IRELAND - Strong gains for the National Pensions Reserve Fund (NPRF) and an eventual budget surplus meant Irish state finances were better off by €7bn more than expected last year, the National Treasury Management Agency (NTMA) has suggested.

Details of the NTMA's report and accounts for the year ended December 31 2006 revealed the overall budget surplus for the NTMA was €2.3bn to the financial year, compared with an earlier estimated deficit of €3bn, in part because the pension fund grew by €3.5bn through investment returns and government contributions.

More specifically, the pension fund achieved a return of 12.4% in 2006, lifting total assets to €18.9bn, because its heavy equity weighting helped contribute to the €2.03bn return.

NRPF's asset allocation saw over three-quarters of assets (76.5%) held in equities while 18.6% was held in bonds and currency and 4.9% was invested in alternative assets.

NTMA's management of a passive bond mandate for the NPRF has lifted its bond portfolio by €500m to €1.8bn along with €340m in cash.

That is expected to change under the terms of the 2006 strategic asset allocation review, however, as those weightings will shift substantially to place just 14% of assets in bonds and cash by 2009 and reduce the total equity holding down to two-thirds (66%) - large cap stocks see the largest reduction from 70.5% to 56%.

The remaining assets will be invested in alternatives, with private equity seeing at least half of the allocation, including 2% in infrastructure, accompanied by a five percentage point increase in the property weighting from its current holding of 3% to 8% and a small increase in commodities allocation to 2%.

Proposals for the strategic asset allocation should mean private equity and property asset classes will both hold around €2bn each in assets by 2009 compared with its current holding of €909m in 22 property investments and €705m in 18 private equity vehicles.

But this is not too dissimilar to the National Pension Reserve Fund Commission's earlier strategic asset allocation proposals set out in 2004 which stated two allocations of 8% should each go into private equity and property investments.

The NPRF had announced in 2005 a "significant diversification" to increase its exposure to alternative investments by 2009.