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  • irishtimes.com - Posted: November 30, 2010 @ 12:30 am

    The National Pensions Reserve Fund: an obituary

    Laura Slattery

    The National Pensions Reserve Fund (NPRF), which has died aged nine from infanticide caused by multiple stab wounds, was born under the premise that it would prepare the Irish State for a pensions “time-bomb” due to explode in the decades ahead as Ireland’s population ages inexorably into an impoverished abyss.

    It was the best of what would prove to be a series of generally good times for its creator, then Minister for Finance Charlie McCreevy, who legislated that at least 1 per cent of gross national product would be committed to its coffers each year, on top of the proceeds from the flotation of the much-loved Eircom. This, he said, would pre-fund a rising public sector and State pension bill from 2025 and beyond. There were to be no drawdowns until that date.

    From its official launch in April 2001, when the fund had £5 billion (€6.35 billion) in good old Irish punts to play with, McCreevy proudly declared that he had “no power to give directions to it or to seek to influence its investment mandate in any way”. The academic Patrick Honohan, who would later become governor of the Central Bank, called it “the most important initiative in economic policy for the past decade”. From its birth, however, there were fears that the fund would flirt with potentially disastrous investments, such as dotcoms, which were fashionable at that time. Indeed, the decision to require the fund’s managers to engage in stock-picking rather than simply acting as a passive “index fund” tracking the whole investment market served to push up costs (while making a lot of market types a lot of money).

    Recommendations by Honohan and others that the fund be precluded by law from holding Irish assets in order to prevent “pressure from promoters for the fund to finance worthy-sounding but unviable projects” were not followed. Critics of the fund’s overseers, the National Treasury Management Agency (NTMA), would later point to potential conflicts of interest. One branch of the NTMA, the National Development Finance Agency, was in the business of advising public-private partnerships (PPPs) on how to secure the lowest-cost financing, while the other branch, the NPRF, was figuring out how to maximise the commercial returns.

    The rationale for the “rainy day” fund was consistently questioned. Economists from across the ideological spectrum wondered why McCreevy was intent on setting aside money for the pension fund while at the same time cutting back on infrastructure spending. Its surplus evaporated, the Government was borrowing in order to both save and spend – an economic strategy described as “unique”. In a 2002 election pledge, the Labour Party advocated using billions from the fund to build schools, hospitals and roads, for which it was accused of not taking public and State pensions seriously. But it lost the election and Ireland’s sovereign wealth fund was instead kept for a higher purpose.

    As far as investment performance was concerned, the fund enjoyed some early luck. The time devoted to the recruitment of fund managers in 2001 meant the initial investment was held safely on deposit during that disastrous year for equities. Entirely coincidentally, once the fund managers got their mitts on the money, the fund’s value began to slip back and it lost €763 million by the end of 2002. The State’s distinct lack of an ethical investment policy also proved controversial – tobacco vendors Philip Morris, Imperial Tobacco and British American Tobacco; cluster bomb makers such as Lockheed Martin, Raytheon and Thales; and Iraq war profiteer Halliburton were among its hottest stock picks.

    In 2003, the NPRF pulled itself back into the black. A year later, the fund value crossed the €10 billion mark, while 2005 was stellar all round as it pocketed returns of almost 20 per cent. By 2006, it was busy getting stuck into the burgeoning bubble in private equity. In July 2006, then Minister for Finance Brian Cowen denied suggestions that the Irish economy was a “headless chicken”, citing the NPRF as one of “the hallmarks of an economy which is prudentially and well managed”. All had changed utterly by 2008, when Minister for Finance Brian Lenihan signalled that he was reviewing payments to the fund due to the State’s mounting deficit. But the fund would not be “raided” to prop up public finances, he pledged. “I don’t succumb to temptations like that.” Michael Somers, the NTMA chief executive at that time, added “future generations will thank us” for the foresight of maintaining “a big kitty”.

    As Ireland’s banks lurched from crisis to crisis, the NPRF’s status as the sole evidence of Irish economic prudence began to look in even greater jeopardy. In March 2009, the Government used emergency legislation to give €3.5 billion each to AIB and Bank of Ireland from the fund in exchange for preference shares. The bank recapitalisation project was in full, cash-devouring swing. In 2010, an additional State investment of €3.7 billion was assigned to AIB, while on November 28th, in a fatal blow, the fund was further drained of “approximately” €10 billion in order to prop up Ireland’s ”black hole” banks. There would be no schools, hospitals and roads, no NPRF-funded stimulus and pretty much no pre-funding of State pensions. The liquidation was set to begin.

    From a total fund of almost €25 billion, just €4.2 billion remained in the “discretionary” part of the pension pot, with no new influx of money on the heavily indebted horizon. The fund’s passing was nevertheless marred by the insistence in official quarters that the monies invested in the banks would one day secure an investment return for the fund and maybe even allow it to fulfil its original purpose. The demographic pensions “time-bomb”, which will see the ratio of workers to pensioners shift from five-to-one to two-to-one by the middle of the century, continues to tick down as before.

    National Pensions Reserve Fund, born April 2001, died November 28th, 2010; survived by a sister, Nama.

    • brendat says:

      Excellent article written in ‘layman’s’ language, tragic ending. Woe are we….

    • Paul says:

      There is now literally nothing left to note of the “quality”times of the economy. What a sad time. Paying for 100% of the bailout when in reality there are complicit parties in the proverbial sturdy nations of France and Germany who lent to fund our insane growth. To be fair to Charlie McCreevy, he is often derided on the paraphrased “when i have i spend it” quote. He did a very good thing and although his intentions to use it to fund for civil service pensions may have been misguided, those who came after him should have known to funnel more funds into the NPRF. I was in college graduating in 2006 and i didnt need an education to be told to save for a rainy day not during a rainy day as the Government did from 2004-2007. I think the likes of David McWilliams, George Lee etc. deserve an apology for nobody in power listening to their warnings on the need to cool the economy and box off the property market.

    • Justin says:

      Great piece.

    • Tony Bowe says:

      Great piece but why are we allowing this to happen?

    • Simon says:

      An appropriate obituary for the pension fund. The raiding of the Irish pension fund to invest in the rotten banks leaves us utterly bereft. It is a dire punishment and it is designed to strip us of any remaining financial independence.

      Padlocked to the ECB and with nothing in the kitty we cannot undertake any alternative default or other independent strategy. The same shackles have been applied by the IMF to the sale of any other State assets – it is a condition that the proceeds cannot be used for stimulus but must go towards loan repayment.

      The pension fund robbery is also well described (with dark humour) at: http://kpswa.wordpress.com/2010/11/29/armed-robbery-at-irish-pensions-reserve-fund/

    • Max says:

      Craven administrative traitors facilitated the pillage of Ireland. Crippling the pension plans simply completes mopping up what few financial crumbs remain. I had hoped the Irish would show some spine and take down those institutions who have impoverished the country. Instead, Ireland has been kicked like a sad old mangy dog, whimpering, cowering and afraid to show what few teeth remain. Irish pride will soon follow NPRF to its grave.

    • H Canu says:

      How can Ireland allow Cowen to mortgage their future when he is directly responsible for the financial crises?

      There seems to be something terribly wrong in the structure of Irish rule. When do the Irish assign accountability and take away authority – after being knowingly sold down the river?

      I would think that if Cowen and his group of finance hucksters are allowed to assign the Irish to being EU serfs, then Ireland deserves what Germany, France and Britain are demanding. In essence, they are establishing an unelected governing control party, remotely located, that will feed what will become EU bureaucracy elites – a structure that will evolve to that of China’s.

      Iceland saw through this use of financial serfdom to usurp democratic ideals. Up to now, Ireland has not. Heck – even Ireland’s pension money is now being propagandized as part of an “EU” rescue plan!

    • Steve O'Reilly says:

      The pension fund should be used to help restructure our society and ease the burden of the least well of .Not used to fund the banks . But I think we should use it now instead of borrowing money at such high rates .

    • Cian says:

      What difference does it make for the pension fund to invest in the irish economy and seek returns on it rather than investing in other areas/countries? Surely this money will be paid back in the same way that the ECB and IMF loans will be too?

    • Robert Browne says:

      The NPRF was never a true national fund as it was to be used exclusively for the body politic and other public sector jobs. It should have been called the PSPRF (public sector pension reserve fund) but that would have been giving the game away! Many people think it was being used to pay the state pension/old age pension, it was not.

      “Economists from across the ideological spectrum wondered why McCreevy was intent on setting aside money for the pension fund while at the same time cutting back on infrastructure spending.”

      Go figure! McCreevy knew that the fund was to be used exclusively to pay government workers pensions. He knew they were expanding government jobs at break neck speeds and break neck records. Every year the Comptroller and Auditor General bemoans the fact that there is an escalating contingent, unfunded public sector pension liabilities of at least 114bn. That means they are being paid from the cash register or directly from the exchequer. McCreevy knew that the 2025 bit was mere window dressing which could be changed at the drop of a hat. Just as a 10 year NAMA will become a 20 year NAMA or just as the Moriarty tribunal that was to report “expeditiously” is still yawning on after 13 years or just as a 3 year IMF rescue will become a perpetual rescue until we do a structured default.

      Hohohan and Lane wanted the fund to be ring fenced and not mono invested. It has been neither having been raided and mono invested and that is just another of the reason the state is insolvent.

    • Peter Lydon says:

      You don’t get it Steve…we should not used tax payers money from the pension fund to rescue reckless investors in Irish banks. Nor should we borrow vast sums from the IMF-EU fund. We shouldn’t be borrowing anything for anything. The markets know that the EU will try to bail out countries and so they have begun to attack Spain and Portugal. If we let the banks go (having set up a state bank) then the investors would cut a deal with Spain and Portugal for 20c in the Euro or whatever they could get.

    • H Canu says:

      regarding the comment by “Clan”, the difference is that Irish money is being spent on the past, not the future. Bailing out the banks, in the fashion it is being done, is just exchanging Irish pension money to bail out the investing mistake of British, French and German bank investors. They were conspirators in the folly, as lenders, just as the Irish were as borrowers. However, the Irish bystanders have been kidnapped and held for ransom to make the marauding foreign financiers whole again. Don’t permit societal guilt to chain your future to serfdom.

      Whether you feel my view is right or wrong, one can not argue that a leadership that implemented and fostered the very policies that caused this mess should not be the leadership a democratic society engages to lead them out of the mess. There simply is no logical or emotional rationale for this, outside of depression. Get your heads together and take back your country from foreign bankers and Irish “bluebloods” who lead you astray. It should be no EU deals until you have in place your leadership for the future, not for a monumental coverup of the past.

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