JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Wednesday, 28 Jan 2004

National Pensions Reserve Fund Commission: Presentation.

Chairman

The joint committee has a remit under its orders of reference to consider policy issues concerning the fund, its annual report and accounts and the fund's overall operational results, statements of strategy and corporate plans. We are joined by Mr. Donal Geaney, chairman of the National Pensions Reserve Fund Commission, and from the National Treasury Management Agency by Dr. Michael Somers, chief executive, Mr. John Corrigan and Mr. Brendan McDonagh, directors, and Mr. Adrian O'Donovan, an official. On behalf of the committee, I thank the witnesses for attending and for providing the committee with material in advance. I look forward to an interesting discussion.

Following Mr. Geaney's presentation, I will open the discussion to members of the committee and the visitors may respond to questions as appropriate. I advise that while comments of members are protected by parliamentary privilege, those of visitors are not.

Mr. Donal Geaney

I thank the Chairman, Deputies and Senators. I am pleased to be here to discuss with the joint committee the work of the National Pensions Reserve Fund Commission. As members know, the purpose of the fund is to provide partial pre-funding of social welfare and public service pensions from 2025, which is an essential concern in view of our ageing population. A great deal has happened since the fund was established in April 2001. In my initial comments, I will outline the organisation of the fund and, in particular, the strategy decided on by the commissioners which informs investment decisions. Before getting into such issues, it will be useful to look at where we are today.

I am very pleased to report that by anyone's standards the fund had a good year in 2003. The mark to market value of the fund at 31 December 2003 was €9.562 billion compared to €7.426 billion at 31 December 2002. Excluding the 2003 Exchequer contribution of €1.1 billion, there was an appreciation of €1.33 billion in the value of the fund during the year. In other words, the fund's investments earned it over €1 billion. At the end of 2003, the fund was almost €300 million in the black by reference to the capital contribution by the Minister for Finance which is a complete reversal of the book losses reported in 2002. The fund will receive its largest contribution yet in 2004. This sum will be €1.177 billion. The overall return on the fund in 2003 was 12.9%.

Sitting suspended at 3.35 p.m. and resumed at 3.40 p.m.

Chairman

We are back in public session. That was the Leinster House version of Haydn's "Surprise" symphony to ensure everybody was awake.

Deputy Ó Caoláin

It is significant that the Government Members have not returned yet. Do they know something the rest of us do not?

Chairman

They did not tell me, which is what really worries me.

Deputy Burton

Is it significant that just as the chairman was saying the fund was doing well the alarm bells went off?

Chairman

There will be many interpretations of the alarm bell before the day is out. It was noticeable, however, that a large number of people were working in the committee rooms. People may believe committees do not do much work, but we all saw the number of people outside when the bell rang. I ask Mr. Geaney to continue. He may wish to restate his final sentences before the suspension in case it was lost in the turmoil.

Mr. Geaney

While the news was good, it was not so good as to warrant such a fuss. As I stated, the overall return on the fund in 2003 was12.9%. Within this, equities were the real drivers of growth at 18.1%, a point to which I will return a little later. Since inception, the fund has outperformed its long-term benchmark by 9.6% due to the averaging-in investment strategy adopted by the commission, which I will also explain in detail in a moment.

The cost of social welfare and public service pensions is projected to increase dramatically in 20 years' time due to Ireland's ageing population. In 2001, the fund's establishment year, there were just over five people at work to every pensioner. By 2025, this ratio is projected to fall to three to one and by mid-century there will be fewer than two working people to each pensioner. This changing ratio is due to two factors, a decline in the birth rate and the fact that we are living longer lives.

This problem is faced by many countries. Our comparatively young population means that we have an opportunity to address the funding question through the National Pensions Reserve Fund mechanism and we have been ahead of many other countries in developing provision for the future. The increase in the number of pensioners to be supported by the working population will have profound implications for the costs of social welfare and public service pensions. It has been forecast that to maintain current levels of provision, costs will rise from about 4.5% of GNP at present to 8% of GNP in 2025, the first year the fund comes into play, to around 12.5% of GNP by 2056.

The bulk of these increased pension costs will arise in the social welfare rather than the public service area, with 80% of overall Exchequer pension expenditure likely to go to social welfare pensions in 2056. I emphasise this point because there has been a misconception to the effect that the fund will primarily benefit public servants or future generations. Nothing could be further from the truth. The bulk of the annual 1% of GNP contribution will go towards the financing of social welfare pensions, while three out of every four people now of working age are likely to benefit from the fund during their retirement. In short, every worker has a stake in the fund and an interest in its success, a fact of which I and the other commissioners are acutely aware.

Turning to how the fund operates, members will be aware that the National Pensions Reserve Fund Act provides for an annual Exchequer contribution of 1% of GNP to the fund. No money can be drawn down before 2025 and from then on drawdowns will continue until at least 2055, in accordance with ministerial rules related to the growth of the percentage of people aged over 65 in the population.

The commission which controls and manages the fund is independent of Government in the exercise of its functions, which include the implementation of the fund's investment mandate. This mandate requires that the fund operate on commercial lines so as to secure the best possible financial return subject to prudent risk management. The NTMA acts as the manager of the fund and the commission performs its functions through the NTMA. Essentially, the fund is structured in the same way as a private pension fund, with the aim of achieving the returns that such funds earn and the commission acts in a manner similar to private pension fund trustees.

While the commissioners determine and implement the National Pensions Reserve Fund's investment strategy, we decided at an early stage to outsource the detailed tactical or day-to-day investment decisions to specialist investment management institutions. Basically, we set the boundaries and parameters within which investments are made.

Strategic asset allocation typically accounts for 90% of returns over the life of an investment. It follows, therefore, that this is the key decision for the commission and to assist us in making it we retained Mercer, the international investment consultants, to advise on an appropriate long-term strategic benchmark. In June 2001, the commissioners considered a range of possible portfolios with different risk to reward trade-offs. The one chosen, because it offered the most attractive balance between risk and reward, was an 80-20 equity and other real assets to bond split, with a 50-50 split between eurozone and non-eurozone equities. It was recognised in setting up the fund that, given its size, Irish equities would never represent a significant holding.

There has been considerable debate around the fund's apparently heavy weighting in equities, no doubt fuelled by the market's poor performance from 2000 to 2002. I referred earlier to the role of equities in the fund. Several other points need to be considered. Equities have historically outperformed other asset classes. This extra return is known as the equity risk premium and compensates the investor for the increased risk of investment in equities as opposed to a more predictable asset classes such as bonds. The commission's investment strategy is based on a conservative equity risk premium assumption of 3% per annum.

Much of the risk associated with equities is the volatility of returns from year to year which is smoothed out in the longer term. As the fund will not have to make significant disbursements until the 2030s it can afford to bear this volatility in anticipation of the increased return which equity investment will provide.

Over the timeframe in which the commission is operating, equities must outperform bonds because investors must be rewarded for buying riskier assets. Otherwise the entire free enterprise system would collapse as there would be no adequate rewards for risk-taking and no incentive to invest in businesses. In short, the fund's equity weighting is driven by its long-term investment timeframe and the commission's statutory remit of securing the optimal financial return subject to prudent risk management.

The NTMA carried out a truly global search under EU rules for managers to run the investments according to the strategy agreed on by the Commission, reviewing 574 expressions of interest, evaluating 178 detailed submissions, interviewing 50 managers and finally appointing 14. Our fee negotiations included securing best or "favoured nation" terms. The NTMA has put in place state-of-the-art performance measurement, attribution and risk management systems to monitor the performance of the managers and to ensure that the risk to the fund remains within the limits set by the commission.

Fund managers are formally reviewed every six months by the NTMA on behalf of the commission. Full reports of these review meetings are made to the commission along with a recommendation for any action which the NTMA might consider necessary.

The next step was to start investing. Upon establishment the fund received €6.515 billion comprising the net receipts of the Eircom flotation and 1% of GNP contributions for 1999 and 2000 plus interest earned on these amounts. The commission was then faced with a decision; whether to commit funds to the markets in one fell swoop or whether to average in over time.

Despite widespread expectations of a US-led global recovery in early 2002, the commission decided that the economic and financial markets outlook was not certain. Therefore, we pursued an averaging-in approach which would reduce the fund's market entry risk by spreading its market entry over time. This enabled the commission to delay its investment strategy as market conditions deteriorated and to mitigate the worst effects of the bear market. Indeed, the fund is still not fully invested. It is currently invested 75% in equities compared with the long-term strategic benchmark allocation of 80% equities. We have already covered the 2003 performance and in 2003 we increased the equity holdings substantially while leaving the amount committed to bonds unchanged.

With the strategic investment strategy in place and the fund's core managers selected and funded, the commission has been considering additional asset classes in its continuing effort to maximise fund returns. We have approved new mandates for small capitalisation equities and corporate bonds and these are currently out to tender. At the commission's request, the NTMA is currently working on business entry plans for investment in property and private equity.

The commission is also keen to access PPP investments where the risk-return characteristics are competitive with other investments and satisfy the fund's statutory commercial investment mandate. A €200 million preliminary allocation has been made available in this area.

My introductory remarks have been deliberately brief as I know that we will explore the issues in greater detail in the course of questioning, but I hope they have provided a useful overview of the commission's investment strategy and have given you a flavour of the work we and the NTMA undertake.

I emphasise that the fund must be looked at from a long-term perspective. Short-termism, which focuses excessively on current performance or on flavour-of-the-month asset classes, will undermine the successful management of the fund. I am confident that the long-term strategic perspective adopted by the commission combined with proper risk management systems and clear manager selection and review processes will ensure that the fund will meet its overall goal of proper pension provision for all those workers who, through their taxes, are contributing to the fund and are its ultimate stakeholders.

Chairman

I thank Mr. Geaney. I am delighted to hear the fund is in the black to the tune of €300 million at the end of 2003. This is good news because the fund was launched at a difficult time.

What are Mr. Geaney's estimations for how 2004 will shake-out? While we know the past, people are more interested in the future. How much of the fund does Mr. Geaney expect to be invested in property in the longterm as opposed to equities and bonds?

Mr. Geaney referred to the €200 million "allocation", rather than "investment" for public private partnerships. Has any of this been drawn down or spent? If many new Government offices emerge as a result of decentralisation, I am sure it would be of commercial advantage to be involved rather than to have every town coming up with its own financial arrangement, depending on the promoters. Perhaps this is something Mr. Geaney could also investigate.

Mr. Geaney

With respect to 2004, the year has started off well; markets have performed okay so far. If I had any idea what the end of the year would be like, I would be ready to retire somewhere very pleasant, and it certainly would not be here in this weather. I do not have a clue as to what the markets are likely to do. My gut instinct is that they will retreat a little bit during the early part of this year, and I suspect that political factors in what is probably the largest market in the world will come into play later in the year and are likely to drive returns however brief in that period. The point I made about the fund's ability to tolerate volatility in markets because of its long-term outlook puts us in a good position. We can tolerate that, given that we know that over any long period of time, equities have always out-performed any other asset class.

We are currently looking at investing in property. Given the size of the fund and the fact that over its lifetime the fund is likely to grow to something north of €100 billion, it is difficult to see how one would get to an allocation that would be more than 10% or 12%. Our initial allocation would not be of that level to get going, but it is very hard to see how one would get more than that in that period.

With respect to PPPs, the words were chosen carefully, the funds are allocated. No commercial proposal has been put to us at this point. The question of funding for other infrastructure or Government programmes was also raised. It is not the business of the National Pensions Reserve Fund to do that, other than through the mechanism of investing in PPPs, which we are quite happy to do, although in regard to PPPs there will be competition for those investments. The first time really good commercial investments are put on the table, it will not be just the National Pensions Reserve Fund that wants to buy them, other pension funds will want them. International funds will also want to buy them, given Ireland's credit rating and so on. I do not expect it will be a question of a lack of capital. The National Development Finance Agency deals with the other question of the funding and perhaps that is the place to which this question ought to be addressed.

Deputy R. Bruton

I welcome the members of the fund commission and thank them for the presentation. I was looking at the Budget Statement for this year, which states that the Government plan is to borrow €9.5 billion over this year and the following two years. Almost half of this, €4.5 billion, will be put into the national pension reserve fund. Therefore, the State is borrowing money to buy shares in the pension reserve fund. It is buying them on tick. Not many investment managers would tell someone to borrow to buy shares or to carry out this sort of operation. What are Mr. Geaney's comments on the wisdom of buying shares not out of Government savings, but out of Government borrowings?

What does Mr. Geaney believe to be the medium term rate of return we can expect on the national pension reserve fund? We have been borrowing money to put into this fund and we are losing on it. This is what the benchmark, about which Mr. Geaney spoke, tells us. However, he is saying that we may not have lost as much as others. That is not a very satisfactory benchmark if one is borrowing and paying 5%. Am I correct in suggesting that when Mr. Geaney says he is €296 million in the black, he is not taking into account the fact that cash investment income was about €700 million to €750 million in the years in question? He is actually in the red and the investments are still losing money. It is not good enough to have a benchmark that may be going down itself and to say that, although we lost money, others may have lost more than us.

Apropos of this, in terms of public policy, the ESRI has indicated that we should be investing our savings in infrastructure. It has suggested that we have an infrastructure-starved economy and that, rather than borrowing money to put into shares overseas, we should be making sure we remove the infrastructural bottlenecks if we want to provide for the future of our pensioners in the longer term. Perhaps this is a public policy issue that goes beyond that of the pension reserve fund, but Mr. Geaney has commented on the wider pension issue and on how we can best provide for it. Having constrained infrastructures may not be the best way to provide for it. The ESRI has indicated that we should lay off paying into the pension reserve fund at present and make a bigger effort than that associated with the rate of 1% after we have overcome our infrastructural bottlenecks.

One of the general concerns I have about PPPs is that the investors are voracious in what they require in terms of returns. They are looking for a 15% rate of return at a time when the NTMA can borrow at a rate of 4.8% — I believe this is the rate for Government borrowing. What is Mr. Geaney's attitude to this? I know he needs an optimum rate of return but when he is approaching PPP projects, for what is he looking? Is he looking for a rate of return of 15% on them? Is this his long-term perspective on what a PPP should yield or is he looking for something less in accordance with his overall medium term rate of return projections for the overall fund?

Mr. Geaney raised the issue of the split between paying into the social insurance fund and paying for public service. We are all paying into the social insurance fund, which is in surplus, yet there is no fund as such because it operates on a "pay as you go" basis. Should we be envisaging actual funds attached to liabilities so a genuine social insurance fund would be created with some of the money Mr. Geaney is now managing such that the contributions would go into the fund as well as the 1%? This would enable us to have a genuine, managed pension fund matching the liabilities being built up and into which contributions were being made. In the public service, where certain people make contributions, should the money go into a fund and be part of what Mr. Geaney is managing on behalf of pensioners?

I notice that Mr. Geaney is hedging against currency loss. Why does he do this when he is working with a lengthy time horizon? How much does it cost?

Mr. Geaney

On borrowing and the related issue as to what we expect will be the long-term yield, I am not sure it is fair to look at borrowing in the context of a €9 billion borrowing requirement and say that half is going into the pension fund and does not need to go there. One could argue equally well that we should fire so many civil servants and not have them at all because we are borrowing to pay for them. I do not know how one ascertains which piece one is borrowing against.

Deputy R. Bruton

I am making the point that most people save to contribute to their pension funds and do not borrow to do so.

Mr. Geaney

If one considers the State finances in terms of households, the point at which one is borrowing is presumably where either one's income is temporarily low and one is forced to borrow or where one has some form of capital expenditure, such as a mortgage. Therefore, I am not terribly sure where one makes the allocation. I am not sure it is fair to say the pension fund is the cause of the borrowing. If one wanted to raise a controversial subject, one could argue that we have too many teachers — I am not suggesting that we do.

Deputy R. Bruton

The 5% cost of that borrowing is a benchmark against which the fund should be——

Mr. Geaney

That is a different question. I agree with the Deputy entirely on that point. This is why the fund is structured in such a way that we are largely looking at real assets, which by definition means property plus equities. The return on real assets in the longer term clearly has been significantly higher than that on bonds or, vice versa, on the return the Government has to give on its bonds — the two are the same. If we consider any 20 year period, we will note that this has been the case.

Our assumption in driving the fund to meet its original objective, which was to achieve approximately 30% to 35% of the cost of the pensions in the future, was that there would be a real return over the period of 3%. In other words, equities will yield 3% on average more than bonds. Historically, that assumption would be regarded as very conservative because the real equity premium is about 6%. If we achieve a real rate of return of 6%, we will do more than we set out to do in terms of our remit. If one wants to judge the fund in terms of its performance over time, one will have to ask if it achieves the equity premium or a figure close thereto. We are assuming this equity premium to be 3%. Over the life of the fund that would amount to an enormous sum. I do not have an exact figure, but it would be considerable by 2050. I am not sure if I have answered the Deputy's question clearly.

Deputy R. Bruton

Mr. Geaney is setting a target of bond rate plus 3% as his long-term target, which is——

Mr. Geaney

We hope to beat it, but it is our target.

Deputy R. Bruton

——way ahead of what has been achieved to date.

Mr. Geaney

Of course, but equity markets were down 25% the first year and 28% the second year. Therefore, it was very unlikely that we could have achieved the target in those circumstances. I will deal with the rest of the Deputy's questions if he is happy with that answer.

Deputy R. Bruton

That is fine.

Mr. Geaney

A question was asked about the rate of return we expect from PPPs. We look at this in terms of the credit rating of the particular instrument. We have not looked at the equity component of PPPs — they have not been offered to us. The IIR expected by equity players in PPPs may be more than 15% in many cases. As regards the debt element of PPPs, usually the majority of the funding in such programmes, we would only seek a couple of basis points above what we could earn on a bond portfolio. This depends on the credit risk associated with the transaction and we are nowhere near the 15% category. If bonds were 4.8% of a period of time, we might seek 5.3%.

Deputy R. Bruton

If the commission takes a risk on a road toll not meeting the expected yield, it will seek a higher rate of return on this element of risk.

Mr. Geaney

Generally speaking, there are two components to the funding of any such project, namely equity risk and bond. The bond component has a lower return and a much lower risk. The equity component has a higher risk and higher return. To my knowledge, no equity proposals have been made to the fund and, therefore, we have not had to address the issue.

Deputy R. Bruton

Will Mr. Geaney deal with the hedging and creating of a fund?

Mr. Geaney

Given that we were going to be involved in non-euro markets, particularly the US and Japan, our decision on hedging was to hedge 50% of the exposure to cover the short-term perspectives. It has turned out to be a good decision. At the end of last year, this accounted for approximately €300 million of the mitigation of the cost of the decline in the dollar and the rise in the euro. If one looks at local returns and compares them to euro returns in the same markets, one will see that while US equities were up by approximately 28%, the return in euro was substantially less. The difference was the currency and we were hedged by 50%.

Dr. Michael Somers

Had we not hedged, we would have lost approximately €300 million.

Deputy R. Bruton

Is there an overall hedging cost across the balance of currencies?

Dr. Somers

It can be argued that the full cost should be hedged as no one knows how currencies will fluctuate. Our advice was to hedge only 50%. There is an argument not to hedge any of the currency risk on the basis that most of the companies the fund invests in are multinationals and what they lose on their home currency they probably gain on foreign currencies, or vice versa. The commission decided to adopt the 50:50 approach and this has gained about €300 million net.

Mr. Geaney

We do not pay a fee to hedge. The last point the Deputy made related to the question of social insurance or overall funding. If taxpayers are promised a pension as a return for paying their taxes, surely they are entitled to have some provision made for it. A "pay as you go" system will not work in 20 or 30 years time. The Oireachtas made a relatively brave decision to adopt this strategy and took a long-term view that will at least provide some of the finance. While it can be argued whether it should be provided in one year or another, and whether surplus from an asset sale should be added, it does not change the profile of the liabilities. Ideally, we would provide for the costs we are incurring as we proceed. One would not be happy if one's company decided not to fund the pension scheme every year and would only do so when it had a good year. We have committed to provide for pensions and social welfare benefits and we must recognise the cost.

Deputy R. Bruton

My point is that there is a surplus of €1.2 billion in the PRSI fund and it is not under management. It is open to be raided by a Minister strapped for cash, as has happened in the past. Should that money not be put under management in the same way as this fund? If public servants make contributions towards pensions, this should be under management in the same way that the commission manages the 1%.

Mr. Geaney

I agree. The funds people contribute to should be sensibly managed. I am not familiar with the ins and outs of the fund the Deputy is referring to and cannot comment on it.

Dr. Somers

The money in the social insurance fund comes within our bailiwick under the NTMA. The Department of Finance has told us that it is under "shortish" term deposit with financial institutions. There is €1.2 billion in the fund and what happens to it is a matter for political decision.

Deputy R. Bruton

Decisions have been somewhat arbitrary in the past.

Chairman

Sin scéal eile.

Deputy Burton

I welcome Mr. Geaney and other members of the delegation. The fund is not a real pension fund and is markedly different from the social insurance fund. The social insurance fund consists of confined contributions by different categories of workers and employers at defined rates, with defined benefits that may be changed from time to time by political fiat. This is rather like the Central Bank's surplus reserve in that it is a form of savings fund. There is no defined system by which the beneficiaries contribute to the fund, except by Government borrowing in terms of national housekeeping. As yet, there is no defined system for distributing to the proposed beneficiaries. He himself stated there is a popular misunderstanding that the key beneficiaries will be social welfare recipients, whereas the popular understanding up to now has been that it may well be different classes of civil servants. I share Deputy Bruton's concerns that in this instance — this is not really a matter for the fund commissioners as it is a political decision — we are borrowing to invest at disproportionate rates.

The other argument that I would be deeply concerned about is that we have a serious infrastructural deficit. In terms of growing the economy's capacity in the future, there is a serious argument that significant funds that become available should be put into infrastructural investment projects, from education to health, roads and rail, so that in the future the economy will have grown strengths out of which it can pay to the future requesters of pension funds. That is not a matter for the commissioners, but is a political decision by the Minister. As a political point of view, however, the notion of growing the economy, particularly through sound infrastructural investment and promoting different types of industry and activity, has considerable merit.

I have a couple of questions on the role of the commissioners. What is the mission of the commissioners in the investment profile and the investment portfolio? In particular, does the fund — and the commissioners, and the NTMA which has an overall supervisory role — have an approach to ethical investment and to governance of the commissioners and their management of the fund which requires the commissioners to pay attention to the ethical and social responsibility dimensions of the fund's investments?

I have last year's report, dated June 2003. It is a pity that there is not a requirement for an interim statement which would allow us update it and, therefore, I am talking about 18 months ago. I ask Mr. Geaney to forgive me but that is all the information available.

Chairman

Are these the accounts up to the end of December 2002?

Deputy Burton

Yes, that is all we have. I do not have any accounts for 2003 and I do not have an interim statement. If this were a private pension fund or a publicly quoted company, we would have some interim accounts but in this case we do not. What I am saying is that, on the questions I am about to ask, I do not have more recent data.

Chairman

They are almost 13 months old. I thought the Deputy said a year and a half.

Deputy Burton

On average.

Chairman

In case the Deputy thought the accounts were up to June 2002, they are the accounts for the year ending December 2002.

Deputy Burton

Averaging the profile of investments and the way they move, what I am saying is probably correct. I want to draw attention to a number of the investments the fund's designated intermediaries and managers made. One is an investment in Halliburton, which has been significantly involved in the conflict in Iraq and which is a significant defence contractor to the United States Government. By and large, as Mr. Geaney will be aware, Ireland has a policy of military neutrality. In the context of the war in Iraq, I would like to know the ethical dimension to that investment.

Similarly, the commissioners have a significant investment in Philip Morris, the major tobacco company — 0.14% of its portfolio according to the last report. The Government and the Minister for Health and Children have spent the last year correctly lecturing all of us about the evils of tobacco and I am not clear if they have a governance statement which addresses the commissioners' ethical and social responsibilities.

I want to give some other examples. On the relationship between US investments and investments in Ireland, for instance, one of the companies the commission had invested in was Parmalat, which we have all read about. There is an ethical governance issue involved in this which it is reasonable to ask the commissioners to address, but another question also arises. If one is investing in Parmalat, that is fair enough because while the company may have mismanaged its accounts, it certainly was involved in cutting edge technology in the area of processed agricultural goods. Why not then have significant investments in the Irish food sector, which may need significant investment? That is a fair question.

I also notice that they have investments, on the sunnier side, in Weight Watchers and in Coca Cola. Currently the politically correct go to great lengths to tell us that there is a obesity crisis in the western world and I want to know about the ethical and social responsibility dimensions to these investments. Coca Cola also has advertised problems with its labour force. While I know Sinn Féin receives contributions from Coca Cola, nonetheless important questions have been raised about Coca Cola's investment.

On the overall policy, they spoke — I accept what they stated — about their investment being for the long term and for the future over a 20-year period. Why then is there in the portfolio of investments a significant bias in favour of oil companies and very little interest or indication that you are investing significantly in alternative technology, which presumably, in the context of the problems with carbon, will be highly profitable investments in 25 years. I would like to hear Mr. Geaney expanding at length on whether they simply are seeking the optimum return, as the Minister fo Finance, Deputy McCreevy, once stated, or whether they have an ethical dimension.

Does the proposal to invest in property and in smaller-scale enterprises have a specific Irish dimension? Do they have a figure for that portfolio proposal? Would that, for instance, include areas of new technology? Would it include Irish infrastructure, for instance, broadband, IT, etc.?

On their comments about hedge funds, does Mr. Geaney have a view about the volatility of the euro versus the US dollar, given that they made an overall decision to have approximately 50% of the equity portfolio broadly on the US side? I would be interested in hearing about that.

Chairman

Does Mr. Geaney wish to respond to the various questions? We are not blaming him for Parmalat.

Mr. Geaney

The first issue raised was the question of borrowing for the fund. As the Deputy stated, this is not the commission's decision. I can only repeat that the liability we are trying to contribute towards is one that accrues every day and the people who will ultimately benefit from this fund are, in my view, perfectly entitled to have that liability covered. Beyond that, there is nothing much more I can say about it.

Deputy Burton

I do not fully understand that statement. Could Mr. Geaney elaborate on it?

Mr. Geaney

The people who would benefit from this fund — or at least four out of five of them — are currently at work or just about to start work. The fund will contribute towards pensions for their old age. They are entitled to those pensions under the current social welfare provisions and indeed in the public sector although, as we have already established, the public sector component is quite small relative to the social welfare component. If we do not fund this over the next 20 years we will be facing a situation in which the cost of these pensions will rise to approximately 12.5% of GNP by 2056. This is considered unsustainable. At that point GNP will be provided by people who are working. For every pensioner there will only be 1.8 people working, whereas today there are 5.4 people at work for every one pensioner. The burden on the individual to pay for something these people have already earned — they have already paid taxes for 50 years — is huge.

The pensioner is entitled to his or her pension. Are we to make a decision——

Deputy Burton

Would Mr. Geaney accept that it is also a legitimate investment policy for the broad economy — or the household economy, as it is described — to encourage the economy to grow? From that point of view, in the interest in encouraging growth in order to provide returns to future pensioners, is there not a profound argument in favour of investment in areas such as PPPs? Mr. Geaney's proposals appear to be extremely modest.

Mr. Geaney

Contributions to the pension fund do not restrict the Government from investing in infrastructure. This is how it is calculated under Maastricht. The money that goes into the pension fund is not considered Government borrowing within the Maastricht limit. It is considered an investment. It also reduces the cost of Government debt because it increases our credit rating. We have a much better credit rating today because of our pension funds and so on than other Governments that do not have them. It is not correct to suggest we are making a decision to scrap infrastructural investments because of a borrowing cap and that we are making a decision to put this money into a pension fund. That is not accurate. It does not count against Maastricht. It is not a decision to put the money into one area and not build a road. I am not sure whether that is clear enough.

Deputy Burton

My question is to the commissioners. They have sizeable funds at their disposal. If, as Mr. Geaney has said, their concern is about the population of pensioners in 25 years, is there not equally an legitimate argument for seeking to assist more significantly the growth of the economy and GDP by investing in infrastructure where there are bottlenecks and where there are proposals available? I find the amount of €200 million that has been set aside extraordinarily modest.

Mr. Geaney

We are in complete agreement with the Deputy. We are more than happy to invest in infrastructure if such projects are put to us. The amount of €200 million was our initial allocation. It is not the total allocation over time. If a good PPP process gets going here it will not require the national pension reserve fund to make it happen. Looking at what has happened in other countries, one can see that when the process gets going — although it takes time for that to happen — there will be competition to buy bonds and equity positions.

It is not that the national pension reserve fund will be the white knight that comes along to put up the money. That will not happen because once it gets going it will go at a gallop and plenty of people will want to invest. I am sure of that, because that is what has happened anywhere else a system such as this has worked. The issue is not about us in this instance, although we are more than happy to do this.

To move on to the question of ethical investments, we have a specific mandate set out in the legislation for our task. The question of governance was decided by the Oireachtas and presented to us. We as a commission do not have a view outside what is contained in that mandate. The mandate was to obtain the highest possible commercial return on these funds — the best possible investment return — commensurate with prudent risk management. That is what the legislation says. We took a decision that it is not our business to reinterpret what the Oireachtas says.

Deputy Burton

Is Mr. Geaney saying there is no ethical or governance social responsibility dimension to the way the commission decides its investment portfolio?

Mr. Geaney

Obviously, if we were aware of a particularly awful type of investment that was agreed by everyone to be clearly unethical, we could——

Senator O’Toole

We should not talk about ethics and governance together — they are two separate issues.

Deputy Burton

As I am asking the question, I will be the judge of that.

With regard to Irish Government policy and our tradition of military neutrality, what is the commission's position on investment in armaments manufacturing companies? I also asked specifically about investment in tobacco companies because of the stated view of this Government that it wishes to do everything it can in this regard. This is a difficult area, but Mr. Geaney ought to know that internationally, so-called ethical investment funds have out-performed those with no ethical dimension. That may be because in the long run, the risk associated with armaments companies, for example, may be rather higher than that associated with less controversial types of investment. There is much international data to show that.

Why does the commission not feel, although it has received its instructions from the Oireachtas, that an ethical dimension would be appropriate? I know it is a difficult thing to do, but it is an appropriate aim.

Mr. Geaney

The first problem is deciding what is ethical. That is a difficult issue. For example, is it ethical for us to own US Government bonds when the US Government may be using those funds to wage war? Is the same not true of British Government bonds? Would it not also be true of many other countries around the world? The Australians have been involved in something else.

Second, the commission deliberately decided it would not make investment decisions about which stocks it would own. The decisions it makes are to do with the selection of managers and the construction of particular types of portfolios. Considering this in terms of the entirety of a fund of this size, the question becomes what types of mandates we should write and what types of managers are appropriate for those. We must run good competitions to appoint those managers and institute systems under which we can monitor their performances on a routine basis, with detailed performance reviews taking place regularly. This is all consistent with our mission, which is to maximise the return while being prudent in deciding how this is done. We do not make those decisions.

Deputy Burton

May I ask a question?

Mr. Geaney

I must explain this point, because I have another point to make. The final issue is to do with the question of active and passive management of funds. By definition, the market overall is not going to be beaten by the market — that cannot happen. The market will be made up of players who are behind and those who are ahead, but over time it is difficult for people to out-perform the market to any great extent.

The cost of active management is around 0.30% and 0.15% for passive so our costs would amount to half. That cost is relatively significant in terms of the percentage of the fund over the long-term so there must be an out-performance over and above the cost of an active manager, which is hard to achieve. Consequently we decided to put half of our funds into passive funds and, because they are passive, they buy the index. That is how Parmalat and the tobacco companies got in there.

Deputy Burton

Are there not programmes for passive funds? Parmalat exists in a different sphere from the other investments but there are models for passive funds that offer an ethical dimension to their use.

Mr. Geaney

I do not believe there are. It is hard to see how there could be a passive fund that is making decisions because it would then be active.

Deputy Burton

From what I have read, I understand such models exist. Is Mr. Geaney saying that investments in tobacco companies are a consequence of passive funds generated by computer under chosen managers? The NTMA has a supervisory role over the managers. Has decision ever been overturned or reviewed by the NTMA and, if so, why?

Mr. Geaney

Not investment decisions. We do not look at individual investment decisions. It would be an impossible task without creating our own investment managers. We would have to establish an enormous in-house operation to make the investment decisions in the way investment managers make them. We regulate the performance by looking at it in the context of the objective. If an active manager with a risk budget is not performing in the context of that budget, he should be terminated. He must be given time, however, because within a risk budget, he will be over or under depending on where he is in the cycle, but if he does not perform and does not use the risk budget, he will be terminated. That is how it is controlled.

We could not possibly manage the detail of individual investments without creating a huge overhead in infrastructure. Our view was that it would be more sensible to out-source them to managers who are professionals and if we do not like what they are doing and they do not perform within the context of the mandates, we change them. It is much easier to deal with.

There are practicalities involved in managing a fund of this size. We have 1,300 equity holdings at the moment and the number is increasing. We are talking about a sum of €30 or €40 billion under management and it would be an impossible task to evaluate every single holding and make a decision to buy or sell it on a daily basis. That is why we have outsourced the whole operation.

Deputy Burton

What is Mr. Geaney's view of the US dollar versus the euro and the implications of what is happening in the American economy? I presume he is hedging against that.

Mr. Geaney

Fortunately, we have been hedged to the tune of 50% against the dollar. I can only offer a layman's view of what is happening. The US balance of payments has been in severe difficulty for a long time, people have been concerned about it for five or six years and it is only now the dollar is reacting to that. The consensus of opinion is that the dollar will weaken further.

The consequences of that are twofold. First, it will improve the outlook for the US economy in due course because it has significant competitive advantages in productivity improvements that we have seen coming through in the figures over the last two years in particular and they will continue to be strong. The productivity must, at some point in time, convert into a better export performance.

Second, the complete opposite is true for Europe, so productivity will become a greater issue. The decline in the US dollar could be the mechanism that will finally get Europe to address the structural changes that are required in the long term to produce reforms in economic structure and productivity on mainland Europe. Nothing else has done it so far, so perhaps this will achieve it — I do not know. That seems to me, however, to be the likely consequence.

From an Irish perspective, it will not have a huge impact either way because we have been to the forefront in increasing productivity. We always complain about our competitive position but the fact that we are complaining about it and everyone here is conscious of it is a good thing. Ireland has shown its ability to be competitive and to make the necessary productivity gains when needed. I am encouraged that the economy is doing better than we expected and the reality is not as gloomy as was forecast. It is like the snow we did not get this week — it was threatening and threatening but it did not arrive. I am encouraged about the outlook.

Given the size of the fund, we will be looking at property in an international context. Over time, if we are looking at a very substantial investment, it would need to be an international investment, although that does not preclude us from buying Irish property.

Deputy Ó Caoláin

I also welcome the representatives of the National Pension Reserve Fund. This gives us an important chance to discuss it. I mean no disrespect when I say the National Pension Reserve Fund is the child of a seasoned gambler — that is how I view it. We must recognise, however, that the National Pension Reserve Fund is of huge importance. It will have a significant impact, not necessarily on our lives but certainly on our children's lives, given that there is a massive, ongoing investment of public moneys.

People were rightly concerned with the performance in 2002 but according to the Chairman everyone wants to move on and forget that. However we will leave those remarks aside and carry on. The recorded loss of €737 million in that year was shocking but it brought people's attention to the fund and underscored the importance of careful scrutiny. Mr. Geaney believes in the long term such peaks and troughs are levelled or smoothed out, but is it not the case that long-term investment of this nature is equally open to the risks of long-term vulnerability and the potential downturns in the international market? He could not give an opinion as to the outworkings of 2004 but no one can suggest that in the long term everything is safe in this regard. It is not the case and no one has the power of crystal ball gazing, yet we must look at the international stock market and the future for our children's pension entitlements and so on. That is one reason why I, and others, strongly advocated investment in infrastructure and public works, to see real investment that would make a critical difference in the lives of ordinary people.

Before Christmas the Minister for Transport, Deputy Brennan, was reported as having stated that contacts opened up with Mr. Geaney about an investment of €650 million in the widening of the M50 and the elimination of some roundabouts, and he or people from his Department "coaxed" Mr. Geaney with the carrot of control over tolls between 2015 and 2035. Mr. Geaney did not refer specifically to that in his address to us today. Could he comment on that statement? If it is the case, can he confirm that the report was accurate, or was it edited erroneously? I would like Mr. Geaney to set the record straight for us. While I want to encourage him in that area I also wish to apply a brake to his enthusiasm, if he has any, by saying that I would not support extensive tolling. We must take a measured approach. It is very important for us to know exactly where Mr. Geaney stands on this and I presume his reference to PPPs is an image for the future.

Can he explain the relationship between the National Treasury Management Agency and the National Pensions Reserve Fund in lay terms? The portfolio of investments up to 31 December 2002 includes the Imperial Tobacco Group. I do not know the status of these investments. I will not repeat what Deputy Burton said but I have other views which support and complement her arguments.

The Imperial Tobacco Group is involved in increasing the market in Africa. The developed world as we see it is being continually pressed, and rightly so, on debt cancellations, support in the fight against HIV and AIDS and other measures to relieve the economic and health distresses experienced by people in Africa. While public awareness is reducing the tobacco market in Europe, the manufacturers are heaping the problems and experience of the West on to an already terrible situation in Africa. The people there will develop all the additional health problems which result from smoking tobacco, apart from the passive smoking risks.

There are very sound and valid reasons why the National Pensions Reserve Fund should pause in considering some of the areas in which it is prepared to invest. Deputy Burton has talked about the domestic contradictions in terms of the Government's views vis-à-vis tobacco smoking and passive smoking risks and the fact that the National Pensions Reserve Fund is investing in major producers such as the Imperial Tobacco Group.

There is also in the Canadian portfolio a reference to CAE. This is one of the top 100 so-called military technology providers. Mr. Geaney said that the National Pensions Reserve Fund sets the boundaries and parameters within which specific and individual investments are made. Does the National Pensions Reserve Fund bring it further? Are there specific areas that it would exclude from the portfolio? Has the Government laid down ethical guidelines on the establishment of the fund or has that been addressed?

Mr. Geaney

No. There are no ethical guidelines set down for us, other than that our job is to earn the highest possible commercial return in the context of prudent management and investment decisions within prudent risk parameters. Depending on the type of portfolio, we give to risk budgets to different investment managers, which is a way of measuring how much risk is taken in a portfolio against a benchmark and we expect them to outperform those benchmarks. The sum of those benchmarks returns us to our overall position in the fund. Those are the parameters and the performance yardsticks we use.

Whether we will ever get to the bottom of what is ethical and who should make that decision, I do not know. I do know that different people have different views as to what is ethical. It depends on countries and people go to all sorts of extremes on point of views on both sides. For example, there is a body of people who suggest that any company that makes contraceptives is an ethical company. However, some argue that those that sell contraceptives are unethical and, therefore, we should not have any shares with Boots the chemists. There are other people who have an opposite point of view. There are people with an ethical problem with the "morning after" pill that the French invented. It is a difficult task to determine this issue.

The Deputy asked me if there are certain companies the National Pensions Reserve Fund would definitely not invest in. The fund has not been faced with that particular decision as such. However, I cannot imagine investment in prostitution, even though it might have a good return. I cannot see the fund making a decision such as that. We would probably be concerned by managers who made such decisions. Beyond that, where there are shades of grey it is difficult to make determinations.

Some of the companies that could be considered quasi-questionable or come on the radar of ethical investments can also produce many other items. The Philip Morris group owns the Nabisco brand that produce Oreo cookies which are very different from Marlboro cigarettes. One could argue that Kerry Foods plc is an unethical investment because it makes ingredients that go into food production which goes to armies. Does Kerry Foods state that its foodstuffs cannot go to armies? I do not know where one draws the line.

Deputy Ó Caoláin

Mr. Geaney is saying that the National Pensions Reserve Fund has no ethical guidelines prescribed by the Government nor are there any companies excluded by the reserve.

Mr. Geaney

Again, I will say clearly that we have not instructed managers in making their individual investment decisions. We have set out what we expect in terms of return and what risk budget is involved. This is consistent and prudent in the context of the overall mandate of the fund. It is up to them themselves to perform. If they perform well, we are happy with them. If they do not perform, that is another matter. That is how it works.

The Deputy referred to the 2002 performance which saw the fund on a mark-to-market basis substantiallydown in that period. That was an upsetting and distressing period. However, we have taken some comfort from the fact that we did not follow the advice received at the time to plough right into the market in 2001 and early 2002. For example, the Irish Association of Pension Funds came out publicly to urge us to commit all of the funds directly to the market at that time. Incidentally, it was not following the same course. However, we ignored that sensible advice on the simple common sense basis that there was too much uncertainty and concern. There was no clear sign that economies were coming back and we took a cautious approach. That was the NTMA's view and it was shared entirely by the commission. If it had not this view, we would have it and vice versa. It was a careful and sensible approach.

I must stress that the loss as reported was a mark-to-market one. It was not an incurred loss in the sense that if one did not sell the securities, one had not actually lost. It was down in value and yet if one has not bought those securities and used the cash at that point of time, one would have a better uplift. The only way to deal with that was on a gradual incremental basis and commit more money as we got more confidence.

I stated earlier that we did not buy any more bonds in the latter part of 2003. This was for the same reason. We did not keep our bond percentage up to the 20% mark. It was obvious that interest rates were unlikely to go lower and there was no great sense in doing that. It is practical common sense more than anything else.

The way one deals with the volatility is through a long-term approach. If one has a long-term horizon, one can take a volatile market. It may look awful to be down. The €700 million, as Deputy Richard Bruton pointed out earlier, is the net amount. The income was actually several million euro on top of that. If one wanted to take the various components apart, it was worse than €700 million. One can take this approach if one is not selling out because markets go up and down. The problem begins when one sees the crystallising of one's liabilities. That is the point in time to adjust one's appetite for volatility. It is obviously not going to be my problem but for those in charge in 2017. They will have to check how much appetite they have for volatility. The drawdown on the fund will begin then and they will have to begin easing off the amounts in equities. It may come down to 75% or 70%.

In the UK, we have had examples of pension funds that are very mature. Boots, in particular, had got much praise in the 1990s for its decision to go into bonds and sell all its equities. It looked like a great decision when one looked back at it because of the way the markets fell apart. The reason Boots made such a decision was it spotted the profile of its fund's liabilities because they were maturing. The number of active people in the pension fund was lower than the number of retired people. The draw on the fund was much higher than the income coming in and the fund could not take volatility. I am not sure if I have explained that adequately

Deputy Ó Caoláin

I understand what Mr. Geaney said. There are differences of opinion but I do not intend to press on them. There were other matters I raised that I would appreciate comments on. The first is the comments made by the Minister for Transport, Deputy Brennan, before Christmas. The second is an explanation in layman's language of the NTMA's relationship with the commission.

Mr. Geaney

The Minister for Transport and his departmental officials did not talk to the commission per se. The Minister has spoken to me — not his officials — on the progress of PPPs. I will ask Dr. Michael Somers to speak on the conversations with the NTMA because there is more than one hat being worn on this matter. There is a National Development Finance Agency, which has nothing to with the National Pensions Reserve Fund Commission, but is a player in this area. I am aware that they had conversations around that time.

With reference to the relationship between the NTMA and the National Pensions Reserve Fund Commission, the legislation mandates that the NTMA will be the manager for the first ten years of the life of the fund. The commission sets all the policy and reviews performance. It sets objectives and monitors what is going on. The NTMA, as the effective manager, carries out all the control and administrative functions and manages the investment managers on our behalf. It provides the executive. That is the relationship between the two.

Deputy Ó Caoláin

Mr. Geaney gave me the most minimalist answer in regard to the contact with him by the Minister for Transport, Deputy Brennan. Can he elaborate on the proposal vis-à-vis the expansion, the widening of the M50 and so on? Is he progressing an interest with the Minister in regard to that specific project?

Mr. Geaney

To be clear about what I said, the Minister, on a number of occasions, has spoken to me directly. If "coax" is the word he chooses to use, that is perfectly fine. I have explained to the Minister our great interest in this whole area, and we have no dispute on the matter, but the mechanism for how his Department interacts to access the fund or other mechanisms housed within the NTMA goes to the NTMA, not directly to the commission.

Dr. Somers

I will try to clarify some of the issues that have arisen. The NTMA wears a number of different hats. We were originally established to manage the national debt and borrow on behalf of the Exchequer. We also act as the manager for the pension fund. We have a number of other roles also, one of which is to run this National Development Finance Agency, which came out of the Fianna Fáil manifesto and the programme for Government.

The National Development Finance Agency has three roles. One is to provide a centre of expertise that Government authorities can approach if they are doing PPP projects or complicated funding mechanisms for specific infrastructural projects. It can also borrow or guarantee up to €5 billion and set up special purpose companies. Most of this is done with the agreement of the Minister for Finance. The idea was that if one has, say, a PPP project, a town bypass or whatever, the National Roads Authority could ask for a quote on the basis of design-build-maintain-operate, and then ask for another quote on the basis of design-build-maintain-operate and finance. If the finance aspect looks excessive, the other option open to the Government is for the NDFA to come in, raise money on the markets and fund that particular project rather than have the private sector fund it.

It was mentioned earlier that the private sector in some instances could be looking for a huge rate of return in respect of its investment in some of these PPP projects, so this gave the Government an alternative way of funding them. The project could still go ahead, and instead of the private sector doing the funding we would put on our NDFA hat and provide the funding. I was curious when I read the interview which the Minister, Deputy Brennan, gave and I think there must have been some misunderstandings on some of the issues mentioned.

I will tell the committee what I know about the M50, a lot of which is anecdotal. To do a full upgrade of the M50, that is, to put down a third lane in each direction and put in clover leaf intersections instead of the crude intersections in place at present, the total cost could be of the order of €750 million. A portion of the tolls collected on the Westlink Bridge come to the State. I think they come to the National Roads Authority and that it gets about €8 or 9 million per year from the tolls. From 2020 onwards, the full toll will revert to one of the organisations of the State. I am told that the net present value of those tolls is of the order of €400 to €500 million.

There has been talk as well that instead of doing a full upgrade of the M50 there should be some sort of partial upgrade, widening it to three lanes from the airport to somewhere around Tallaght, I think, and putting in a few clover leaf intersections. This would cost in the order of €300 to 400 million. If that is the case, those tolls could be securitised, and the State should be able to get enough money from those tolls to pay for at least the partial upgrading of the M50. If that is the way the Government decides to go, the involvement of the National Pension Reserve Fund would not arise because the project should be largely self-financing if the State is prepared to give up the receipt of the tolls it is getting at the moment. Wearing our NDFA hat, that is what we have been looking at in association with the National Roads Authority and so on.

In regard to other bypasses, it is extremely difficult to find PPP-type projects which make commercial sense in the sense of giving a financial rate of return sufficient to cover the cost. There are three that I am aware of at the moment — the Dundalk bypass, which has already been dealt with, the Kilcock-Kinnegad bypass, which I understand is being done by a Spanish consortium, and the Fermoy bypass, which I think is to carry a toll.

We have no interest, by the way, in tolling anything. It is not part of our function to impose tolls. We are completely agnostic on this. If people want to impose tolls and want them securitised, we are certainly there to assist them in doing so.

We had some previous involvement in this, I think in 1996, when the Government decided to sell off the State's mortgage book. We set up a company called Ulysses Securitisation and used it to issue bonds. The mortgage payments would then come into the company in order to meet the bond repayments. Obviously there was a mis-match in terms of cash flows, so we put on our NTMA hat then and acted as a swap counter-party between the Ulysses outfit and the Office of Public Works, which I think was the payer at the time.

That has worked well and we got a lot of experience in doing that type of securitisation. We can usefully bring that to bear on the M50 if that is the way the Government wishes to go. I do not know if that answers the Deputy's question——

Deputy Ó Caoláin

That is fine. I appreciate very much the time taken, and I am also conscious of colleagues who want to come in after me.

Deputy Boyle

I begin by stating that I probably have an interest. I should be 63 years old in 2025 and 65 years old in 2027, but of course by that time the retirement age will have moved to 80, so I might not benefit at all. In regard to this initiative I probably have a more personal interest than most.

I wish to ask a few questions about the real value of the fund and return to the question of ethical investment and how it is being defined or not defined, as it happens. Regarding the real value of the fund, Mr. Geaney talked about a book value increase of €296 million over the life of the fund. As Deputy Richard Bruton has mentioned, there is actually a cash loss balance still in existence. Does the National Pensions Reserve Fund discount for the value of inflation, for instance? The telecom moneys have been there for the best part of three years so that money has been discounted accordingly over a three year period, and the inputs made on an annual basis on foot of each budget should have been discounted for inflation since.

The NTMA seems to be taking account of currency fluctuations, but I presume that is a degree of the percentage of hedging because one does not know the extent to which the dollar will depreciate or how fast it will depreciate over any given period. Mr. Geaney might comment on that. There is a third element in determining the real value of the fund, and I know that Mr. Geaney has talked about this in regard to previous contributions, arguing that the total value of the fund's input should not be taken as the contribution to borrowing that exists now. The total value of the fund's input should surely not be taken as the contribution to borrowing that exists but as a percentage of overall spending. At least the amount that is going into the national pension reserve fund and the cost of borrowing that percentage element of the total expenditure in the State should be factored in as a cost of the fund itself. If one takes all those factors into account, the real value of the fund is much diminished, and it might take a few years before it even reaches break even point.

Mr. Geaney

To be clear, the real value of the fund at the end of the year was €9.562 billion. The returns earned on the fund are a different question. They are calculated by reference to global investment performance standards, which is a standard way of calculating returns. It weights when contributions are received and so on. The €296 million is the surplus over and above the capital contributed by the State. That surplus is calculated from income and losses. That is what surpluses are made up of, and that is what the surplus is.

I accept the member's point that, if one wants to examine the return on the fund over time, one must look at the cost of the fund. The fund is obviously not free. One can examine it in one of two different ways. One can look at it in terms of the reduction in the interest bill that one would otherwise have had if one had used the fund to pay off a portion of the national debt. However, we say that we must earn considerably in excess the cost of the bond return, which is the same as the cost to the State — since the State is giving the return in that instance — because of the effort and trouble involved. That is where the issue of the risk premium for equities comes into play. The theory — and please God it turns out to be true — is that, if we have invested in the right types of assets over the period, we will earn a surplus over and above what we would have saved by not having the fund at all. Does that make sense?

Deputy Boyle

I can understand the theory, but many of us are sceptical about whether that will turn into reality. I am curious about Mr. Geaney's first answer to the Chairman about the factors that will influence the fund in 2004. In particular, he pointed out that, in the early part of the year, there is likely to be some form of market correction, meaning that the return will not be as great as it was in 2003. He also mentioned politics as one of the factors that might influence the degree of return in 2004. That suggests to me that the markets are politically influenced. I presume that Mr. Geaney is suggesting the American presidential election, feeling that the re-election of George Bush might be looked on more favourably by the markets. That being the case, I would fear that judgments of this type regarding a national asset in the long term are, or could be, influenced by such political factors.

Mr. Geaney

I thought I was answering a question from the Chairman about my personal view of what would happen in the markets. I do not wish that to be interpreted in any way as saying what we will do regarding the pension fund. If my personal view were the only thing taken into account, we would probably be doing far worse. I would probably have accepted the great wisdom handed down to us from all sorts of parties who were saying that, if we went for it then, in the early stage of the fund, we would get a huge return, since markets would recover and economies boom. The simple fact is that they did not.

One must sit back and say that this is not a personal matter but a responsibility on behalf of almost all the pensioners in the State, taking a slightly more prudent view. That is why the Oireachtas passed a law specifying commercial return consistent with prudence. As it turns out, if we had gone down the other road, we would have made a better return in 2003, since we would have had more equities. However, we might make a worse return in 2004 and a different one in 2005. One must be sensible about such matters, trying to take a pragmatic, practical view given the longer-term nature of what we are doing.

The way we would take into account the degrees of uncertainty or changes in the financial market have to do with tactical changes in the asset allocation, meaning that one might invest slower or faster, or prefer equities to bonds. It will never mean that we restructure everything from the general guideline of 80% to 20% so that we go to 10% and 90% or vice versa. The execution costs of doing that would never pay for the likely return. One would have to pay all those costs to carry out the change in strategy. One must factor that in too.

It is really easy to sit back and pontificate about the matter. I am sure that members feel that we have pontificated enough to them. One must be practical, and the fund's performance must be judged on the return in excess of the cost of Government debt over time.

Deputy Boyle

I take it that the fund has no vested interest in encouraging the re-election of George W. Bush.

Mr. Geaney

I make absolutely no comment.

Deputy Boyle

I do not want to go over too much old ground, but I find Mr. Geaney's definition of ethical investment fascinating. He seems to accept that some areas are unacceptable for the fund to invest them, mentioning prostitution as an example. At the same time, he seemed to be saying that he gave no guidance whatsoever to fund managers. Technically, it is, therefore, feasible for investments to be made in areas where prostitution is legal. They may have been made already. Someone might be making that decision today.

Mr. Geaney

If they were in the index, I suppose that could happen, but none of them is big enough to be in the index, as far as I am aware.

Deputy Boyle

Is it not something that the fund can look at? Surely there are areas of unease which are consistent with a consensus approach to ethics. I accept what Mr. Geaney says about different people having different ethical concerns, but there are large areas where there is practical unanimity among people uncomfortable that pension funds from which they might benefit will be gaining. I do not want any money earned from Halliburton.

There is no harm in recommending policy changes on behalf of the national pension reserve fund or the National Treasury Management Agency. There is a need not only to exact maximum return but to ensure that the money is earned in a manner consistent with all the other policy objectives that we have as an independent nation.

Mr. Geaney

That is a very small element.

Deputy Boyle

While Mr. Geaney accepts that there are areas in which the fund should not be involved, he is also saying that he is not giving particular direction and that there is a technical possibility that investments might happen through his very inactivity in involving himself in the area.

Mr. Geaney

It is not a matter of the fund never having thought about these issues. They have been raised with us, and we have considered them. I admit that they have not been a major priority to date. That does not preclude our thinking about how we might do something about it in future. Our big difficulty so far has been to get anywhere near the question of a definition that is consistent with our mission.

Senator O’Toole

Without equivocation, in terms of the remit that was given to the NPRF by virtue of the legislation, it has been discharged effectively and fantastically well. The people who criticised the NPRF last year in these Houses for losing money did not formally recognise this year the gains that have been made. One cannot win in these situations, but issues have been raised here today which are not in the legislation. That is why I make that point at the outset. Real issues have been raised which the committee will have to come back to.

I want to raise three matters. What Mr. Geaney has said on demographics looks to me to be old stuff and I do not accept it. The comment is made somewhere in the statement that European fertility rates have decreased since the 1970s. The first thing to say is that European fertility rates did not move in concert. In the Scandinavian countries, followed by Germany and France, the fertility rates dropped below the renewal rate of 1.1%. Consequently huge investments in pro-natal policies were introduced, particularly in Scandinavia and France, to change the trend around, which they did. The Catholic countries were late into the market. In terms of the graphs the two groups were inverts of each other. They did not move in concert and they never do.

I make the point, not because this needs to be discussed by the committee, but because self-preservation of the human race informs all. No country will ever allow its fertility rates to drop below renewal levels. That is why I believe judgments cannot be made on that basis. That comment might have been in the document itself.

In Mr. Geaney's presentation the reference to the birth rate is equally questionable. It does not factor in immigration. It does not factor in many other things such as people working longer. Neither does it factor in increased productivity, which is taking place all over Europe. I am not blaming Mr. Geaney for that but some of that stuff is quite old. I do not think it stands up. The statement and background looks to me to be very like what was stated around 1996 with the establishment of the Public Service Pensions Commission around that time. Much has changed in the meantime. We should look at what has been happening in the last few years. People are still talking about declining birth rates in Ireland. Our birth rates peaked with the papal visit in 1979, then dropped but they have been coming back up again since 1989. The masters of the national maternity hospitals can confirm that.

Some of the points he is making are enormously important and I wish he would say loudly to the world at large what he said earlier to Deputy Bruton about pension funds and the need for people who pay a certain percentage of their funds, whether in the public or private sector, into a fund which should be managed. Unfortunately, the pay-as-you-go regime, which is all over Europe, is going to be a great problem. Mr. Geaney should state for the record that our exposure in terms of pension liability is far less worrying than in many other countries in the European Community, particularly Italy and even Germany. We need to reassure ourselves, particularly people in this area who are involved in the policy area. That needs to be stated clearly.

I do not understand the point he has made — and I would ask him to repeat it — in reply to Deputy Bruton's point about hedging. I can understand hedging, in terms of running a business, buying and selling within a particular area. I recognise the fund has a certain amount of investment in the dollar area. However, unless there is much movement out of dollar denominated equities or bonds I do not see the point of hedging an investment, which is a management of risk in the first place. I do not understand the connection between the two. Perhaps I did not hear it properly, but I would like to hear him spell that out again, in terms of how it happens. I have no difficulty with passive investment in indexing, but it bothers me that we are paying fund managers to do that. In many cases someone is just being paid to follow the weighting in the index. Can that not be done by computer? I know a manager has to gainsay it.

That brings me on to the question of managers. I applaud the great trouble the NPRF has gone to in the documentation to ensure the proper governance of companies that manage funds. That is important. Having said that, it is somewhat specious to refer in one strong paragraph to corporate malfeasance undermining confidence, then say that the SEC requires all chief executives to sign off and to swear that company returns and financial reports conform. It requires chief financial officers, not just CEOs, to do the same. In addition the New York Stock Exchange now requires more than half of a company's directors to be truly independent of management. Why is the committee being told this? It does not seem to impact anyway, no more than what was said to the committee about ethics, if one looks at what is happening. It is there and it seems to give us a crutch, but it only applies to the United States.

I agree with the low level of investment in this country. It would be a vicious circle for us to invest in our future twice, both in the country and then try to gain from this in 25 years' time. The weighting is the only way to go. It is up to Government to deal with the matters that were raised earlier. Why does Mr. Geaney tell us this? I have never heard the NPRF say half the directors of Irish companies should be truly independent of management. That is not a guiding principle in its investments. In terms of what it is telling fund managers to do, it does not require them to invest in areas, geographical or otherwise, which conform to the level of governance as outlined, or indeed in the area of independent directors. These are important issues.

I am not saying it can be changed, but that leads me to the question of ethics. I do not think it is good enough to respond to ethics on the basis of conscience. It is not because some people might be opposed to the selling of contraceptives or stuff like that. There must, at some stage, be ethical measurement and that must be applied to management. I accept Mr. Geaney's assertion that he is not in a position to make that stick. However, we as politicians cannot get away from the fact that as we talk about the issues raised by different people this has to find root somewhere. Can this only be done through legislation or are there other ways? I would like Mr. Geaney's views. He does not need to re-state what he has said, effectively that it is not within the NPRF's area of competence because it is governed by the requirement of prudence etc., which does not allow it. I accept that. However, is there a way of making it work?

I would like to hear his views those three areas of demography, governance and hedging as well as ethics, in terms of moving forward. I have listened carefully to the answers given so far and there is no need for him to re-state some of the comprehensive responses he has given and which I appreciate.

Mr. Geaney

In the context of demographics and what is being looked at, the question of the declining birth rate is considered in the context of hindsight. We have had a declining birth rate, if one looks at where it was compared to 1975.

Senator O’Toole

I accept that, but it does tend to go upwards.

Mr. Geaney

I agree with Senator O'Toole that it is probably not very accurate to make the assumption that nothing else will change between now and 2025 or 2050 or whenever. It is unlikely that there will not be productivity changes in that period. If we really do get the sustained benefit of improvement in nutrition, which we have and we have a healthy population, it is not too great a leap of the imagination to believe people will still want to work and earn beyond the age of 60 or 65.

It is not too hard to see that one of our goals as a society might be to make the extra years that people live worth living. I am not necessarily sure that being retired for 50 years is necessarily something that people will find very engaging, particularly if you are healthy, fit, able and active. You may not necessarily want to be retired for 50 years.

Senator O’Toole

I absolutely agree with that and in the United States a different approach has been taken. Successive Irish Governments have consistently looked at a person working until a certain date, stopping and never working again. In the US pension legislation has been changed so that somebody can work half-time, draw half a pension and continue to pay into the other half of the pension. In that way people do not stop work on a particular date. One can see from the Budget Statement that we are headed in that direction, but it would be very valuable if Mr. Geaney would make that statement in the public domain, that people would work, having reached 65 years, as long as they would not have to work a full day every day and yet have the flexibility to draw their pension and earn at the same time.

Mr. Geaney

I think the Senator is right and I agree that there has to be a change in the approach. The age of retirement at 65 years was introduced at a time when the average male life expectancy was 65 years. Nobody expected to retire on average. It was only the lucky man who was able to retire, the others were dead. That is a fact.

Senator O’Toole

None was in the trenches.

Mr. Geaney

Of course not. Senator O'Toole commented on the US model and it is true that things are happening in the US, but they are not all exactly delightful either. There are good things but other aspects are not entirely thrilling. If one goes into a Walmart store, one sees many old age pensioners working, which does not sound very fulfilling. On any golf course, the rangers, marshals and those who do not earn very much are "retirees" in a second career. I think we could do a bit better than that, particularly if we are to have a continuous investment in education.

Senator O’Toole

Does Mr. Geaney favour Brussels over Boston?

Mr. Geaney

Not at all, I am not making that statement. I am suggesting that perhaps Irish people deserve a little more than being relegated to Walmart. We are concerned about the question of demographics and we have a responsibility in the legislation under remit to look at it and to assess the liabilities. We will be doing that approximately every five to six years through the life of the fund. We will need to look at it actuarially and we will need to look at the assumptions and hopefully the assumptions will change, because we would all be pleased if they did.

The only point I was making is that the corporate governance crisis as it appeared in 2001 and the early part of 2002 led to a collapse of confidence in the markets and it pulled the market down with it. It was not only impacting on companies that had bad governance but on all sorts of other companies who had perfectly good governance. We had a very interesting experience recently. We invited a senior fund manager from the UK to come over and talk to the commission about his experience in running a long-term fund. Somebody asked him about corporate governance and his answer was that only four things were important in corporate governance: have they the right business strategy, the right board, the right management and the right balance sheet? He never mentioned one word about the SarbanesOxley Actor any of the other items commonly referred to as corporate governance. If you think about it, he made a very sensible point. There is not consensus on what really makes sense in that area.

In the context of ethics generally——

Senator O’Toole

Does Mr. Geaney feel he has a responsibility to push proper governance, because even those four points are all dependent on an ethical honesty?

Mr. Geaney

The corporate governance question was raised largely as a result of massive fraud. I realise that fraud has not been proven yet in a court of law. One finds people who have taken hundreds of millions of dollars from companies which have gone bust because there were no assets, when there were supposed to be large amounts of assets, as happened in the case of WorldCom and Enron in particular, the two really nasty cases. That was fraud and not governance.

I had the experience of being in the United States when the Enron audit committee was being interviewed by the Joint House and Senate Committee that was inquiring into their affairs. All of these very worthy people, including a former minister from the British Government, were sitting there being interview and they spoke of their procedures, which sounded pretty good and up to the mark but they just did not catch collusive fraud. We may have gone over the edge, but the Enron fraud did rock confidence. That was the point we were trying to make, even if we did not make it very clearly.

On the question of ethics in general, even though it is very difficult to define, our view as a commission would be that we would want to be associated only with ethical companies and involved in ethical things. Defining ethics is another matter but assuming we can define them we would like to be involved only in those types of situations or, at a very minimum where breaches of ethics have taken place and something has gone wrong, we would want to be assured that the appropriate actions were taken. One can never expect that everything will be absolutely perfect everywhere one goes. What one can expect is that when something has gone wrong, that appropriate action is taken immediately and things are dealt with properly. In that situation we would consider that the company was operating ethically because one cannot govern everything. People are human and they make mistakes or they get it wrong. Some of them are not good.

Senator O’Toole

I asked about hedging.

Mr. Geaney

The long-term argument about hedging is definitely if one is to invest in a market, one should be investing in that market in the belief that the market will make returns over the long term and consequently it should not have a significant fall-off in currencies and whatever else as a result. That would be part of an investment decision. From the point of view of the fund, the advice we received was it might be prudent to do a 50% hedge, to take out the short-term extreme volatility that one might experience, which is what we have done. That was why our return in local currencies from the US market this past year was better than it would otherwise have been. That does not mean that if things go the other way next year it will not be the same. At the end of the period it has no effect at all.

Deputy R. Bruton

How does hedging work?

Mr. Geaney

One of our experts, my colleague, Mr. John Corrigan, will explain exactly how they do it.

Mr. John Corrigan

We sell dollars against the euro so that it immunises the capital value in dollars on translation into euro from the effects of the dollar's decline against the euro.

Deputy R. Bruton

Does the fund not have—

Mr. Corrigan

: No, but it means that something that is worth $100 million dollars and there is a one for one exchange rate today that is worth €100 million and tomorrow the dollar declines, based on the exchange rate of a $100 worth €95, if one is hedged, it means that it continues to be worth €100 million. It immunises one from the translation effect. The currency is a random walk and is very difficult to predict. The approach the commission has taken in terms of the 50-50 approach would reflect what many funds do internationally and would conform with the practice pursued by major funds. While it means that the translation effect can go the other way and, as the Chairman said, over the life of the fund is perhaps a zero sum game, it immunises one from very sharp declines in currency where one is holding assets.

Chairman

I do not understand what Mr. Corrigan is saying and wish to tease out the matter. Is he saying that the hedging is really only to cover the balance sheet for 31 December — the translation results — in case it reported a bigger loss due to currency? Is it just to cover the next 12 months? What is the significance of covering 24 or 36 months if, in the long term, it will all balance? This is what the committee does not understand.

The way to balance in the long term might be to change the 50-50 ratio slowly or marginally over a long period, for instance if one felt that the euro was to become a more dominant world currency over the decades. However, in the short term, given that all that is being recovered are unrealised gains or losses in a balance sheet valuation at the end of December, why bother? If these are not realised gains or losses, one is actually incurring a cost to cover what is only a book valuation at the end of the year. I hope I am making myself clear.

Deputy Burton

Is the Chairman not talking about currency fund management?

Chairman

The NTMA has indicated that it is not paying a specific fee for hedging. I do not understand what it is hedging against if the gains or losses are unrealised and will sit there in the long term. What is the agency hedging against?

Mr. Corrigan

Hedging transactions are over a three month period.

Chairman

Does that mean the investment is to be realised in the course of the three months? Is the NTMA hedging against realised or unrealised losses or gains?

Mr. Corrigan

We are hedging against an impact which the translation effect of a currency change would have on the book value of the fund.

Chairman

So we are spending money to keep the book value right rather than affecting the realised value of an equity at the end of a period.

Mr. Corrigan

It is ultimately the realised value.

Chairman

I know but, if we are not realising any of this, why do we not just take the hit up and down on currency? Why are we spending money hedging on a yearly or three month basis?

Mr. Corrigan

We have hedged it on a 50-50 basis because the currencies are on a-——

Chairman

So the agency is hedging on a quarter of your investment. Some 50% of the fund is in euro currency in the first place and 50% is outside euro. The agency is only hedging 50% of the 50%, which is 25%. Can we start on that basis?

Mr. Corrigan

Yes.

Chairman

Why does the agency hedge against a quarter of its fund if these are only unrealised gains or losses?

Mr. Corrigan

In terms of the investment strategy for the fund, that was the advice we got from the advisers.

Chairman

Would the NTMA send the committee a briefing note on this policy because discussing it could take up a lot of time here? I hope we would understand a briefing note.

Deputy Burton

I have a technical question. The notes to the account state that the fees and expenses of the seven commissioners were €328,000. Could the delegation tell the committee the fees and expenses of the highest paid and the lowest paid commissioners?

Mr. Brendan McDonagh

The chairman of the commission receives a salary equivalent to £45,000per annum. The other six members of the commission receive remuneration of £30,000 each per annum, whatever that is in euros.

Senator Mansergh

Those fees sound pretty reasonable to me. Deputy Ó Caoláin said this enterprise or fund was a form of gambling; in many ways, it is the opposite. We would be gambling economically if we were not making provision well ahead of time for pension liabilities. We have watched the debilitating effects, in what one might call advanced social market economies such as Germany and France, of inadequate provision coupled with very high entitlements. We do not want to find ourselves in that situation.

While the economy cannot be insulated from international political movements or events, including their economic knock-on, I very much take Mr. Geaney's point that the existence of this fund and the progress it has made is an important confidence factor in the Irish economy in terms of matters such as debt rating, investment confidence and so on. I do not want the fund cannibalised or frozen for political reasons. I accept the point that despite the urgency of the need for investment in infrastructure or other worthwhile purposes one could mention, the fund must operate in an absolutely commercial way and that confidence would suffer if it was perceived that it was essentially subsidising projects, however worthwhile.

I can understand why there would be hedging as there have been market fluctuations. The NTMA must maintain — this is not an economic point — political and public confidence in the fund. Large paper losses might tend to undermine such confidence.

There has been much discussion of ethical investments and I will come to that shortly. However, in many ways imprudent investment would be worse. Ireland had an example of this some 20 years ago when imprudent investments sank a very worthwhile semi-State company, Irish Shipping. We never want to experience something like that again. There was also much controversy across the water when the Church of England commissioners became involved in too much speculative investment, the value of which sank right down.

With regard to ethical issues, the NTMA report answers one of the questions in that it provides a complete list of investments. These include, albeit at minimal levels, arms manufacturers and the like, including Halliburton, Lockheed, Parmalat, Imperial Tobacco, Philip Morris and so on. There has to be a balance between some concern for ethical investment and too much political correctness. A recent political controversy associated with a particular unfortunate Member of the Houses got tied up into knots. Furthermore, to take an extreme example, if one was to take a Marxist approach, is any private investment ethical?

It would be the wish of the public, and indeed the entire Houses of the Oireachtas, that investments in, say, companies that specialise or major in arms manufacture or, alternatively, tobacco should preferably be avoided and, if unavoidable, kept to an absolute minimum. One can get into ethical arguments about oil companies polluting Alaska, etc. A very unfortunate and controversial incident occurred involving Shell and Nigeria but on the other hand we must consider all the good oil does in the world. One must not get too deep into that but there would be some ethical preferences, and I would keep the list very short, that all parties in the House would prefer the pension fund keep as far away from as possible.

Deputy Twomey

I thank the delegation for coming in today. I do not have financial training, unlike some other members of the committee, and the past two hours has been a learning experience for me. I noticed that as the conversation went on we started getting into areas and raising new ideas which we might have missed if we had proceeded more quickly.

There is one issue that has been on my mind since the presentation began. We are talking about investments in PPPs in Ireland and Mr. Geaney said there was no need for the pension fund to invest in Ireland because once the PPPs take off, they are a profitable source for investment which everybody wants to get into because it is expensive to buy these types of funds. Senator O'Toole said he did not agree with investing money in Ireland and said it is a good idea to move it out of the country.

This time last year, when the Minister, Deputy McCreevy, was here, we broached the subject of using taxpayers' money to invest in this country's infrastructure but he said the reason he was against that — I may be misquoting him; somebody else may have said this — was that it might push up the costs of the projects without gaining any benefit. He said that since only a limited number of companies can do that type of work, they can charge more for it because they know we are trying to find somewhere to invest the money. Mr. Geaney still seems to hold against the idea of investing this money in Irish infrastructure in whatever projects may come up. Would that be correct?

Mr. Geaney

I am not against it. We have allocated money specifically to go into this, an initial allocation, and we are ready to invest it when somebody brings us a proposition that will stand up to any kind of commercial review. Once that happens we are happy to invest and to commit more funds to that but that is not the question. The point I was making was that I do not believe it will be necessary for the national pension reserve fund to be the one to make this investment, although we will do it. Many people would be more than willing to make those types of investments when they become available. Somebody will have to address the other aspects of the infrastructure problem, which is not to do with financing but with the return one might get on the financing because of the length of time it takes to do anything and the cost of actually getting it done. I do not need to explain to anybody here that if one is going to build a project and it takes five, six or seven years to get from conceiving to completing the project, the return on that is less than the same project in five or three years. It is a simple equation. If money is put in today and one does not start getting it back for seven, eight or nine years, that is a much more expensive project than when one starts getting it back in three years, so why not do it in three years?

There are many other issues here. It is not just a question of whether the national pension reserve fund is interested in going into PPPs. We are and we will, and we are perfectly happy to do that. I just do not think we are the solution; that is the point I was trying to make.

Deputy Twomey

I do not the NPRF as the solution. I was just trying to tease out the reason it was not investing money in PPPs and whether there was some sort of ideological reason for that.

Mr. Geaney

No, not at all.

Deputy Twomey

Mr. Geaney said it will invest but he also explained that it takes these projects so long to get going that the return on the money is very bad.

Mr. Geaney

The return is directly related to the time it takes to build the project. Percentage returns are annual and if it takes ten years to get to A, it is a lower return than if one can get to the same place in five years. It is very simple. That is what it amounts to and the frustration everybody feels about the whole infrastructure question arises from the fact that no matter what we seem to do about it, it does not solve the problem. That is the general level of frustration. I hope that will change in the next period of time but if we want to solve that problem we must address the whole problem, not just half the problem. There is no point in throwing money at it if the other issues do not get resolved and one does not get a return anyway.

Deputy Twomey

That makes it more clear. Mr. Geaney is saying that he does not believe PPPs will have much success due to the problems encountered in bringing them to a level where one can get a return on one's money.

Mr. Geaney

To be clear, I am not saying that. I am saying I do not believe PPPs are the sole answer to solving the problem. They certainly can contribute to doing so but they are not the sole answer.

Chairman

I thank Mr. Geaney, Dr. Somers, Mr. Corrigan, Mr. McDonagh and Mr. Donovan for their attendance here for three hours. We have had a long and extensive exchange, which members found helpful and which I hope the representatives found helpful also. It has been important from our point of view as members of the Oireachtas committee responsible for dealing with this area. I thank the representatives for their attendance and look forward to meeting them again on another occasion. I express gratitude on behalf of the committee for the time and effort they have given. I note they will report on one item of correspondence, which is probably the best way to deal with that.

We have some other matters to mention.

Deputy Twomey

RU486 was an abortifacient, not a contraceptive. That is the reason it caused such controversy.

Chairman

Under any other business, I remind members of the invitation from Bank of Scotland to the seminar and presentation tomorrow in the Merrion Hotel at 12 p.m.

The Public Service Management Bill is scheduled to come before the committee on 19 February. Members will get further notice of that. Our next scheduled meeting is 4 February. The meeting will not be as long as the one today but it is proposed to discuss our work programme and the information notes on the statutory instruments which we requested from the Department of Finance a week or so ago.

We gave a commitment at the time of the budget to the representatives of the Combat Poverty Agency that we would invite them in before the debate on the Finance Bill, but we did not have time to meet them. If members agree we will invite them in for next Wednesday and we will ensure a tight timescale and that the meeting does not go on too long.

Ms Burton

In respect of its pre-budget submission?

Chairman

They asked to meet us regarding their pre-budget submission, but we said we did not have the time to meet them at that stage and that we would talk to them about their issues early in the new year. That is how we left matters with them, at the request of committee members. We did not want to refuse to meet them.

Deputy Ó Caoláin

When will it suit to meet them?

Chairman

We will contact them this evening or first thing tomorrow morning.

Deputy Ó Caoláin

To meet them on the day at 3 p.m.?

Chairman

Yes, at 3 o'clock.

The joint committee adjourned at 6.10 p.m until 3 p.m. on 4 February 2004.