Laying down a legacy
For Irish finance minister Charlie McCreevy, interest in the concept of an Irish reserve fund for pensions came some time before his arrival on the Irish political scene.
“My own interest stems from two factors. Firstly, for many years, I would read what the occasional commentators wrote about the so-called ‘demographic timebomb’ that Europe was facing and adding that it hadn’t yet hurt in Ireland but that in the future it would and that something should be done about it.
“Secondly, over the last few years it has become apparent that many core European countries didn’t provide in times of good for putting money away for an ageing population.”
To this end, as early as 1998, McCreevy began looking closely at Ireland’s social welfare pension levels and says that year’s report from the National Pensions Policy Initiative (NPPI) paved the way for pre-funding as a serious option.
McCreevy notes that a number of budget issues to do with ageing were then considered by different groups in the finance department; the principal forum being the Budget Strategy for Ageing Group, which published its report in July 1999.
“With these various reports in hand I had a look at the other countries in Europe facing the same problems and I decided that we should start doing something about it early, particularly since we were having economic growth rates that we could only have dreamt about 10 years previously.
“A prudent, sensible person would say that when things are going well you need to make provision for a rainy day.”
The minister then put forward a memorandum to the government arguing the case that had been put forward by the Budget Strategy for Ageing Group; namely that 1% of GNP and the vast bulk of the receipts from the Telecom Eireann flotation should be put aside to kick start the National Pensions Reserve Fund. The proposal got the green light from Parliament and McCreevy was charged with overseeing the implementation of a structure for the fund.
1998’s NPPI report had suggested there be two funds created to separate the monies for state and public service pensions.
However, McCreevy explains that such a division became difficult: “At the time we were set to put in place two funds, but we settled on one fund rather than have it divided between state and public service pensions.
“When I got around to producing the bill it became so complicated as to how we were going to divide the fund that we said, look, let’s keep it simple with one pensions reserve fund that will be investing for the next 25 years or so and give it an optimal mandate.”
To this end McCreevy ruled out any proscriptive social or ethical investment criteria for the fund’s investment – a decision that roused some political ire.
“This didn’t become a national controversy, but some other parliamentarians in the Dail made this particular point, but I ruled against it, because the more I looked at it and compared what we were doing to the experience of other countries and private pension arrangements, the more the problem loomed of how we could ever define ethical investments. It would have been a nightmare! We decided to invest as would any normal pension fund where you expect the trustees to get the best return.”
As such, McCreevy points out that the ethical issue is left up to the good sense of the commissioners: “They have to produce a report every year on the fund, and the chairman and chief executive will be able to be called before an Oireachtas parliamentary committee to explain the report, which will show all the things they have invested in. I think it would kick up a big row if they were shown to be doing something they shouldn’t. I didn’t want to start putting down rules in law though, because that wasn’t the way to go.”
One exception to the free-hand rule, however, is investment in Irish government bonds. McCreevy explains: “I ruled against that because in bad times you could be buying your own paper. Apart from that the fund can invest in anything it likes.”
The watchword for the philosophy behind the fund investment, according to the minister, was prudence. “None of the other world-wide funds really influenced me in my decision. I just decided to go for the best possible returns in the safest possible way.
“This is the reason that the fund’s commissioners are totally independent from the government. There was a big debate on this, but this money is managed on behalf of the people of Ireland, so constitutionally you should be responsible for it, but at the same time not interfere in how it is managed. We framed the legislation in such a way that the government of the day has no involvement in the day-to-day running of the fund.”
While any future government could, of course, change the legislation in the Oireachteas, when the fund has been up and running for a few years, McCreevy believes it would be a brave government that were to interfere with assets designated as the ‘people’s money’.
McCreevy notes that the demographic situation in Ireland – at present about five employees to one retiree – compares favourably with that of France and Germany, but adds that such favourable figures will not last: “If I hadn’t done this then no minister would ever have got the chance.
“Some economists argued for cover of the future deficit to come from economic growth, others said that it was a long time before we would start having any problems. However, 50 years is a very short time in actuarial-speak and the sooner you start making provision in pension plans the better, which is why I also introduced a range of measures for personal pension cover at the same time.”
McCreevy’s choice of the National Treasury Management Agency (NTMA) to run the fund, he says, came about because of its successful management of the country’s debt.
“There have been a lot of government finance regimes around the world that have taken a look at how this works and copied the Irish system. They have a lot of expertise, so I decided they would be the first managers of the fund for a period of 10 years. After that we’ll see how they go and the contract can be renewed or given to someone else.”
The important cog in the wheel,though, was the introduction of the board of independent commissioners to oversee the fund’s investment strategy. “As I say, my main goal was to take this fund as far as it was constitutionally possible away from government influence. With the commissioners I can’t influence investment policy or anything.
“In selecting the commissioners I wanted to get a mixture of people, but I also stipulated that the chief executive of the NTMA, Michael Somers, would have to be a member of the commission. I then looked for both home and away skills, from Germany and the US, for example. I concentrated on independence and people that I felt would be beyond reproach.”
Looking forward, McCreevy explains how far he expects the fund to meet some of the pension requirements of the Irish government: “The reserve fund is not strictly a pension fund because money goes in and is not paid out until 2025. The study we did in 1998 showed that if the money was invested it would meet about 30% of the costs at that particular stage, but I’m sure the fund will grow to a fairly large size, potentially about 40% of Irish GNP, and will be there to assist the government of the day to draw down as it sees fit.”
He notes though that one piece of luck for the commissioners so far has been the time taken for the fund to be set up. “Thankfully they have only started to invest this year because I don’t know any pension fund that has not returned negative figures for 2001.”
Even so, in the event of any future underperformance, he does not envisage government intervention. “Pension funds are long-term vehicles and you have to look at them over 10 years or so. The fund has been set up to be under scrutiny, not any direct or indirect control. I just hope they are as successful over the long-term as ordinary commercial funds.”
More money beyond the current statutory 1% of GNP requirement could be added, he notes, although it would call for a resolution of the house to do so. This might be the case if times are good and we have a surplus.”
With such an ambitious project now coming to fruition, the man who thought about the concept of a national pension fund before his time in government says a fitting reward might be that future generations look back at those who worked for its creation.
“I would like to think that in 2030–40 this has all done really well and that some commentator will say: ‘Well wasn’t that a really far-sighted decision. Who was the fella that did that, it was the guy with the funny name, McCreevy, from down in County Kildare.’ That would be the best legacy you could have.”