities, but I do not accept that all is rosy in the garden. Are we really saying we are happy with the state of our health services now – not in five years time, but now? Are we happy with the level of investment in education and transport? Even more to the point, are we happy with the current level of pension provision to today's pensioners?

This fund is one of the proposals made by the National Pensions Policy Initiative, which was set up by the previous Government. The establishment of the fund was just one of a series of proposals made by the pensions board at the time and many of the other proposals have yet to be acted upon by the Government. Most important is the failure so far to bring forward proposals on the portability of pensions. The Government has said time and again that it is committed to allowing people to carry their pensions from job to job, but so far we have seen no Bill or action relating to this. This is becoming more important year after year as people change jobs more frequently in the course of their working lives.

The Minister will know that the NPPI spent a lot of time trying to get to grips with the problem of pensioner poverty, often, it has to be said, with little assistance from the Minister's Department, which seems unwilling to commit to any level of provision, but it concluded after a great deal of debate that a State pension of approximately 34% of the average industrial wage is needed to prevent pensioners from falling into poverty. We should emphasise that stipulation, that is what is needed to stop pensioners from falling into poverty, not to ensure a good life or to ensure a provision we would be proud of or which pensioners would be happy to receive. That would amount to approximately £108 per week in current terms and the Government has so far failed to meet that target.

It would be churlish not to acknowledge that in terms of sheer volume increases the Minister for Finance has added a decent amount to the level of the pension by comparison with five, ten or 15 years ago. Unfortunately, it is also true to say that despite the economic boom the Government has still not managed to match the rate of increase in industrial wages. The reality is that despite those increases, percentage or actual, pensioners, as a group in our population, are relatively worse off than when the Government came to power. Given the economic boom, that is intolerable. We are talking about approximately one third of a million people who are not living month to month or week to week but probably for 20 years on £96 per week. No Member would attempt to suggest that is a decent amount of money to live on in a given week. It might provide for the frugal standard of living many pensioners choose or have forced upon them, but what happens if the fridge breaks down or some slates are dislodged from the roof? We all know that level of income is not sufficient. Perhaps 20 years ago when people lived to 71 or 72 they could live with that, but with increased life expectancy people are required to live on this level of income for 20 to 25 years and that is not acceptable.

Minister of State at the Department of Arts, Heritage, Gaeltacht and the Islands (Éamon Ó Cuív):

The Deputy's memory is very short. His party predecessors did very little for pension provision when they were in Government.

Mr. McDowell:

I give way to the Minister of State because the point is not unfair. I accept that in times of economic difficulty we were unable to make the provision we would have liked, but things have changed.

Éamon Ó Cuív:

Things changed when Labour was in Government.

Mr. McDowell:

We returned a current budget surplus for the first time in 25 years when we left power in 1997. We now have an overall Exchequer surplus of £2 billion and a current budget surplus of approximately £5 billion.

Éamon Ó Cuív:

It was £2 per week.

Mr. McDowell:

It would be more than reasonable for Ministers before 1977 to say they could not afford it but that they did the best they could, keeping up with the CPI. That argument no longer holds and that is my point. Circumstances have changed.

Éamon Ó Cuív:

It was £2 per week.

Mr. McDowell:

The excuse for so long, which was a reasonable one, will not wash with pensioners—

Éamon Ó Cuív:

We did better than that even in the bad times.

Mr. McDowell:

—and we should not ask them to buy it anymore. We must understand the fundamental change that has occurred and not ask people to buy an argument which is out of date and does not wash. That is the fundamental issue. It is fundamentally unfair to set aside money to fund pensioners in a quarter of a century if the current level of pensions is simply inadequate. How can we ask taxpayers to set aside tax moneys to cater for future generations if their own parents are living in poverty? When I say "living in poverty", I do not use a definition I have just made up but one on which all parties are agreed, which the Pensions Board has published and which has been accepted by Government. We cannot and should not do this. We must ensure that adequate provision is made for today's pensioners before we make provision for the pensioners of tomorrow.

Having settled on the basic level of payment, we must then decide on a mechanism for increasing it. In his Second Stage contribution last week, the Minister referred to the debate in the United Kingdom about whether they should seek to index link pensions with the rate of increase in wages. The case in terms of equity is certainly open and shut. Having set the level of pensions, we must seek to maintain it by a formal link to wage increases. I do not look at this through rose tinted glasses. I accept the point that, in times of difficulty, that could prove to be onerous. However, surely that argument cannot be made now in times of plenty.

I suppose the Minister is entitled to ask what this has to do with the establishment of the fund. In a sense, it has everything and nothing to do with it. It has nothing to do with it so long as we can afford to make provision for today's pensioners out of current revenues, but it has everything to do with it as long as we have to make a choice between making provision for current pensioners and future pensioners.

As Deputy Noonan said, the argument extends well beyond the net issue of pensions. It could equally be applied to the health service. Between 1987 and 1989, Fianna Fáil in Government made severe cutbacks in the health service. We are now, ten or 12 years later, only getting around to reversing some of them. It is all very well to say we are happy to set aside 1% of GNP now, but would we be just as willing to do that if we had to impose cuts in the health service to make the books balance? I do not want to anticipate what a successor of mine might say faced with that choice in future, but it does not require much insight to make an intelligent guess.

What would happen if we were faced with a situation which has applied for most of the past 30 years where we were required to borrow money to invest it? In pure, simple economic terms we are borrowing money at 8%, 9% or 10% and investing it at a return of 5%, 6% or 7%. We are borrowing money at a higher rate of interest to invest at a lower rate of interest. We are losing money in the process. In pure economic terms, that would be completely daft and I am not willing to commit my party to do that into the future.

Before going any further, I would like to say a few words about the basic premise which has brought us to this point. An actuarial study was carried out by the Department of Social, Community and Family Affairs to facilitate the NPPI. Virtually all the findings relating to the birth rate, immigration, the labour force and the cost of pensions relative to GNP are now hopelessly out of date and have not stood the test of time.

The Department of Finance produced an interesting paper called the long-term issues group paper in December 1998 which looked up to a half century into the future and dealt specifically with the issue of pensions. It is interesting and, at the time, represented a good stab at predicting the future. A few years later, it is worth looking at just to establish how fragile even short-term forecasts can be. The paper assumes a level of labour force which is out by about 200,000. It also assumes levels of economic growth for the past three years from 1997 to 2000 averaging 6% whereas the average growth was about 50% higher than that. This is a paper which dates from just a few years ago and the projections it makes are already, unfortunately, hopelessly out of date. I do not blame anyone for that. I simply point to the fragility and unpredictability of many of the economic factors which are central to this argument.

One can still make an argument that the dependency rate in 2025 and into the future is likely to change and could change dramatically and very quickly. The point is that we need to keep this under constant review. To be able to state that we are confident about what the dependency rate will be in 25 years' time has simply no reality. It will almost certainly not happen that way. We need to be in a position in five or ten years time to take a different view, draw different conclusions and do things differently.

I wish to turn to the mandate of the fund and the way in which it is to be managed. The Bill is surprisingly and shockingly silent on this issue. The only mandate of the fund is to make as much money as possible and the only restriction is that it cannot invest in Irish Government bonds. This is hopelessly inadequate and is not in keeping with experience elsewhere. The mandate of the fund should be set by the Oireachtas and the rules should be agreed between the Minister and the commission.

There are many obvious issues involved. One is whether the fund is to be actively or passively managed. I know the Norwegian petroleum fund is up to 80% passively managed and the results appear to be generally positive. The impression I received from listening to the Minister during his Second Stage contribution is that he sees active management, albeit not within this jurisdiction.

We must examine a basic economic question. Even accepting the projections in the long-term issues paper, we will have a national debt for another 20 to 25 years at least. That will cost us money. We make interest repayments at a rate of 6% or 7% and perhaps a little less than that as things stand. Does it make sense to borrow money in future at a higher rate? Does it make sense, for that matter, to invest money and receive a lesser return while at the same time repaying debt?

Let me spell it out even more clearly. If we invest money in this fund and it is passively managed by being put on deposit, we will receive a return of 4% or 5%. I am no expert in these matters and the Minister has more actuarial experience or experience as an accountant, so perhaps he is in a better position to tell us, but it is likely that we are repaying more in terms of our national debt. Does it make sense to be taking money that could be used to pay off the debt and putting it into a fund where we are actually losing money? This is a central argument in terms of the economics and the good sense of the whole procedure. As Deputy Noonan said, there is an obligation on the Minister on Committee Stage to spell out the economics, to show us the actual repayments we will make towards the national debt, to project the likely return on the investment in the fund and to make the sums add up. If the sums do not add up, we should not be doing it, whatever about the principle of it in the first place.

We also need to know, as Deputy Noonan also said, whether the fund will be entitled to invest in Irish equities. I know the argument has been made elsewhere, and the Minister was obviously taken by it, that the fund would have a disproportionate capacity to distort the Irish stock market if it were permitted to invest in Irish equities. I can see that there is some argument in that.

I recall saying in conversation with a senior official in the Department of Finance not too long ago that I saw this as a wonderful means of nationalising by the back door. Just at the time when the Labour Party was moving away from nationalisation as an ideological principle, the Minister had suddenly presented us with a wonderful opportunity to acquire 10% or 15% in virtually every PLC on the stock market in Ireland. The fund is not for that purpose and should not be used for that purpose and, therefore, I accept the general argument that we should not use the fund to influence the management or ownership of Irish PLCs. Apart from anything else, it opens up the possibility that political pressure would be brought to bear on the fund, fund managers or Ministers to act in a certain way in the interests of a certain company or in terms of making specific acquisitions. That is something which should be avoided. That said, we should not say that there should be absolutely no investment in Irish equities. There is scope for some investment of that nature.

Another question which arises is whether the capacity will exist to invest in other pension funds in Ireland. A great deal of Irish money is caught up in other pension funds and I would be interested to hear whether the Minister foresees that this fund would have the capacity to invest in other pension funds or whether he sees himself prohibiting that by way of regulation or otherwise.

There is the issue to which Deputy Noonan also alluded of whether there would be ethical constraints on what the fund could do and my strong view and that of my party is that there must be. These should be set down in legislation and should at least be part of regulations which have the force of law. It would be intolerable if Irish taxpayers' money were to be invested, directly or indirectly, in the arms industry. It makes no sense for Irish foreign policy, no doubt now articulated at the level of the Security Council, to be pushing in one direction if Irish taxpayers' money is being used to achieve exactly the opposite effect.

If the fund is given a totally commercial mandate, it is conceivable and even likely that the moneys it contains will be invested in the arms trade because arms companies are among the most profitable in the world. This possibility should be firmly closed off by legislation or regulation. The same possibility arises in relation to the tobacco industry. It makes no sense for the Government to pursue an active policy of discouraging smoking if we are investing in the unscrupulous industry which makes it all happen.

A serious issue of governance arises here. The Bill seeks to appoint commissioners, the general management of the fund is the responsibility of the NTMA and that organisation may, in turn, seek to set aside parts of the fund to certain fund managers. The NTMA may seek to farm out certain parts of the fund for management by particular fund managers. It strikes me as rather cumbersome to have several different layers of management. Apart from that, it also blurs the lines of accountability.

We are discussing a great deal of taxpayers' money and the Oireachtas is entitled to know how that money is being spent or invested. In that context, a direct responsibility for reporting should be placed not on the Minister but on the director of the NTMA. We need to know what is happening and those operating the fund must be accountable to the Dáil for the way the money is being spent. There must also be firm rules governing how the money is to be used. Effectively, these are commercial decisions but there are also other ethical considerations. I do not believe they would change from week to week or year to year but they must be clear because people need to know what is being done with their money.

There are two specific proposals to which I alluded last year in relation to what the Labour Party believes could be productively done with this money. I accept that once the money is put aside and the capital sum is secure it must remain secure. However, that does not mean it cannot be used in the intervening 25 or more years for productive purposes within our economy. I refer here to the role it could play in respect of public private partnerships. The Government has committed itself, at least in principle, to the notion that it will co-operate with the private sector to effect infrastructural changes and improvements. That is a welcome development because progress in that area has been far too slow and we must improve the way we deal with it.

The traditional way of doing things involves the mantra of "design, build, operate, finance". The presumption has been that the finance element would be part of the private sector input. We must reconsider the position and examine the possibility that infrastructural projects could be part or wholly financed by the public sector, while the private sector's expertise could be used in relation to some of the other issues to which I referred, namely, taking some of the risk in terms of designing, operating, etc. This system would have to operate on a commercial basis but, as already stated, the money would be available to part or fully finance PPPs with the assumption that there would be a stream of income and that the capital would be returned over a period of ten to 15 years. While the money is being put to productive use during that period, the capital sum would have been secured and increased in the long-term. Consideration must be given to this matter and it could be done by way of some sort of Exchequer bond, some kind of straight borrowing or any class of strategic partnership which might seem appropriate to particular projects.

This money could also prove useful in respect of the intervention currently required in the provision of building land. The principle is simple: the capital sum must be in place when required in the future. However, there is no reason a proportion of the moneys currently available in the fund could not be given to a building agency or local authorities thereby entitling them to intervene and purchase building land in order to free it up, by way of compulsory purchase or otherwise. As it stands, everyone acknowledges there is a difficulty in freeing up development land and the State could, using the moneys to which I refer, perform a useful role in that regard.

A sum of £5 billion or £6 billion would allow us to take the course to which I refer in any event, but I am not suggesting that we simply nationalise all the building land in the country. However, encouraging the State to become involved as a player through an agency or through local authorities will help to free up the market and may help to bring more land on stream, even in the short-term. The principle is that the State should not seek to retain this land, it should dispose of it at a reasonable commercial price to builders, local authorities and voluntary bodies in order to have houses built.

We are not seeking to hoard land or invest in a capital asset we would retain, we are seeking to make a temporary intervention in the building land market. This can be done while safeguarding the capital assets held by the State and the pension fund. That would be a useful way to proceed. My basic point is that there are ways of using the capital resources available to this fund such as through productive investment, investment that will show a return and investment that, over the period in question, will ensure that the capital sum is secured. I would support our proceeding in that way.

I have made clear that I harbour substantial reservations in respect of the Bill. The pension fund is a good idea and we will attempt to operate it within the broad principles and mechanisms set out in the Bill. However, amendments will be required on Committee Stage. My party has reservations about this not merely for now but also in respect of the future.

Mr. Collins:

One of the most important social policies administered by any Government relates to the wide-ranging and various pension programmes which are currently operating for social welfare recipients and public servants. The Government understands the importance of putting in place innovative structures to encourage people to take out pension plans for themselves and their families to ensure they have a secure income when they retire. Pension programmes are in place for public servants, social welfare recipients and private sector employees. The Government has always supported the implementation of tax breaks to encourage people in the private and public sectors to take up pension plans during their working lives.

Before discussing the specific provisions of the National Pensions Reserve Fund Bill in detail, I will make a brief comment about the ongoing reform process in respect of old age pensions. I welcome the Minister for Social, Community and Family Affair's recent statement at the launch of a report on phase one of a fundamental reform of the qualifying conditions for old age contributory and retirement pensions. The main issues explored in this review were the implementation of the proposals in An Action Programme for the Millennium. These included a commitment to allowing women who take time off work for family reasons to qualify for pensions. The action programme also shifted the current complicated yearly average approach to qualifying for pensions to a more equitable approach based on total contributions over one's lifetime.

The Minister for Social, Community and Family Affairs, Deputy Dermot Ahern, was correct when he stated that this is a fundamental review of pension qualification conditions. Together with the proposals set out in the national pensions policy initiative, this review provides a sound framework for examining pension provisions in Ireland into the new millennium. More detailed proposals will be developed in phase two of this review.

On a broader level, one of the Government's key priorities has been to improve old age pension rates which have risen by 14% in real terms since 1997. However, the Government must also ensure that the qualification conditions for such pensions are more equitable and respond to changing social and economic conditions. I will continue to lobby the Government to ensure that future increases in old age pensions are included in the next budget.

I will now analyse some of the provisions of the National Pensions Reserve Fund Bill. There was a lively debate in respect of last year's budget when tax changes concerning individualisation were introduced. It is ironic that the Government allocation of £600 million to cover the future costs of social welfare and public service pensions went arguably unnoticed. This is in part a reflection of changing macro-economic conditions in Ireland but, as such, it did not catch the full attention of the general public.

However, last year the Government took this wise and bold decision partially to pre-fund the Exchequer cost of social welfare and public service pensions over the long-term. The Government did this by setting aside 1% of gross national product this year from the annual budget which is currently around £600 million and by allocating part of the Telecom Éireann flotation proceeds for this purpose.

I wish to share my time with Deputy Cooper-Flynn.

Acting Chairman (Mr. Briscoe):

The Deputies have been allotted ten minutes each.

Mr. Collins:

This was a highly innovative measure and the Minister for Finance must be congratulated on his boldness in introducing it. It is always much easier to spend money today and not to look to the needs of future generations. However, all evidence from scientists and actuaries in Ireland and Europe suggests that we are now living longer than ever. It is estimated that from the year 2025 onward the number of people over 65 in Ireland will rise significantly. There are wide-ranging demographic projections pointing in this direction. Only recently in The Irish Times I read that scientists are indicating that children born today may easily live to 120 years of age and beyond. The national pensions reserve fund provides for the establishment, financing, investment and management of a reserve fund aimed at meeting part of the escalating Exchequer cost of social welfare and public service pensions from the year 2025.

This Bill may be broken into six parts which clearly outline the role of the National Pensions Reserve Fund Commission and the administration of the actions of the national pensions reserve fund. Part 2 of the Bill deals with the National Pensions Reserve Fund Commission which will control and manage this pensions 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 allocation and will set appropriate benchmarks with regard to the overall performance of the fund and of particular asset classes in which the fund is also to be invested.

Section 6 provides that the fund cannot be invested in Irish Government securities. This restriction is to ensure that the fund may not be used at some future date artificially to support Government borrowing. Section 6(1) provides for the appointment of investment managers to invest and manage portions of the fund while it also provides for the appointment of custodians to safeguard the assets of the fund. Other functions of the commission provided for under section 6 are the authorisation of payments from the fund; determination of an annual administration budget; commissioning of independent valuations of the assets of the fund and assessment of the projected Exchequer outlays on social welfare pensions and public service pensions; submission of annual reports to the Minister; and maintenance of accounts and submission of annual accounts to the Minister. The commission will perform its functions through a manager who will act as the commission's chief executive.

Under section 7 the commission will consist of a chairperson and six ordinary members who will be appointed by the Minister. Persons appointed to the commission will be required to have substantial expertise and experience in a number of specified areas. The term of office of ordinary members of the commission, other than the chief executive, will be five years.

Part 3 deals with the actual national pensions reserve fund. Section 18 provides for the establishment of the national pensions reserve fund, the purpose of which is to cater for the Exchequer costs of social welfare and public service pensions from 2025 onwards. Section 18(2) requires the Minister to pay into the fund from central funds an annual sum equivalent to 1% of GNP in each year from 2001 onward. Such payments are to be made in equal quarterly instalments based on the budget estimate of GNP for the relevant year in which payments are made. Section 19 defines the high level investment policy for the fund based on commercial principles. The objective will be to get the best return for the fund consistent with prudent risk management.

Ms Cooper-Flynn:

I welcome the opportunity to speak on the National Pensions Reserve Bill, 2000. We have an ageing population. In my part of the country I am particularly conscious of this where the average age is higher than in other areas. We are also experiencing a declining birth rate. In the past two days I have listened to considerable debate on national radio about the effects of our ageing population and what this will mean in the future. In the past the average lifespan was assumed to be between 70 and 80 years but this is increasing all the time and it is projected that some of us may live to 120. Some of us will appear to be in a very bad state by then.

Mr. Noonan:

Some of us will still be here.

Ms Cooper-Flynn:

Some of us may well still be here. It is important to recognise that we are not prepared financially to fund pensions for 20, 30 or 40 years. This Bill puts in place a plan to enable us to continue to pay social welfare and public service pensions in the future.

The establishment of a fund such as this has serious budgetary implications, but without it we will face serious consequences in the future. In the years ahead we will have fewer people working and we will, therefore, experience lower growth. This will not enable us to make provision for pensions. We will also have increased health care costs. We are already experiencing this development throughout the country. Adequate health care must be provided for our ageing population. We are facing increased long-term care costs and increased pension costs.

Ireland is not unique in this regard. Many other European countries are in a worse situation than we are. Those countries, however, are taking corrective action although perhaps in different ways. Germany, for example, has put plans in place. The Minister stated that while our current dependency ratio is one person over 65 to every five people working, the ratio in 2016 will be one over 65 to every four people working, and the ratio will continue to fall. Some statistics show that by the year 2046 we will have a 50% dependency ratio. The EU average is 55% so that other countries are experiencing greater difficulties than Ireland.

What must we do to prepare for this situation? The national pensions policy initiative prepared a report on this issue, as did a number of groups within the Minister's Department. The policy initiative report, which was presented to the Minister in July 1999, examined the corrective action needed. It reported that provision of the existing level of pension costs 4.7% of GNP in 2000 but maintenance of the same level of pension would cost 9.2% of GNP in 2036. Even in a relatively short period of time the burden of the cost of pensions will double.

What can we do about this? We can sit back and do nothing and continue the pay-as-you-go method which has existed in the past. However, if we do this we will face a substantial increase in the level of taxation. Alternatively, we can decide to do something about it. I am delighted the Minister for Finance has taken the initiative because it is not easy to do so. We are enjoying great economic success in this country and are fortunate enough to be able to put 1% of GNP into a reserve pension fund of this type.

At a time when we are enjoying such wonderful economic success, this is not a great burden on us but we have to recognise that this strategy will exist well into the future, certainly for the next 50 plus years. There will be times when it will put a serious strain on the country, particularly if we do not continue to enjoy the current level of economic growth. Having said that, I agree with the Minister that the long-term gain to be derived as a result of taking this decision is worth any pain we have to endure as a nation and I fully support him.

We all recognise that 1% is not sufficient to cater for the needs of our ageing population in the future. In excess of 3% or even 4%, would need to be contributed if we are to adequately prepare ourselves for the cost of increased pensions in the years ahead. However, I recognise that this is a step in the right direction and I am sure all Members would fully support the Minister's initiative.

I also welcome the very clear guidelines set down by the Minister on investment of the moneys in the fund. This is very important because if we are to make the sacrifice of donating 1% of GNP to a fund of this type, it is important that we generate a solid commercial return from the moneys invested. I welcome the indication in the guidelines that decisions will be made on a commercial basis. That will necessitate much of the fund money having to be invested abroad because the Irish market, as everybody is aware, is very small. To get prudent investment advice, it is important that much of the money is invested outside of the country. I also welcome the fact that drawdowns on the fund cannot commence before 2025. It is important that the fund is not raided for any other purpose but is used for the purpose for which it was originally intended. That is safeguarded by the Minister setting down those guidelines.

If we invest this 1% premium, the projected size of the fund by 2025 will be 42% of GNP. Should we be able to enhance the fund in the future – I hope we will be because it will be needed – if one takes a 3% premium, one is talking about 57% of GNP which would place us in a much stronger position. I am also pleased the fund will be owned at all stages by the Minister for Finance and that, in the way he has set up the fund, the commissioners who will have responsibility for the fund must have proper managerial experience in this area. That is a critical point. There has been much debate about whether suitable people are put in positions to do the job in question. The Minister has safeguarded that by stipulating in the Bill that the commissioners will have managerial expertise in the area to ensure the fund is invested properly.

I also welcome that the National Treasury Management Agency will act as an executive to the commissioners for a ten year period. The steps currently being taken by the Minister in providing this fund will ease the burden on us as a country in the years ahead. I welcome the provision that the chairperson of the commissioners in charge of the fund will also be responsible to the Committee of Public Accounts. That is a very important step because accountability and transparency, particularly in regard to such a large sum of money, is vital. Any person placed in such an influential position must be accountable to the Committee of Public Accounts.

The fund will enable this Government to meet future pension requirements. It will not be used to provide for other social issues. That is provided for in the Bill. I welcome the Bill and congratulate the Minister on his initiative. It is not often that Ministers look forward to what will happen in 30 and 50 years' time. This is a very brave and welcome step and in the fullness of time people will thank him for it.

Mr. Sargent:

Tá áthas orm seans a fháil labhairt ar an mBille um Chúlchiste Náisiúnta Pinsean, 2000. This legislation provides us with one of those rare opportunities to focus on long-term interests and planning. From that point of view, it is welcome as we rarely get such an opportunity given the day to day, hand to mouth type of legislation that is often debated. While this is of major concern to people looking ahead to their days as pensioners, it is also important to focus on those being born and going to school today and to plan not only for their pensions but for the type of society in which they will live and hopefully enjoy. The pensioners of 2030, 2040 and onwards will live in a very different type of economy. I hope the National Pensions Reserve Fund Bill will take into account the long-term investments that would bear this in mind.

At a lecture in Trinity College recently, Dr. Campbell, a petro-geologist, made a very strong and thought-provoking comment. He said that whereas oil had driven the 20th century, it would not exist to drive the whole of the 21st century. That in itself raises many questions about the type of economy in which this national pensions reserve fund will be paid out. There is no doubt the recent oil shocks will increase in frequency. If nothing else, they are a warning signal that we have only a limited time before major transformations take place to get us off our junkie-like dependency on oil as the driving force in the economy.

This Bill also raises serious questions of social equity, given that people who are currently investing in pension funds are very different in terms of their ability to make such investments. Many people do not have the luxury of thinking that far ahead and will depend entirely on social welfare pensions. The Bill must ensure the pensions are index linked as well as planning for a greater increase in social welfare pensions to ensure a level of social equity which is often aspired to and talked about but seldom seen. This gap between rich and poor mirrors the gap between the rich and poor in the northern and southern hemispheres, which is also widening. I take this opportunity to congratulate the Government on securing a place at the United Nations Security Council. I hope the long-term thinking in this Bill will be reflected in a similar type of long-term thinking in our diplomatic efforts to bridge the gap to which I referred and ensure social equity on a global scale as well as here. It is our duty to do this.

In terms of the operation of the fund, an article in today's The Irish Times states that the manager of the commission that will deal with the fund has already been chosen. That raises questions as to how accountable and to what extent the management of the fund is based on merit. The NTMA is mentioned as the assumed management structure for the fund, but hopefully lessons have been learned from the past. It is important to ensure that appointments to such a body are opened to the type of accountability, competition and meritorious consideration to which all jobs should be. I ask the Minister to reflect on this because the last thing we want is for people to assume this is another closed competition which is not open to people who feel they might have a particular role to play in managing this fund to the best effect.

I echo Deputy McDowell in stressing the necessity of the ethical investment aspects. No matter how much we talk about social equity, sustainability and ensuring moral integrity in investments, if we simply allow the investment to be dictated by market forces then we will be seen as little more than hypocritical in our claims to be acting in the best public interest and in the interest of the common good. The tobacco and arms industries have been mentioned as the bêtes noires of the investment community, and rightly so. The type of economy we should be planning for and investing in, which will ensure quality of life for people who are now schoolchildren and who will be pensioners, requires that we make strategic and long-term investments to ensure, for example, energy conservation and renewable energy are well provided for and that we are successful in providing the returns necessary for such a fund. It is important to bear in mind that Ireland had an opportunity to invest in renewable energy in the Bellacorick wind farm in County Mayo, but investment could not be found in this country – it was not considered a safe investment. Instead investment had to be sought and obtained from Denmark. This indicates the short- term, blinkered thinking which is going to backfire on us badly unless our strategic thinking is long-term, something which applies to investments as well as this pension fund.

There is no doubt that ecologically sound developments require investment and I hope the Minister will signal that the long-term thinking behind this Bill, which I welcome, will be followed through in terms of a long-term investment climate which will last well into the 21st century and beyond, rather than following the usual investment portfolio which looks to the end of the day's business in the Stock Exchange. For example, the forestry industry is bedevilled by such short-term, quick rotation venture capital investment. While this might give a short-term return, in the long-term it is self defeating as it creates a glut, a lower price and a worse return than a long-term, broad leaf, hardwood, indigenous investment. This is nothing new. The lessons in this regard have been learned in other countries, particularly on the Continent where investment thinking is much more long-term than has been the case to date in Ireland.

I would be grateful if the Minister were to enlighten me on the type of portfolio investments he has in mind in terms of the Bill and if they will be looking to the future after 2025, bearing in mind what I said at the outset, namely, that oil drives the 20th century and cannot drive the 21st century, and how this will affect the Minister's thinking in terms of long-term pension fund provisions.

Mr. Higgins

(Dublin West): The Minister said this is a simple, clear-cut Bill, and to a certain extent it is. However, I agree with the Deputies who say it involves critical issues which should be far more widely debated than heretofore in the Dáil, society, the workforce and by all the people who will be affected by it in various ways. There is no doubt that when a Bill as initiated includes a provision of almost £5 billion for the fund and a further 1% of GNP per annum, we are talking about substantial resources.

According to the Minister the Bill is based on the projections made regarding demographics and the percentages of the population which will be at various ages. There are projections in regard 2016 and up to 2056. It is wise and proper to plan in advance, but it is very difficult at this stage to be very accurate on the precise age structure of the population in 2056 and what economic structures here and in Europe will be by that time. Perhaps we will have democratic socialism where all the resources of society will be invested in the public good with comprehensive care for pensioners and those who are ill, poor and homeless, a situation we do not have at present. Therefore, the issue of a balance between the current need for the deployment of resources for those dependent on State payments and provisions for the future arises. The Minister should have dwelt longer on these issues and justified the commit ment he is making to the national pensions reserve fund and related this to the current needs and demands on the State for an improvement in living standards and the quality of life of people who are in many cases confined entirely to dependency on State payments.

More serious questions are raised by the national pensions reserve fund commission, how it will function and how the funds in the reserve will be deployed and invested. The Bill provides for an independent commission. However, how independent will it and should it be? The Bill provides for what the Minister calls accountability to the Minister for Finance and the Dáil. However, as outlined by the Minister, that accountability does not amount to very much. Provision for detailed annual reports is necessary as is the appearance of the commission chairperson, the chief executive and the manager before the Committee of Public Accounts. However, regarding the criteria which will be set down for the investment of these funds, I wonder how much influence Dáil Éireann will have or to what degree the views of the majority of people in the State will be represented.

The Minister went on to say that a strictly commercial investment mandate for the fund will be put in place. Where precisely will this lead? Where will the investment end up? Will it end up here or abroad? It is accepted that a large proportion of the fund would, under our current structures, be invested abroad. Does the Minister intend to lay strict criteria in regard to the manner of investment which would be permissible or encouraged and that which would be prohibited by the regulations before the Dáil?

Reference was made to the armaments industry. That is a critical issue and the Minister should, in his reply, state categorically that not one penny of any pension reserve fund will be invested in the armaments industry either in this country or abroad. Were the Minister to make such a statement, it would require quite a degree of research and supervision to ensure that would not happen. The tentacles of the armaments industry are reaching ever further into different countries and areas. In many countries which pride themselves on being supposed democracies, the military industrial complex carries a huge weight and its tentacles extend into many societal activities. It is crucial that it would be stipulated that not one penny will be involved in any company which derives its income or profits from the creation of weapons of destruction. Can we seriously accept any assurances in this regard from this Government when the Department of Enterprise, Trade and Employment issues hundreds of licences – up to 400 on an annual basis – to companies which export material which is related to the armaments industry? It would appear, judging by the line the Tánaiste and Minister for Enterprise, Trade and Employment adopted some days ago, that this Government is intent on encouraging Irish owned and Irish based companies to further engage in production for the international armaments industry through the supply of parts—

Acting Chairman:

The Deputy should remain within the parameters of the Bill under discussion.

Mr. Higgins

(Dublin West): With respect, I am very much within the parameters of the Bill because, in ten years' time, the Minister will have in the region of £15 billion to invest. My point, which is well in order on a Second Stage speech, is that this Bill must state the criteria for such investment.

I want the Minister to state why the fund should not be used to invest in the provision of badly needed infrastructure and services for which people are crying out. We currently have a massive housing crisis where young people cannot afford the speculative prices being charged. Why should the Minister and the Government not use pension funds to establish a national house building agency with a brief to build homes for people who cannot afford the obscene prices being charged in the marketplace? Many middle income workers who cannot afford these prices would be in a position to buy affordable homes which would provide income to the pension fund in the future while at the same time catering for a very important need in society. I would like to see this proposal and others being teased out.

Does the Minister accept that current State pensions are very inadequate and that increased resources must be deployed in this area? How does he propose to strike a balance between investment in the national reserve fund and current needs? Public service pensioners were deeply aggrieved by the fact that their link to increases in salaries in the public services was discontinued in 1996 or 1997. Does the Minister believe that, in regard to current and future commitments, serious inequities must be addressed and funds must be committed in this area?

The Minister put in perspective the 1% gross national product from the Exchequer which will go into the fund each year until at least 2055. By comparison, he stated that the amount which would go towards servicing the national debt was approximately 3% of gross national product. If my memory serves me correctly, taxpayers paid in the region of £3 billion to £4 billion to service the national debt last year. That is a very sobering figure which should be examined in the context of what is being invested for our people. It is outrageous that three or four times of what is being committed for the pensioners and welfare recipients of the future will go towards fattening the already bloated profits of the international and domestic banks. That, in my view, is immoral and speaks volumes about the nature of a system about which nobody in this Government raises questions.

Mr. McCreevy:

The Deputy is hardly suggest- ing that we should renege on the repayment of the national debt.

Mr. Higgins

(Dublin West): When I spoke on the State claims agency legislation yesterday I outlined the staggering reply I received from the Tánaiste about Nitrogen Éireann Teoranta which had a debt of £164 million in 1987 and by the end of last year £188 million had been paid in interest on that debt. Did the Minister hear the figure I gave?

Mr. McCreevy:

I heard it last night as well.

Mr. Higgins

(Dublin West): I am glad. I hope the Minister will comment on the insanity and immorality of that.

Mr. McCreevy:

Is the Deputy suggesting that, as a nation, we should not repay our debts?

Mr. Higgins

(Dublin West): I am suggesting we should carry out an audit on how much profit we have contributed to international bankers. In the case of NET there should be an inquiry into why £188 million in interest was paid on the principal. Why did the State not repay the £164 million debt? It would have had £188 million extra which could have been used to increase pensions for those dependent on them and on social welfare. The case is unanswerable. In the event of democratic socialism and the philosophy I hold having majority support at some stage, and it will happen, we would not be bound by the usurious agreements entered into between previous Governments and international bankers. The people's need to live in reasonable comfort and dignity comes before everything else.

The Minister should elaborate in some detail on whether he agrees that the investment of funds from the national pension reserve fund should be subject to detailed and clearly outlined ethical guidelines. I mentioned the armaments industry. That would be one area but environmental concerns on an international basis would be another. Many multinationals which may be good sources of profit play a despicable role in degrading the environment in the Third World and elsewhere. Some of them are involved in genetic engineering and play a perfidious role and will so do increasingly in the future if they are let away with it.

The public may not agree with every point I make but I believe that the people whose taxes we are talking about and whose pensions are being provided for will want to be very clear that any investment from this country will be for the enhancement of people whether within or outside our boundaries and will not play any role in the destruction of the world's environment or peoples through the armaments industry.

Mr. G. Reynolds:

I welcome the Bill. It is prudent that the State should invest money in pensions for the long term. Before the turn around in the economy it would have been difficult to control pension funds. This Bill is evidence that we have now become a strong economy and can afford to place 1% of our gross national product in the pension fund. I understand 1% this year will be to the tune of £630 million. The fund is intended to take account of the inevitability of an ageing population. I understand that 1996 data were used in correlating this information and it is widely off the mark as regards the present position. My greatest fear is how effective it will be in 2025. I would like the Minister to address that issue.

While paying old age and public service pensions out of current tax revenue is not an easy or popular option, by making early provision or investing well the current working generation can preserve the old age pension from the political pressures of rising tax rates that could otherwise lead to an erosion of pension funds. An article in today's The Irish Times raises a number of points regarding the legislation that are worth mentioning. The main element of the Bill is the investment mandate and the Government's structure of the pension fund. It states:

The manager of the fund needs to be given a clear mandate. Nobody wants the fund to hold only speculative dot.com; nor would the pensioners have been well served by a manager who plumped for recent initial public offerings by green chips such as Eircom or First Active. [It should be taken into consideration] that no Irish Government securities are to be held and investments are to be made on strictly commercial criteria.

Consideration should be given to having the law preclude the fund from holding Irish assets.

.it is not hard to foresee that, without some restrictions on investing at home, there would be continuous political and other pressure from promoters for the fund to finance worthy-sounding but unviable projects.

[It is important to] insulate the fund from these kinds of pressure right away. Besides, most of the investments should be in foreign assets if risk is to be sufficiently diversified; during an Irish economic downturn we would be doubly hit.

That must be taken into consideration because if we had Irish investment and there was a downturn in the economy this Bill would have huge implications for funding. I hope the Minister will consider that.

I do not agree with everything Deputy Higgins said. We differ greatly as regards our economic strategy. However, I agree that when considering investment policy you must also consider ethical practice. He is correct in stating that we should not invest in the armaments industry or environmentally unfriendly activities such as felling rain forests. There should be guidelines laid down for the fund manager to ensure that does not happen. The article further states:

[It would be better] to simply define the broad classes of allowable assets and require the manager to invest sufficiently widely in these classes to ensure that the fund's return equals that on the average of these allowable assets .. the fund should be established from the outset as a passive "index fund", tracking the whole investment market rather than trying to pick winners.

Index funds are cheap to operate and are as safe as the market allows.

It continues:

The seven person commission is to determine the investment strategy and to control the fund.

As outlined in the article, it shows that the chief executive of the fund is a member of the commission and of the board. A fair point has been raised that the individual concerned should not be on the commission. It should be an independent, advisory body advising him or her on the type of investments that should be made. Consideration should be given in the legislation to establishing a board that is more effectively independent.

The public service pension fund places a massive financial burden on the Exchequer. We are in a very strong economic position. When I did my leaving certificate way back in 1978 the only jobs available were in the Civil Service. If one could get their leaving certificate and walk and talk, one had a decent chance of getting into it. The alternative was college or emigration. Today there is a labour shortage. The massive numbers of jobs being created in the private sector cannot be filled from among the workforce. There is a need to bring in labour from abroad which in itself is not a bad thing.

An embargo on recruitment to the Civil Service was introduced in the 1980s when jobs were not being created. Today too many jobs are being created and there is still an open door policy so far as the civil and public service is concerned. The Government should consider introducing such an embargo. While the civil and public service does necessary work, much of it is unproductive in the sense that it is administrative in nature. As a friend of mine says, we have laws but no order. Such a radical approach is needed and would make a massive difference in easing the labour shortage. If someone is offered a job in the private sector and a permanent pensionable position in the civil and public service, the easy option is to opt for the civil and public service. I am a lone voice on this issue. I will probably be committed to an institution shortly—

Mrs. O'Rourke:

They cannot get staff either.

Mr. G. Reynolds:

—but it is a proposal which I hope my party will consider in government and which the Minister would probably view kindly. It should be considered given the performance of the economy.

Minister for Finance (Mr. McCreevy):

I thank Deputies for their contributions. I will address some of the general points raised. We can return to individual issues on Committee Stage. Much as I disagree with some of the comments made, I welcome the extension of the debate regarding the pensions reserve fund.

This is a very important Bill. Deputy Joe Higgins started off by saying that the Minister said that this was a simple Bill. I do not recall saying that; it is anything but simple. While the concept may be simple – providing moneys to meet future liabilities – I readily accept that there are a number of very important issues to which I have devoted much time. Some of them have been raised by Deputies opposite and in today's article, which I welcome, much as I disagree with certain aspects. While the Bill will not have any particular political effect on my fortunes and those of the Government come the next general election, it will have an effect in years to come – for the better. I have had an interest in this area for a long time and I have taken the opportunity to do something about it, not alone in this Bill under which moneys will be provided to meet future liabilities but, as Deputy McDowell and others are aware, I have made significant changes in the area of private pensions, some of which he has welcomed. It is an area to which I have given much thought as there was a need for change.

Deputy Higgins made the point that the pensions reserve fund has not been the subject of great debate. I would have thought that it would have generated greater debate, but that is not my fault or that of other Deputies. I indicated as far back as July 1999 when I published the report what I would do; I outlined my thinking on the subject at a press conference. When I published the Bill I thought it would be the subject of greater debate. Apart from specialist magazines, today's article in one of the national newspapers is the first to appear on the subject. It reminds me of the debate which took place at the Joint Committee on Finance and General Affairs during the term of office of the previous Administration under the chairmanship of Deputy Jim Mitchell on the introduction of the euro. Even though we spent days and weeks discussing the issue with experts from home and abroad and distilled everyone's views from the far left to the far right, it merited about ten lines over a period of one and a half years. In spite of this it was a most interesting debate during which most of those who participated learned much. It failed, however, to generate much debate among the public.

I will elaborate a little on the projections underpinning the Bill. The Irish Pensions Trust, now part of Mercers Limited, carried out an actuarial review of social welfare pensions in September 1997. Mercers has recently updated this review to take account of demographic and econ omic changes as well as changes in pension rates and contribution levels in the meantime. The figures I have used are based on this updated review. Rather than go through all the assumptions behind the projections at length, I will forward the updated review to Deputies Noonan and McDowell.

Public service pension projections are based on a recent update by my Department of the Irish Pensions Trust review of public service pensions carried out in 1997 on behalf of the Commission on Public Service Pensions, the McAleese commission established by the previous Government, which presented its interim report to me in autumn 1997. Its final report is due next week. Unlike other reports, the interim report was very easy to read and understand, something for which I commend Professor McAleese.

Deputies should note that social welfare pensions will account for the bulk of the rise in pension costs. Of the projected pension costs in 2056 of 12.4% of GNP, 10% arises from social welfare pension provisions with 2.4% arising from public service pension costs. I take Deputy Noonan's point that increased immigration and labour force participation could improve our capacity to meet the future pensions burden. The projections can only be based, however, on the best information available at the time. Given the size of the projected pensions bill facing us and the fact that prefunding will only meet part of the burden, even a substantial increase in labour force participation and immigration is likely to do very little to undermine the case for prefunding.

The question of investment in Ireland was raised. 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 asset in Ireland or abroad is 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 to which Deputy Reynolds referred or to provide capital for companies or projects which would otherwise have difficulty in attracting private sector investment.

I have given this area much thought and come down in favour of giving the commissioners a strictly commercial investment mandate. To do otherwise would be to take away their discretion. On the other hand, I recognise that there has to be accountability. I have dealt with that as follows: First, the commission must produce an annual report. Second, the chairman and chief executive of the commission, who in the first instance will be the chief executive of the NTMA, must appear before an Oireachtas committee. Having considered this matter at length, I believe this procedure will address many of the issues raised in this debate. For example, if the annual report produced by the commission shows an investment in a company with a dubious record in some of the areas referred to by Deputy Joe Higgins, the public pressure would be such as to ensure that the fund would not make similar investments in the following year.

The other alternative would be to lay down strict guidelines and rules in this area, but the best approach is to deal with it in the way I have outlined. The annual report will clearly indicate the investments in companies and other investments made by the fund. There will be a report to the Oireachtas, so there will be public knowledge about it. There will be scrutiny by the Oireachtas in the form of the chairman and chief executive appearing before an Oireachtas committee. That procedure will eliminate any difficulties that may arise. To provide otherwise would make the area a minefield.

In the article referred to, which I read this morning, it was suggested that there should be a total prohibition on the fund investing in Irish companies. However, many Deputies advocated that the fund should invest in Irish infrastructural projects and other ventures. I have decided to prohibit the fund from investing in Irish bonds because if pressure arises in the future the fund may end up propping up the Government by it buying its own paper. Suppose the fund had been established in the 1970s, there may have been a strong temptation in the desperate times of the middle 1980s to have the fund invest in the Government's own paper. I decided, therefore, to insert that prohibition, even though there is no need for it at present.

Mr. Noonan:

If the fund was in existence in the 1970s it would have ended up in a party leader's account.

Mr. McCreevy:

I did not agree with the view that the fund should be prohibited from investing in Irish companies. What is meant by an Irish company? Some of the ones talked about have investments abroad. I can think of a large commercial company, not a financial institution, most of whose investments are worldwide. If one assumes a conservative return on fund investment of 1% over the return on Government bonds, the fund is projected to reach 42% of GNP by 2025, the year drawdowns will commence. In view of the magnitude of the fund relative to the limited output of the Irish 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, although I stress that any decision in this regard is a matter for the commissioners. I am not prohibiting it; I suggest that to get a balance in the fund like any pension fund, most of the investment will be outside Ireland, but I do not prohibit the fund from investing in Ireland. It is for the commissioners to decide and the only limitation is a strictly commercial mandate.

Deputy McDowell referred to returns on the fund. The historical experience is that returns on equity investment are greater than the cost of borrowing. The article referred to a passive investment as opposed to, say, active investment in the market. In my lead-up to introducing the Bill and before I produced the report of July 1999, the evidence then appeared to indicate that funds that follow a passive route do better in the long-term than active management. This surprised me. It does not refer to every fund, but studies have been done on this which indicate that passive fund managers who followed the index got a better return over a period of time than active fund managers. There may be a lesson there for those of us who have a few pounds to invest now and again. I took that into account. The commissioners and the fund manager may take that route, but it is for them to decide. While I cannot attest that this was a worldwide study, it was done by a person in the NTMA who has a good knowledge of this area. He was also surprised at the outcome. I make this point because it was mentioned in the article referred to that it could be the best way to proceed on the basis that it removes the risk.

I mentioned that public pressure following the publication of the report by the commission will lead the fund managers to act in a certain way. However, the Government of the day should not exert any influence on the fund. Deputy Noonan may fundamentally disagree with me on this, but while it is the right of the Oireachtas to change the law, people will regard the fund as holding their own money. In my professional capacity, my experience has been that the most conservative trustees of funds are people from a trade union background. I have been very impressed by some such people. They were far more conservative than other trustees and demanded that there be no speculative investments on behalf of their employees' pension fund because they regarded it as their workers' money they had put aside. That is the approach I have adopted to this area. It is the people's money which has been put aside.

There is no provision for the Minister for Finance to exert an influence. I could have included various caveats to give the Government of the day the capacity to exert influence over various aspects, but the legislation has been deliberately drafted to ensure that this will not be possible. I have even gone so far as to ensure that commissioners can only be appointed from certain categories of persons. This has not been done before. I hope when appointing commissioners it will be seen that they are above and beyond any reproach and that they will act completely independently.

I do not know if Deputy Noonan was a secondary school teacher—

Mrs. O'Rourke:

He was.

Mr. McCreevy:

—or whether his organisation has a pension fund or whatever. Most employee groups have pension funds and they regard that money as theirs, not to be tampered with. That is the approach I am taking here. I am removing it from the Government of the day. While the Oireachtas can make a decision to change it, when it is up and running it will be a brave Minister for Finance who says he intends to dip into the fund to finance certain measures.

Deputy Noonan and others made the point that the 1% contribution provision is fine while the economy is going well and there are budget surpluses. However, difficulties may arise when the situation is reversed. Inevitably, the economy will not always be in its present healthy position. The Deputy and others have made the point that there should be some flexibility regarding the 1% provision.

That approach signifies the difference between us on this issue. We should provide for a 'no liability' clause, in the same way as is provided for in respect of ordinary pension costs, education and repaying the national debt each year. This is a debt and the 1% provision should apply. There should be no equivocation on that. I could have provided that it should vary over a period, but that would give a discretionary loophole to the Minister for Finance. Some of the senior civil servants in the Department of Finance who would like to tie up the hands of the Minister into the future might love it. I am fundamentally against that. The Deputies must accept my bona fides in this. I have done everything in my power to ensure the Bill does not have any loopholes for successive Ministers. I may have missed something which might be a loophole, but my intention is not to miss any. There may be principled disagreement among us on this issue.

Mr. Noonan:

The Minister seems to have a poor view of his possible successors—

Mr. McCreevy:

I would have every confidence in Deputy Noonan or Deputy McDowell if they were my successors.

Mr. Noonan:

—for the next 55 years.

Mr. McCreevy:

Yes. I have been here for more than 23 years and I have seen the pressure on Ministers. While I may not agree with everything the Deputy's party leader has said about economic policy over the years, I agree with much of what he said. I remember when he was Opposition spokesman or Minister for Finance some years ago he signalled that we should introduce a law against fiscal irresponsibility. I do not think he made any contribution to the Bill. I have seen the pressure on Governments and I have seen what Ministers for Finance have had to do. I am trying to ensure the Bill will not be a cookie jar into which someone can dip his hand. I have given a great deal of thought to that over a period.

As regards the 1% contribution, the Budget Strategy for Ageing Group estimated that approximately 3.5% of gross national product would have to be set aside annually to equalise the Exchequer burden of health and pension costs over the next 50 years. However, given the magnitude of the prospective costs involved and the many other competing demands on the State's finances, it concluded that a more feasible sum to set aside would be 1% of GNP which it estimated would meet approximately 30% of these costs. In making this recommendation, the group acknowledged it was making no provision for the post 2056 situation.

In establishing a single reserve fund which is not designed to meet a defined liability but to part fund social welfare and public service pension costs to a year potentially beyond 2055, I decided to stay with the recommendation of a 1% GNP contribution. This is a level which will make a significant contribution to future pension costs and is a sustainable commitment. Once built into the multi-annual budgetary structure it should not cause undue difficulty. I reiterate that the contribution is slightly less than our annual contribution to the EU budget and less than one third of the interest payment on the national debt in 1999.

If our economic circumstances make contributions over and above the 1% of gross national product feasible, the Bill allows additional contributions to the fund by resolution of Dáil Éireann. In effect, the 1% of GNP is a minimum annual contribution to the fund and it is open to Governments to make an increased contribution in any year. I would be opposed to any measure which would vary the annual statutory contribution while requiring that the 1% of GNP be achieved on average over a number of years. I fear this would provide a loophole which would be exploited in times of difficulty.

I will point 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 employer and employee social insurance contributions and is used to pay all social insurance benefits. In previous years the fund's income was not sufficient to cover the costs of these benefits and had to be subvented by the Exchequer.

Largely due to the remarkable increase in employment, income has grown steadily in recent years to the point where there is currently a surplus in the Social Insurance 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. Last night during the debate on the National Treasury Management Agency (Amendment) Bill, I set out some of the issues around the investment of the fund and how they are being resolved with the assistance of the NTMA.

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. My officials spent a great deal of time in negotiations and discussions with the Department of Social, Community and Family Affairs trying to find an acceptable way to do this. It was my original intention to take this route. However, after spending many thousands of man hours on this issue, I decided for the reasons I will outline not to use part of the Social Insurance Fund.

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 that it will become necessary to draw on the Social Insurance Fund reserves long before 2025 when drawdowns commence from the National Pensions Reserve Fund. It will be necessary for the Social Insurance Fund to meet all the various social insurance contingencies, such as disability and unemployment benefit as well as contributory pensions. It would be impractical to try to apportion the surplus between those various demands. We were not able to find a solution to it. Deputy Noonan can have the documentation if he so wishes. I decided it was not worth any more hassle or disagreement.

The question of ethical investment was raised by a number of Deputies. The question of socially responsible investment is only at an early stage of development internationally. There will always be intense public debate about what is ethically acceptable either at a personal or foreign policy level or about what is environmentally acceptable. There will rarely be consensus about such issues. The assets of the fund are likely to be invested to a significant extent in shares of multinational groups. It can be difficult to determine what holdings subsidiarities within such groups may have. Even if one adopts a socially responsible investment policy, it is not easy to implement it. There is a danger that if ethical considerations are part of the invested mandate, those responsible for managing the fund will be dragged into intense public controversy, thereby paralysing their capacity to invest.

When I was examining the issues, I looked at a number of approaches to implementing a socially responsible investment policy. An inordinate amount of time was spent dealing with this area. I outlined earlier why I came to the conclusion that the best way to deal with it was to proceed with the commercially invested mandate and to have accountability. There are a number of options. One could copy the UK precedent. Although it does not have a pensions reserve fund, its annual report on pension funds must from July this year contain a statement of the approach to the question of socially responsible investment if adopted by a fund. There will be no requirement on funds to invest in this manner, only a requirement to state their policy.

A fund can use its voting rights to put pressure on companies to pursue socially responsible policies. It appears this approach can be accommodated within a commercial mandate, although its effectiveness is debatable, particularly as the shareholding of the fund in any one company would be relatively small. Some funds put aside a small portion of their assets, typically 0.5%, into a separate fund which is then invested according to socially responsible criteria. The drawback with this approach is that it is largely tokenism because more than 99% of the fund is invested in the normal manner.

Screening is an approach which has been used by some funds, for example, charities. It involves hiring analysts who will examine all companies on the index, such as the Standard and Poor 500 index. That is a complicated way of doing things, although it is an option. One could also adopt a mix of any of those approaches.

The approach I adopted was to give the commissioners the commercial mandate and to publish a report at the end of the year. There will also be accountability to a committee of the Dáil. If an investment is not ethically or socially responsible and public pressure is brought to bear, I am sure the commissioners will take that on board.

Mr. Higgins

(Dublin West): The damage could be done by then.

Mr. McCreevy:

I will not tie the hands of the investment managers of this fund by setting out a range of criteria because I know what would happen. The lowest common denominator would apply and they would be paralysed into indecision. People who invest their own money in investment pension funds should realise they will not have a plus on their returns every year. It will be a minus in some years and quarters. Good surveys are published every quarter on how the funds in Ireland have done. If a person invests in the second quarter, there could be a minus because the markets came off the boil, which often happens. I am worried that with a big investment fund there will not always be a plus every year and that the pressure could be so great the commissioners might take a conservative approach. I will not put any restrictions on them. That may happen so I would not like to constrict them any more than is necessary.

The question was asked if making the NTMA the manager would conflict with the independence of the commission. I provided in the Bill for the appointment of the National Treasury Management Agency to act as agent of the commission in managing the fund for an initial period of ten years. After this period, there will be the option, at five yearly intervals, for the commissioners to extend this arrangement further or to appoint an alternative manager. In deciding to give this role to the NTMA, I was strongly influenced by the fact that almost £5 billion will be entrusted to the commissioners once the fund is established. They will, therefore, need to have access to a fully functioning executive with assistance and expertise to manage such a large sum from day one. The NTMA has been managing the liability side of a safe balance sheet for more than a decade now. While the agency may require some additional skills, I consider it far more sens ible to have the NTMA manage the funds than to expect the commissioners to start from scratch and to establish a second specialised agency to manage such a large amount of money.

There is no conflict between the agency's debt management role and its role as manager of the pension fund. As manager of the national debt, the chief executive of the NTMA is responsible to the Minister for Finance but as manager of the national pension reserve fund, he is responsible to the commission and any possible conflict between those roles would be removed by the prohibition on the fund investing in Irish Government securities.

One Deputy made the point that we are paying off the national debt. People may not realise that this will be the third year in a row we will be paying off the national debt. When the State has an overall budgetary surplus, as I have had in 1998, 1999 and will this year, that money will automatically go towards bringing down the national debt. We did not see it so much at the end of 1999 because during 1999, the NTMA on my behalf restructured much of the national debt to make it more tradable and that had the cosmetic effect of increasing the nominal increase of the national debt but the economic costs were the same. This year we will see the national debt falling in absolute terms because regardless of whether one takes the budget surplus as predicted on budget day or the latest predictions, they will automatically bring down the national debt depending on what the exchange rate is on 31 December vis-à-vis certain elements of the national debt – it is not all held in euros although the vast bulk of it is. I am sure we will revisit many of these points on Committee and Report Stages.

Mr. Noonan:

Will the Minister take a question?

Mr. McCreevy:

Yes, Deputy.

Mr. McCreevy:

How will the Minister administer it in terms of the national accounts? Will there be a charge on the central fund?

Mr. McCreevy:

It will be the same as our EU contributions or our repayment of the national debt. It will come under the central fund from which judges and TDs are paid, the national debt is repaid and our contributions are made to the EU. It will be above the line.

Mr. McDowell:

So it is off balance sheet as far as Government spending is concerned?

Mr. McCreevy:

It depends on how one defines Government spending.

Mr. McDowell:

How does the Minister define it?

Mr. McCreevy:

I defined that very adequately in the past but it will be part of the central fund expenditure.

Question put and agreed to.