For the Irish government, the introduction of such a significant reserve fund into the country’s balance sheet posed not only the question of domestic support, but also that of adherence to the EU Growth and Stability Pact – the 1997 requirement that all member states bring their budgets into balance by 2004.
The relevant measure for adherence to the pact is a country’s general government balance (GGB). For the Irish, the assessment was whether the fund could still comply bearing in mind the relatively complex budgetary treatments for such national funds.
Ireland’s interpretation of the relevant accounting convention (ESA95) was that any social welfare pensions reserve fund would be treated as part of the government sector, regardless of the terms on which it is established. Payments into such a fund would not be treated as expenditure in calculating the GGB and so would not reduce any surplus.
Similarly, later withdrawals from the fund when made would not be regarded as receipts and so would not improve GGB at that time. In effect ESA95 accounting rules mean that social welfare pension costs are always recorded on a pay-as-you-go basis, regardless of the funding arrangements in place. Accordingly, establishing a social welfare pensions reserve fund does not make any direct contribution to protecting the future GGB position. It does, however, have a beneficial effect on the longer-term GGB to the extent that allocating resources to such a fund constrains other near-term expenditure.
However, in the case of a structured public service pension fund – the other half of the government’s plans – such an initiative would normally count as expenditure for calculating Ireland’s GGB, the reason being that the use of the accumulated resources will directly assist the GGB by paying public service pension costs.
For this type of fund to be valid from a GGB perspective, it has to be set up as a properly constituted pension fund, operating under normal pension fund conditions. This means the obligation to pay into the fund must be permanent, the level of contribution to the fund must be determined on an actuarial basis and there must be an independent investment mandate for the management of the resources of the fund.
Confirmation was sought from Eurostat – the statistical office of the European Commission – that this was indeed the case, and the NPRF in its current form was given the green light under EU budgetary requirements.