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  • The National Pensions Reserve Fund: an obituary

    November 30, 2010 @ 12:30 am | by 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.

  • Still waiting for “new faces” in Government, S&P downgrades Ireland

    November 24, 2010 @ 7:00 am | by Laura Slattery

    Poor Frank Gill. The Standard & Poor’s sovereign debt analyst was one of the first people to set our democracy alarm bells ringing when in March 2009 he surmised there was a need for “new faces” in government. This rare example of simultaneous perceptiveness and gall outraged the Dáil, which can usually only muster up the latter. In any case, that was way back when S&P’s best brains were cutting Ireland’s credit rating to a now covetable ”AA+”. Things have moved on, in the markets’ eyes at least. Shortly before midnight last night, the ratings agency downgraded Ireland from “AA-” to “A”, outlook very much negative.

    And, no, an A is not good, as I wrote here, back when it was still possible to be glib about these things.

    The statement by Standard & Poor’s makes little mention of political instability, with just a quick, throwaway blackmail about Ireland’s credit ratings coming under “renewed pressure in the short term should the domestic policy consensus weaken”. You will be shocked to discover that neither the sensitivities of Dermot Ahern and Noel Dempsey, nor Paul Gogarty and his unpredictable childcare arrangements, nor Brian Cowen’s sexist remark about Joan Burton, make the cut. Instead, Frank Gill emphasises that the lower ratings “reflect our view that the Irish government will have to shoulder additional costs associated with further capital injections into Ireland’s troubled banking system”. By Irish government, he means us.

    The statement says lots of other nasty things too, although none of this will surprise anyone at this late stage of the game, what with Bank of Ireland set to join Anglo Irish Bank, AIB et al on the roster of failed, nationalised institutions that we will desperately try to offload on anyone rich enough and brave enough.

    Despite the speed at which events are unravelling, this may not happen overnight. ”In our view, Ireland’s banking system will take several years to downsize,” says Gill. “The outlook for future costs to the government from financial retrenchment remains uncertain.” (Some commentators are talking about a quarter of a trillion, all in.) Meanwhile, ”the high overhang of private debt, fiscal austerity and the uneven outlook for external demand in Europe” means that S&P now expects “close to zero nominal GDP growth for 2011 and 2012″.

    Frank’s still waiting for his “new faces”, as are we. In some ways, it’s comforting that an organisation whose clients are the power-crazed, plutocratic institutions we know as “bondholders” has been even more naive than local democracy fans when it comes to the office-clinging abilities of Fianna Fáil. On the other hand, a general election or no general election – pffft. Worryingly, it now seems that bit more irrelevant to the credit ratings agencies and their institutional investor paymasters.

    Standard & Poor’s will hold a teleconference on its downgrade decision at 3.30 pm today, although frankly I’m planning on training the full leaden weight of my gloom in the direction of the gothic horror that is the four-year austerity plan – upon which you will find news updates and commentary at, here at The Index blog and on

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