Business Irish

Tuesday 12 December 2017

We won't be the first to tap into pensions

Greece and Spain's financial woes are making it tougher than ever for the Government to raise cash for vital state projects. Louise McBride reveals that the €70bn held by Irish pension funds is now being targeted by Brian Lenihan

THE golden eagles of Glenveagh National Park and the planned new runway at Dublin Airport might seem like an unlikely home for the tens of billions of euro of Irish pension money. Yet the Government is quietly eyeing up the massive €70bn sitting in Irish pension funds.

That money, which is largely invested in foreign equities, could be a handy way for the Government to raise cash for some of the ambitious state projects planned during the boom years -- but which have now ground to a halt.

With a massive €24.6bn hole in our public finances last year, we simply no longer have the cash we once had to splash out on the Celtic Tiger's motorways, airports, colleges and hospitals. Figures released last week suggest that our public finances are getting worse. The budget shortfall for last month came to €780m -- up from €747m for the same month last year. Tax take is dismal -- the Government collected just over €3bn in tax in the first month of 2010, compared to €3.7bn in January 2009. And Ireland's woeful credit rating has made it expensive for the Government to borrow money abroad.

The Department of Finance confirmed last week that it is examining whether or not it could tap Irish pension funds as a way of raising money for state projects. "It's something that's being looked at," said a department spokesman.

If Finance Minister Brian Lenihan decides to dip into our pension money to fund infrastructure, we won't be the first country to do so. South Korea's state pension fund is set to take a 12 per cent stake in London's Gatwick Airport. The €59bn Ontario Teachers Pension Plan, which pays the pensions of teachers in the Canadian state, has a big stake in Bristol Airport in Britain. Another Canadian pension fund, the Canada Pension Plan, is among the bidders expected to make an offer for a major electricity distribution network in Britain when it goes up for sale shortly.

"In other countries, pension funds have invested in toll roads, schools, hospitals, and public transport projects through public private partnerships," said Jerry Moriarty, director of policy with the Irish Association of Pension Funds. "Canadian and Dutch funds in particular have invested a lot in infrastructure. Investment in infrastructure is still very low in Ireland but as people look to diversify their investments more, it is an area of growing interest.

"Having said that, a lot of pension funds prefer to invest in a project once it's built -- construction risk is not something pension fund managers like to take on."

Grainne Alexander, managing director of F&C Ireland, which manages Friends First's pension fund, said that while pension fund managers would consider investing in projects such as toll roads, they could steer clear of sustainable energy projects.

"There's a huge capital outlay with energy-related projects, and for the investor, the question is 'when will the return come?'" said Ms Alexander. "Pension fund managers would consider the risk and expected return of a project (before investing in it). Liquidity is also an issue to be considered -- it might be hard for an investor to get out of a particular project and that can be a problem if you're winding up a pension scheme or transferring members from a scheme."

Ms Alexander, however, said that with such a "huge bank" of pension assets, it might make sense for Irish pension funds to consider investing in infrastructure -- as long as there's something in it for the pension fund.

"Before investing in something, pension fund managers look for an income," she said. "They want to see their investment growing and income coming in. Toll roads may be of interest as tolls could increase each year with inflation. Intuitively, the idea of pension funds investing in infrastructure seems reasonable. But the question is whether or not the Government could package something with terms and conditions which could attract the Irish pension funds."

In its pre-budget submission, the Construction Industry Federation (CIF) called on Mr Lenihan to set up a government infrastructure bond as a way of getting Irish pension funds to invest in state projects. "In the absence of an initiative, such as the infrastructure bond, it is hard to see where jobs are going to come from in the Irish economy," said CIF director, Tom Parlon. "We are fortunate in having a large number of projects either ready to go or at an advanced stage, which means we can give an immediate boost to the economy through infrastructure spending."

Jim Power, chief economist with Friends First, believes that pension funds are more likely to invest in infrastructure bonds than to invest directly in a state project.

"The whole pensions funds industry has to get real about what it's doing," said Power. "The mantra from the industry so far has been to invest in equities, and I question the wisdom of that.

"Pension funds have to diversify into less risky assets, and government infrastructure projects would fit into that profile. Similarly, the money the Government would pay to pension funds (for investing in infrastructure) would stay in the country -- whereas the interest the Government is paying on bonds is going out of the country."

The big stumbling block for any investment by pension funds in state projects is that there must be something in it for both the Government and the pension fund. The Government is unlikely to pay more interest on money raised from Irish pension funds than it would if it borrowed the money elsewhere.

"If the Government gives a generous return to Irish pension funds that invest in infrastructure, what's in it for the Government if they can get a cheaper loan somewhere else?" said a government source. "And if pension funds can't get the return on an infrastructure investment that they'd get elsewhere, what's in it for them? There's a big push from Government for green projects. Great if pension funds are willing to carry the risk of investing in green projects -- but pension funds tend to be fairly conservative."

Despite such concerns, the Department of Finance clearly hasn't dismissed the idea of tapping into Irish pension funds. And with pension funds outside Ireland busy pouring money into power grids and airports, it could only be a matter of time before our nest eggs find their way there, too.

Sunday Independent

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