mast image

Special Report

Impact investing

Sections

All quiet on the western front?

To gauge the temperature of the NPRF debate, we asked a number of opinion formers in Ireland, including professional bodies, trade unions and employers’ organisations for their views

The Panel
Ann Fitzgerald – secretary general, Irish Association of Investment Managers (IAIM)

John Feely – chairman, Irish Association of Pension Funds (IAPF)

Fergus Whelan – pensions expert, Irish Congress of Trade Unions (ICTU)

John Fitzgerald – research professor, Irish Economic and Social Research Institute (ESRI)

Marie Daly – assistant director, legal and regulatory affairs, Irish Business and Employers Confederation (IBEC)

Are you satisfied with the overall direction/implementation of the Irish National Pensions Reserve Fund (NPRF) to solve the issue of future Irish pension financing?
Ann Fitzgerald: Yes, we believe that it is very necessary to have forward planning in funding of public sector pensions. Given demographic change, it is not prudent to rely solely on a ‘pay-as-you-go’ approach or to wait until the demographic situation (which is favourable currently) deteriorates. We are also conscious that the NPRF will, in time, fund a proportion only of the estimated pension bill.
John Feely: Yes. The NPRF is an integral part of a series of initiatives designed to alleviate the financial problems associated with an ageing population and generally low levels of pension coverage in Ireland. We are fortunate to have time on our hands to fund in advance for the increase in pension liabilities that we will inevitably face in the future.
Fergus Whelan: We were supportive of the establishment of the fund, which we saw as a prudent step in future pension planning. However we were not very happy with some aspects of the legislation.
John Fitzgerald: Irish pension financing is a very wide field, so no. The NPRF only deals with (part) of the exchequer’s potential liability. It does not deal with the problem of poor coverage of non-state pensions.

Do you believe that there might have been better methods of funding the projected pensions shortfall, such as the setting aside of windfall resources, or the financing of ageing from economic growth? What is your view of the way that the government is funding the NPRF?
A Fitzgerald: We consider that the correct approach is that adopted by private sector employers – planned, regular funding (as is happening with the NPRF) rather than reliance on windfalls gains or a PAYG system only
Feely: There is no one silver bullet. Undoubtedly a series of measures are required and the NPRF is only one part of the overall solution. In establishing the NPRF the Irish government has essentially ‘hedged its bets’. The NPRF is only likely to finance about one-third of the increase in the pension liabilities we face. We will also need economic growth, contributions from windfall assets and an increase in the coverage and adequacy of second pillar pension systems to have a truly sustainable pension environment. However, as a future beneficiary, I’m glad of the comfort of knowing that at least some assets are being set aside out of this highly productive phase in the Irish economy. I agree with the overall approach. The 1% of GNP contribution is the least we could afford to set aside to have a meaningful impact. I do not agree with the idea that contributions should be variable depending on economic performance, as I think the political pressures would weigh too heavily in favour of short-term priorities and the NPRF contribution would be too easily deferred.
Whelan: Congress signed up for the NPPI report that suggested a fund to ease the burden on coming generations, so we implicitly accepted that future economic growth on its own would not be enough. As you know, the funding came from two sources the sale of Telecom Eireann and direct exchequer investment of 1% of GNP. We think that the amount going into the fund should be reviewed from time to time in light of circumstances
J Fitzgerald: This issue needs a lot more research to determine the optimal approach.

Do you think agree with the principle of investment diversity within the fund and the stipulation that the fund should not invest in Irish government securities? Could the fund be of more benefit to the Irish economy as a whole through investment in Irish government bonds?
A Fitzgerald: The investment model which has been adopted is that of a private sector pension fund, with which we are in agreement. The exclusion of Irish government bonds makes sense in the context of a national fund.
Feely: I believe the balance is about right. In advance of the establishment of the NPRF investment policy the Irish Association of Pension Funds argued for an investment strategy similar to typical Irish pension funds, and this is broadly the approach adopted by the NPRF Commission. In relation to the bond question I believe there is little effective difference between investing in Irish and euro bonds. However, there is an advantage in perception as, by avoiding Irish government securities, the fund is not seen to be ‘self-investing’.
Whelan: We were not happy with the idea of letting investment managers decide on the investment strategy for Irish taxpayers money with a strictly commercial mandate. We felt that the legislation should have stipulated that given the broad range of risks involved that if an Irish investment project which had benefits for Ireland such a project should be given priority over a project with a similar risk which would have no benefits for Ireland
J Fitzgerald: It should be illegal to invest in any Irish asset.

Are you happy with the structure of the fund and its administration through the National Treasury Management Agency (NTMA)?
A Fitzgerald: Yes.
Feely: Yes. Since its establishment the NTMA has demonstrated a highly professional approach to the management of the Irish debt. It has also handled the process of investment of the NPRF in an equally professional and thorough manner. As an independent body the NTMA is in a position to apply the highest standards of corporate governance. It is also, appropriately, open to governmental and public scrutiny in relation to its actions.
Whelan: We were surprised at the decision to appoint the NTMA for 10 years. However, had the legislation not specified a role for the NTMA who knows what so-called private sector experts we would have finished up with?

Are you satisfied with the appointment of the commissioners responsible for setting strategy and controlling the fund, as well as the hiring of advisers, and asset managers? Should they be full-time professionals?
A Fitzgerald: Yes, we are satisfied with the appointments. The NTMA has plenty of expertise available to it, both in-house and externally.
Feely: I am satisfied with the process. The commissioners have an important role to play but I believe the current ‘non-executive’ role is appropriate for the commissioners, supported in the same way as a board of directors by full-time investment professionals.
Whelan: We felt that the legislation should have dealt with matters such as ethical investment and set down guidelines to ensure that some of the benefit arising from the investment of this capital should come to Ireland. We would have been happier if trade unions who represent much of the taxpaying public who own the fund were represented more directly as commissioners .

Do you think the NPRF will provide a solution to the funding of civil service pension commitments in Ireland?
A Fitzgerald: As I mentioned earlier, it is a ‘part’ solution to the funding issue.
Feely: The NPRF is only part of the solution. We still need further development of the second pillar pension system as well as strong economic performance to complete the picture.
Whelan: As the matter of funding civil service pensions is being dealt with through the industrial relations system in the public service, we do not wish to comment on the funding of civil service pensions until those discussions have been completed.

Can the assets of the NPRF remain ring-fenced and kept free of political interference? Do you think the fund could be ‘raided’ by future Irish governments?
A Fitzgerald: The assets are ring-fenced by law; it is difficult to see a future government changing that legislation. I don’t envisage that the fund would be ‘raided’ by a future government (the political outcry would be enormous). A future government could, however, decide to reduce the annual contributions to the fund. It is difficult to see that happening in the foreseeable future, at least.
Feely: I believe this is one of the main roles of the commissioners. There is no guarantee that the situation could not change as a result of some severe shock to the Irish economy. However, I could not envisage any political interference without a significant public debate. IAPF clearly believes that there is no place for political interference in relation to the NPRF and would resist any such moves.
In the absence of a significant shock to the economy I could not envisage the government ‘raiding’ the fund. However, a less obvious, but equally damaging, measure would be the curtailing of contributions to the fund into the future.
Whelan: The very idea of the legislation was to make it impossible for a future government to raid the fund. Of course it cannot work. Any government that sees a need to raid the fund can introduce legislation to do so. If money becomes scarce in the future there will be a strong temptation to raid the fund or default on payments.

What do you think could happen to the NPRF in the event of a number of years of bad investment performance?
A Fitzgerald: The NPRF has been set up as a long-term pension fund investment. In such an event, it would be no different to any other pension fund – I would expect that it would review the performance of the managers it has appointed.
Feely: I have no doubt that the commissioners have considered this prospect. Firstly, I do believe there would be concern on the part of the taxpayer. However this would be alleviated if it could be demonstrated that the poor performance was a feature of long-term investment funds generally. Secondly, I believe that the NPRF could be used as a political football. Clearly this is counter-productive and IAPF would seek to influence the debate to focus on the fundamental issues.
Whelan: Well some commissioners might be replaced. Some investment managers might be replaced but we believe that even if investment performance just keeps above the level of inflation the NPRF will be claimed as a great success.

Any further comments?
Whelan: We supported the idea of the establishment of the fund. We believe that the total reliance on commercial return is wrong. We are concerned that the fund could become a gravy train for investment managers.
J Fitzgerald: The major problem is that the creation of the fund was not properly debated in the Dail and in Ireland generally. It is a very important decision and unless the citizens of Ireland believe it is the right course, understand what it is about, and are satisfied with the way it is being run it will probably not survive to fill its objectives.

Employers’ view

Marie Daly: We welcomed the establishment of the fund and continue to do so. However, that being said, the fund was established in a time of plenty and surplus or ‘windfall’ funds were set aside. We’re now heading into less plentiful times and we will probably be looking at exchequer borrowing, at which time the wisdom of borrowing to save for future requirements could then be questionable. Another issue will be the question of management of the funds as they accumulate to a considerable amount.
It will have to be tightly managed with full accountability. The investment decisions will be potentially huge also and what the best use for the funds will probably become quite political – as indeed we’ve already recently seen with the election proposal to use the funds to invest in the National Development Plan, which is already running over and involves significant monies to complete which are not there at present.
So while the theory is sound the practical reality could make the reserve fund one big political football in time to come.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2559

    Asset class: Multi Assets.
    Asset region: -.
    Size: EUR 15m (may be split into two mandates EUR 7.5m).
    Closing date: 2019-09-06.

  • QN-2560

    Asset class: Private Equity.
    Asset region: Global.
    Size: $40m.
    Closing date: 2019-08-30.

  • QN-2561

    Asset class: Infrastructure.
    Asset region: Global.
    Size: $40m.
    Closing date: 2019-08-30.

Begin Your Search Here
<