As we prepare for the downturn, can we afford the State's pension reserve fund?
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IRELAND has its own sovereign wealth fund in the form of the National Pension Reserve Fund (NPRF), whose €21bn of assets are earmarked to meet the future costs of public sector and social welfare pensions.
Established in 2001, the NPRF was one of the first such vehicles in the EU, and drew considerable attention from other governments anxious to find ways to preserve or add to budget surpluses.
The NPRF is more conservative in its investments than some of the sovereign funds making the headlines. It confines itself largely to equities and property and private equity funds, which can easily be sold if desired.
At the end of last year, the NPRF held shares in over 2,500 companies and had invested in 190 debt securities, 25 property investment vehicles and 25 private equity investment funds, as well as some currency, commodity and emerging market investments.
The NPRF has been criticised for not investing directly in Irish infrastructure, but says it has a mandate to make a financial return. It did lend €900m to the Dublin Airport Airport Authority to help develop the airport by investing in the DAA's bond issue.
A more serious criticism is that Ireland no longer has "wealth" to invest in such a Fund, now that its budget surpluses have disappeared. By law, the government gives the NPRF one per cent of national income (GNP) each year -- which will amount to almost €2bn this year.
But, with the Government expected to borrow around €9bn this year, the logic of the Fund is being questioned -- including by Finance Minister Brian Lenihan. The high cost of borrowing -- now 5pc -- is almost the same as the return earned by the NPRF since its inception.
A more subtle argument is that there is an element of delusion in countries -- as distinct from individuals -- saving for the future by making investments. Some economists say governments should concentrate on making their economies as productive as possible, so that taxpayers of the future are in the best position to meet the costs of running the country.
Defenders of the strategy say history suggests that, over the very long term, investments like the Fund's should give an annual return of 7pc-9pc. The legislation says payments to the Fund will continue to 2050, with the first drawdowns not before 2025.
They argue that, so long as capital spending exceeds 1pc of GNP, the government can be seen as borrrowing for that purpose, while taxpayers are supplying the funds for the NPRF. The question then becomes whether the taxpayer ought to make these large payments to meet the cost of future public pensions. BRENDAN KEENAN
- Brendan Keenan
