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Impact Investing

IPE special report May 2018

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Irish wait for fund kick-off

The green light has been given by the Irish government to the creation of the Irish National Pensions Reserve fund, the war chest it hopes will plug the future hole of social welfare costs from 2025 onwards – when the country’s demographic imbalances kick in.
Estimates suggest that from an initial funding level of IR£6.5bn (e8.3bn) the fund could see its assets rise to an enormous 33% of GDP by 2020.
But how will the fund operate? Who will be responsible for the management of the assets and in what way will they be run?
Michael Somers, chief executive of the Dublin based National Treasury Management Agency (NTMA), which will be responsible for the day-to-day running of the fund – sheds some light on the workings of the Irish response to a challenge that is being mulled over by a number of European governments.
The intention, he says, is that the reserve fund will be managed by four to seven so called ‘commissioners’; to be known under the collective title of the National Reserve Fund Commission.
“The commissioners will operate in a trustee-type manner regarding the fund and they have been deliberately been given this title,” says Somers.
“We wanted to avoid having to go into trust law and case laws of trusteeship. It is better that they start with a clean sheet of paper. We do not want to attract whatever baggage is involved in the trustee situation.”
Somers notes, however, that the law still requires minister of finance Charlie McCreevy to determine when legislation comes into force. McCreevy, he says, will then inform the NTMA when it will have to begin its operations. “Currently, he is thinking February 1 or March 1. This will give us a bit of breathing space in terms of hiring staff. So far we have not hired anyone in connection with the fund.”
Any earlier for the NTMA would be problematic, he adds.
“The problem is that people in the business are hanging on for their bonuses and so are not anxious to leave their jobs. Also the labour market in Ireland is very tight and the particular skills we are looking for will be difficult to find.”
He continues by explaining that the commissioners will have very specific functions. They will not work full time, but like non-executive directors, will be paid for their services.
As for Somers himself, his chief executive role at the NTMA qualifies him ex officio as a commissioner.
He points out that the commission’s remit is not permanent – although concedes it is not a short term post either.
“The legislation provides that we are the overall manager for a 10-year period, which is specified in the act. It will be up to the commissioners to decide what happens after that.”
Commenting on the initial IR£6.5bn projected to flow into the fund at its inception – to be followed by regular treasury additions, Somers predicts that asset accumulation will be significant for a number of reasons.
“No money can be taken out for at least 25 years. It is ring fenced. There is also a very wide mandate as to what can be invested in. The only restriction is that the money cannot be invested in Irish government bonds.”
While the investment decisions are taken by the commissioners, Somers notes that it is the NTMA which will actually implement the policies.
And he feels that much of the investment will end up outside the domestic stock market.
“Our own view is that probably very little will end up being invested in Ireland, since Irish stocks come to just 1% of Euroland equities.
“But there will be heavy discussions about the asset allocation and split between equities, bonds real estate and cash.”
Another question, he says, will be the level of risk the commissioners want the fund to take, which he dubs ‘the question of exactly how we are going to start investing?’
“Do you want it all invested over one day, or do you average it over a period and do you buy options to safeguard the downside. What sectors do you focus on and what degree of choice is given to individual managers?”
One of the first issues he says they will decide on is the active versus passive decision.
“We certainly could track indices for parts of the portfolios, ” he offers.
Significantly though, Somers says he believes the lion’s share of the fund’s assets will be outsourced to begin with – a move which should whet the appetites of more than a few asset managers.
“It is not our intention to run the fund ourselves or any substantial part of it, at least in the initial stages. On the bond side, we might decide to do something ourselves, but certainly on the equity side we do not plan to do anything directly.
“So we will have to choose fund mangers, a global custodian and perhaps buy in some consultancy services.”
This process, he adds, is somewhat under way already, noting that the NTMA has been in discussion with a number of managers, custodians and consultants in recent months.
“This was both to get ourselves up to speed and to explain to them what exactly was happening at our end. We wanted to point out though that until the commissioners are in place and have decided what they want to do, no providers can be chosen.”
Debate has already taken place through committees within the Irish parliament, the Dáil, over issues such as ethical investment, but Somers says that the minister decided this ‘was a road with no end’.
Consequently, ultimate judgement will be left to the commissioners.
He also explains that the original intention to create two reserve funds, while on hold, may be revisited in the future.
“Creating the fund is such a novel idea and to get it established with the minimum complications, it was felt, would be simpler with just one fund.”
Nevertheless, despite the fund becoming Ireland’s largest cash pot, Somers says it will still not meet the full future demands of the country’s social welfare bill.
“The aim is to manage it to best meet part of the costs of public service and old age pensions.
“It would be impossible to met the full costs of these. Nor was there any question of saying that if the fund performed badly it would be reduced.”
However, he feels Ireland has a comparative advantage over other countries in the same boat.
“On average people are about 10 years younger in Ireland. So we have an opportunity now to do something about the problem.
“There were a number of options open to the minister, he could have spent more, give more generous tax relief, paid down more of the national debt. Instead, he acted in a very prudent fashion.”

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