For his vision of the state pension fund to become reality, it was essential for Irish finance minister Charlie McCreevy to find the right structure to implement and manage such an important pool of assets. The arrangements for the governance and management of the fund were modelled on the successful private sector formula in which the key elements are the independence of the trustees and the prudent person principle when it comes to investment strategy.
For the former, McCreevy announced the formation of a ‘Commission’ that would in effect be the trustees of the fund, with full autonomy to control, manage and invest its assets. The seven-person commission consists of senior professionals with a background in banking, investment management and accounting from both inside and outside Ireland (see box).
The trustees are required to perform their functions through the National Treasury Mangement Agency (NTMA) which has the role as overall manager of the fund and to which the trustees can delegate any of their functions. The NTMA was set up in 1990 to bring professionalism to the management of Ireland’s national debt and its structure has been copied in a number of other European countries that have set up specialist debt management agencies.
The only individual who straddles both the trustees and the NTMA is Michael Somers, named as a commissioner on an ex-officio basis. Somers was appointed to the post of chief executive of the NTMA in 1990. A former secretary for national debt management in the Department of Finance, he also spent time as chairman of the European Community Group that established the European Bank for Reconstruction and Development. Somers explains the status given to the commission to plan the investment of the NPRF assets: “Irish law now provides for the full responsibility for the fund to pass to the commission, which through its chairman and the chief executive of the NTMA is directly accountable to parliament.”
Once the commission was given the green light by the government, it then engaged with consultant Mercer and the NTMA to plot the risk profile of the fund. An overall portfolio weighting set at 20% in bonds and 80% equities was decided upon, with half to be invested in Euro-land and the other half outside. Currency risk, it was also decided would be half hedged and half unhedged. Significantly, Somers says the commission was under no pressure to favour domestic investment. “The commissioners were not asked to look at any particular proportion in Irish equities. There was no pressure to consider anything other than to secure the optimal total financial return having regard to the level of risk acceptable to the trustees and the 25-year lifespan of the fund.”
The legislation expressly provides that there will be no payment from the fund before 2025, when it is expected that the demographics will begin to bite in terms of increased pension costs.
Despite the members’ varied expertise, Somers flags up the fact that the commission prefers its decisions to be made by consensus, thus lending an air of stability to the fund’s strategic set-up. Adding a little more background to the NTMA itself, Somers offers a sense of why the agency was selected for the job of administering the reserve fund: “The organisation was set up 11 years ago to run the funding and debt management operations previously carried out by the Department of Finance and the Central Bank. It was set up outside the civil service with the legal freedom to recruit directly from the market the skill sets required to discharge its mandate. I suppose the NTMA’s successful history of dealing with capital markets, its strong risk management culture and the fact we could hire in new people for the job were instrumental in our appointment as manager of the fund.”
Today, with the first tranche of manager selections representing the core assets of the NPRF now complete, the commissioners have the task of deciding whether they can add any value through alternative assets – an investigation prompted by the freedom for the commissioners to invest in all asset classes bar Irish government bonds. “We are still at the stage of looking at this: there could, for example, be the possibility of the Fund investing in public private partnerships in Ireland. There have been some lengthy meetings between the Commission and the advisers, Mercer, to decide on these issues, but our main concern up until now has been to get the managers of the main asset classes appointed. Any portion invested in alternative assets would be quite small and no decision has yet been taken.”
Somers declares himself happy with the way that things have gone so far in the manager selection process, adding that it is now down to the managers appointed to do their job. “If there is one lesson that we have learnt from other funds like this, it is that trustee involvement should be kept to a minimum with regards to the investment. If you appoint fund managers you should let them get on with it.
“We have no involvement in the stock selection for the fund and we shouldn’t be second-guessing anyone at this stage. The work going forward for the commission and the NTMA, he says, will be the monitoring of managers and the investment of the approximately E1bn in assets that will be fed into the fund each year.