Dáil Éireann díospóireacht -
Tuesday, 12 Nov 2002

Vol. 557 No. 1

Priority Questions. - National Pensions Reserve Fund.

Joan Burton

Ceist:

70 Ms Burton asked the Minister for Finance the total amount of funds held by the National Pensions Reserve Fund at the latest date for which figures are available; the total value of stocks or shares held by the fund at the latest date for which figures are available; the value at the date of purchase; the total losses incurred by the fund arising from these purchases in both monetary and percentage terms; if it is intended to continue to borrow money to invest in the fund; and if he will make a statement on the matter. [21425/02]

Paul McGrath

Ceist:

71 Mr. P. McGrath asked the Minister for Finance his plans to alter the present basis of contributions to, or investment from, the National Pensions Reserve Fund. [21509/02]

Mr. McCreevy

I propose to answer Questions Nos. 70 and 71 together.

One of the key principles underpinning the National Pensions Reserve Fund Act, 2000, is that the fund is managed by commissioners who are independent of Government. The commissioners control and manage the fund with discretionary authority to determine and implement an investment strategy. The Act requires the commission to follow a strictly commercial investment mandate with the objective of securing the optimal return over the long-term subject to prudent risk management.

These features of the National Pensions Reserve Fund Act, 2000, are similar to the trustee arrangements which exist in private pension funds. With the statutory prohibition on drawdowns from the fund prior to 2025, they insulate the fund from day-to-day pressures on Government and enable the commission to take a long-term view. This is essential if the purpose for which the fund was established, to meet as much as possible of the cost to the Exchequer of pension payments from the year 2025 to at least the year 2055, is to be achieved.

Consistent with the philosophy underpinning the fund, I do not regularly ask the commission for detailed reports on short-term investment returns. The fund's investment strategy is a matter for the commission and I have no say in it. It is my strong view that regular discussions between the commission and me on its investment strategy and the resultant short-term gains and losses, which may in any event never be realised, would seriously interfere with the long-term focus which must attach to a fund that will not start to make significant disbursements for over 30 years.

I recognise that the arms-length relationship between the Minister for Finance and the commission gives rise to some accountability issues. To resolve these issues, the Act provides for the appearance of the commission chairperson before the Committee of Public Accounts to give evidence on the commission's policies at such times as the committee may reasonably request. I specifically included this provision in the Act to ensure that there would be direct accountability of the commission to the Oireachtas in respect of the fund's investment strategy. This requirement is additional to the standard requirement that the chief executive of the NTMA, in his role as accounting officer for the fund, appear before the committee whenever it so requests. I also draw the Deputy's attention to the detailed provisions in the Act concerning the format of the commission's statutory annual report to the Minister for Finance. The commission is specifically required to include in the report information on the investment strategy followed, a report on the investment return achieved by the fund and a valuation of the net assets of the fund at year end. These requirements are designed to ensure that information similar to that requested by the Deputy is made available to the public at the appropriate time.

The commission's report for 2002 is due around mid 2003. According to the commission's report for 2001, the total value of moneys standing to the credit of the fund at end year was €7.715 million. This represented a return of 3.27% for the period to 31 December 2001, compared to a short-term benchmark return of 3.24% and a long-term benchmark return of 3.5%. While the fund was invested entirely in short-term cash instruments in 2001 pending the appointment of investment managers, the report also stated the commission had decided on an investment portfolio of 80% equities and 20% bonds.

The National Pensions Reserve Fund Act places a statutory requirement on the Minister for Finance to make a payment of 1% of GNP into the fund each year. I have no plans to introduce amending legislation to change this requirement. To leave discretion in the making of the 1% contribution would, I am convinced, undermine the whole basis of the fund. If discretion were left in the making of the payment of the 1% contribution, it is likely that future Governments would come under pressure to prioritise shorter term economic goals at the expense of making the payment. It is essential that the mandatory contribution be maintained. Once it is breached for one purpose, it is more likely that it will be breached again.

Ms Burton

As an experienced accountant, would the Minister advise his clients to invest over €1 billion per annum in a plummeting equity market despite the fact that his clients – in this case the taxpayers of this country – had lost €500 million on investment markets in the earlier part of this year? Having regard to the Minister's expressed commitment to the principle of the fund and in view of the recent history of the fund and the failure of equity markets, does he agree that it is political correctness of the right gone mad to have the national pensions reserve fund investing in worldwide equity markets from Hong Kong to New York while this country is crying out for investment in public transport, roads, hospitals and schools? Will the Minister explain how it has come about that, in implementing this policy, he may end up borrowing to invest money to lose money?

Mr. McCreevy

Perhaps one could take the view that the whole capitalist system is finished, in which case all our pension funds are at risk, including those of Members of this House, semi-State organisations, individual private pension funds and company pension funds. Every pension fund in Ireland and elsewhere invests in the equities market but if one takes the view that the capitalist system is finished, nobody will invest at all. One can also take a longer term view of what has happened over the past 50 to 100 years in the equities market. On that basis, a reasonable person, as I believe Deputy Burton is, must conclude that returns in equities over a period are greater than anything else. That is why all pension funds are mostly invested in equities, with some investment also in property, bonds etc.

The national pensions reserve fund commissioners are independent of the Government. In appointing them, I have put them as far away as possible from the maw of the Minister for Finance of the day and I have no power whatsoever over them. If a future Minister wishes to change that situation, it will require new legislation. As matters stand, it is up to the commissioners to do as they see fit. As I understand it from the report, the commissioners have gone through a very elaborate process. They have taken a great deal of advice, tendered internationally and then made their decisions, in which I have had no involvement. I take the longer term view that, in times of success, one should put money aside for a liability which arises every day and I believe future generations will appreciate the fact we have done so. Other European countries have not done so and are now suffering the consequences.

I am not in favour of making the short-term adjustment which Deputy Burton's question implies. Once such an adjustment is made, ministerial colleagues and other Deputies will always have various other reasons for spending the money. At best, the 1% of GNP which is being put aside will probably only meet one third of the extra cost of health and welfare at the relevant time. I hope future generations will thank this generation for its long-term view in setting up the national pensions reserve fund.

Mr. P. McGrath

May I ask the Minister to address the question put to him as to whether it makes economic sense to borrow money, pay returns on it and lose money in the process, as the national pensions reserve fund is now doing? Has he considered the alternative of allowing the fund to invest in infrastructure, such as on a build and lease back arrangement? Does he agree that would give adequate returns and deliver badly needed infrastructure? Will he now look at that approach, rather than having 80% of the fund tied up in equities which have performed very poorly, particularly in the last 12 months?

Mr. McCreevy

There is nothing to prevent the pension fund commissioners investing in any infrastructural project, subject to the overriding requirement in the National Pensions Fund Reserve Act to invest prudently and seek the optimum return. The fund was set up on the same basis as any company pension fund. I have no doubt the commissioners will invest where they see good opportunities. As Deputy McGrath is probably aware in relation to teachers' pension funds, trustees of private pensions tend to take a conservative approach – rightly so – in dealing with other people's money. The national pension funds commissioners are perfectly entitled to invest in infrastructural development if they so choose, subject to the rules to which I have referred. However, we must remember that is similar to borrowing from a bank or other investment institution. It makes sense to borrow money to put into the fund in the short-term if, in the longer term, the rate of return will be greater than the rate at which one has borrowed. I already dealt with that aspect in replying to Deputy Burton.

On the issue of losing money, the pension fund has invested in a wide variety of assets and the chief executive of the NTMA has given a mid-year report on those investments and the value of the fund at that stage. However, those are unrealised values. For example, if one invested in a particular share three years ago at the height of the market and it has since fallen in value, one will not realise that loss unless one sells the share. One may hold on in expectation of a recovery in value. Some of the comments made in relation to national pension fund investments have not taken account of the unrealised losses aspect. I should also point out that the money going into the pension fund has absolutely no effect on the general Exchequer balance, which has been the subject of comment here and in Europe.

Ms Burton

Is the Minister satisfied the national pensions reserve fund commissioners deserve to remain in office? They are handling a very large portfolio of investments and, in disastrously falling equity markets, have decided to invest 26% in the USA and another 5% in Japan. Will the Minister bring in some additional expertise, perhaps from within this country, to identify investment opportunities such as in our disastrous public transport system?

Mr. P. McGrath

Does the Minister not think it is ridiculous to set up the national development agency to examine how to raise funds for these infrastructural developments when the national pensions reserve fund already exists? Can he not ask it to take on that brief? The fund's commissioners could do it and invest the moneys in the pensions fund in infrastructure.

Mr. McCreevy

The Deputy and others, including writers, may misunderstand this. If there were opportunities for investment infrastructure which give a good rate of return people would be queuing at the door of the relevant Department to put money into them. The investors may be from the private sector or the pensions fund commissioners. That is not a problem. Any good project which comes up will have people knocking down the door if there is a satisfactory rate of return.

Regarding equity markets, I do not wish to judge how the commissioners made their decisions. It is not my role. When they present their annual report at the end of the year the chief executive and the chairman will come before a Dáil committee to outline details of their investment. They can answer those questions. I do not wish to pre-empt their decisions. If Deputy Burton was able at the start of the year to guess the way in which the markets would return I am sorry that she did not tell Deputy McGrath and me. We could have made a fortune on the market. She is wasting her time here because she could make a fortune in the private sector if she can predict those events.