A fund is born
When Irish finance minister Charlie McCreevy announced on 23 July 1999 that the Irish government had approved a new strategy to maintain the exchequer’s ability to finance future pension provision in Ireland through the creation of a giant reserve fund, the impact of his statement was by no means confined in significance to financial circles in Dublin.
The announcement, which eventually became the National Pensions Reserve Fund Bill of 2000, roused the interest of governments around the globe that had been grappling with the same, if not worse, demographic issues as Ireland.
It also sparked enormous excitement in the global investment management arena, with the announcement that the money was set to be outsourced to third-party managers via an independent supervisory body set up by the minister.
Few, if any, governments had gone this far in entrusting a large part of their future state pensions commitments to the market.
The fact that the decision involved such mouth-watering figures as an annual government contribution of 1% of GNP, augmented by the allocation of a large tranche of the flotation money from the sale of Telecom Eireann, got tongues wagging as to how these assets would be administered and invested – a huge task in anybody’s language.
For McCreevy, the government project had been prompted by a long-held view that a sea-change in attitudes was needed by both the state and its citizens with regard to the financing of future pension provision.
The Irish government not only needed to find a way to cover its own pension liabilities, but also a stimulus for individuals to save more for their retirement.
To prompt the latter, subsequent legislation laid down major changes in the area of personal private pensions for groups such as the self-employed.
However, for McCreevy, the Irish superfund project seemed to transcend politics; representing something of a personal mission.
Noting the problems being encountered by other European countries faced with similar demographic challenges, McCreevy pledged that he was “resolutely determined” Ireland would not make the same mistake in the pensions area.
Irish demographics in 1999, he pointed out, showed a relatively strong position of one retiree for every five working people. The danger though came in the predicted figures for the middle of the 21st century, where the ratio was set to plummet to one pensioner for every two people of working age.
In tandem with this demographic jolt, Ireland was scheduled to see a sharp hike in the cost of public service pensions, which would begin to hit in the early to mid 21st century, following on from the boom in social provision in the 1970s.
Yet the decision to create the National Pensions Reserve Fund had not been plucked from thin air by the government. The announcement was set against a background of government initiatives to look into the area of pension provision.
The 1996 National Pensions Policy Initiative (known as the NPPI report), laid the bedrock for legislation with the initial recommendation of a reserve fund to cover Ireland’s future pension commitments.
In the same year, the government also established the ‘Commission on Public Service Pensions’. The commission, the first comprehensive public review of the public service pension issues in Ireland, was chaired by Dermot McAleese, professor of economics at Trinity College Dublin.
The commission produced an interim report for the government in 1997, and in early 2001 published its final conclusions.
Broadly speaking, the commission rejected the full funding of public sector pensions in Ireland in favour of partial funding through a reserve fund to ensure improved transparency and discipline in public service pensions costs.
In turn, the NPPI initiative prompted a 1998 report by the Irish Pensions Board, entitled “Securing Retirement Income”, to flesh out broader suggestions for the reform of Irish pension legislation.
Upon election, McCreevy himself then set up a Department of Finance assessment of the budgetary implications of these prospective developments over the period to mid-century.
This was published in 1999 as the “Long- Term Issues Group Paper”. Collectively, the work of all these groups pointed up the magnitude of the issue and the desirability of taking early steps to underpin the Exchequer’s ability to maintain and improve public services under the favourable demographic balance of the time.
As a result, McCreevy set up another working group within the Department of Finance to bring forward appropriate proposals. Its findings, the “Report of the Budget Strategy for Ageing Group” were published in 1999 and took as their basis 1997’s “Actuarial Review of Social Welfare Pensions”, an actuarial study undertaken for the Commission on Public Service Pensions.
More specifically, the group was asked to put forward proposals based on Ireland’s substantial present and prospective budget surpluses, with the aim of easing the longer-term budgetary burden of the Exchequer’s liability for social welfare and public sector employee pensions.
The Budget Strategy for Ageing Group recommended that the annual provision of a non-discretionary 1% should be made from the general government budget to partly pre-fund the costs of ageing facing the exchequer over the medium to longer term – beginning with a IR£520m (e660m) allocation in 1999.
The group’s original recommendation provided for two funds; the first a social welfare pension reserve fund to be seeded with IR£320m, the second, a public service pension fund, assigned the remaining IR£200m.
A further suggestion was the diversion of the assets of future state utility privatisations into the funds; starting with the transfer of assets from the flotation of Telecom Eireann.
Such provision, the report said, would cover 40% of the required funds needed to meet future pension costs. Without such remedial action, the report predicted that pension costs could spiral to a level where a 7% rise in GNP would be needed to guarantee the same level of pensions and health service provision over the following 60 years – equivalent to a one sixth increase in the level of taxation.
Extrapolating its findings, the group’s report surmised that if these extra exchequer costs were to be met and spread equally over the necessary financing period it would cost the Irish Exchequer some 3.5% of GNP annually – rolling Ireland over into deficit compared to its surplus at the time of 3% of GNP.
As a result, the group then considered a number of proposals to plug the future pensions shortfall.
The first was the setting aside of windfall resources. The second was to finance ageing costs from pure economic growth.
Eventually, though, the group could recommend neither course as an alternative to pre-funding pensions from ongoing budgetary surpluses through the form of a reserve fund.
The report’s findings backed up minister McCreevy’s view that Ireland had to begin planning properly in the good years to ensure sufficient pension levels in the future.
Upon approval of the plan in the Irish Dáil, McCreevy commented: “I believe that we must take the long-term perspective in the state’s economic and financial planning. I thank my colleagues in government – and the minister for social, community and family affairs Dermot Ahern in particular – for supporting my proposals, which I believe again highlights this administration’s forward-looking agenda in all aspects of the nation’s affairs.”
Government approval came later that year (1999) for a temporary holding fund for the assets, with IR£3bn set aside by the government for initial funding – incorporating approximately IR2.4bn from the Telecom Eireann flotation, plus 1% of GNP (IR£582m).
With a further payment of IR£1.15bn from the Telecom Eireann flotation earmarked for the fund for 2000, the Irish government announced its prediction that the fund would have an asset base of some IR£4.8bn by the end of 2000, ahead of its outsourcing to the markets.
The National Pensions Reserve Fund was born.