Minister went against advice on fund

The Minister for Finance went against civil service advice in giving the National Treasury Management Agency a lead role in managing the new £5 billion state pension fund. Department of Finance officials were against a statutory role for the agency because they felt it could undermine the independence and credibility of the funds trustees.

Unless the trustees could "hire and fire" the managers of the fund they would not be considered independent, senior department officials argued. The trustees, who will be called the National Pensions Reserve Fund Commission, have yet to be appointed and will come from both the public and private sectors. The new fund - which is to meet the State's future social welfare and civil service pension liabilities - is to be established this year and is planned to grow to be worth up to 30 per cent of Gross Domestic Product over the coming decades. The NTMA will manage the fund for the next 10 years under legislation currently going through the Oireachtas.

The NTMA - set up in 1980s to manage the national debt - was not seen as having anything other than a minor role in running the fund when internal discussions began in earnest during June of last year. The view of Department of Finance officials was that the fund would have its own trustees who could hire a mixture of fund managers to look after the money. "The NTMA may manage the fund on behalf of trustees/directors but this is a decision for the trustees/directors and not the Government, although the NTMA cannot become the sole manager," was the initial view formed by a departmental working group set up to look at the proposal in July last year.

Documents released under the Freedom of Information Act reveal that Dr Michael Somers, the chief executive of the NTMA and a long time critic of the Department, had different plans and some support in high places. A departmental memo from the following September indicates that Dr Somers was already telling international fund managers that he would be managing the new fund.

Mr Jim McCaffrey, the assistant secretary who chaired the advisory committee, raised the issue with the Secretary General of the Department, Mr Paddy Mullarkey, a few days later.

"His [the secretary general's] attitude is that the NTMA should be appointed investment managers to the funds unless there are compelling reasons not to do so. . . my difficulty is that the trustee/commissioners must be as independent as possible. . . their independence might be possibly reduced if the power to appoint investment manager were not to be given to them," wrote the official in a note of the meeting. The two men decided that the matter would have to be resolved by Mr McCreevy.

Later that month the advisory committee recorded its opposition to the NTMA involvement in a written note of a meeting. "Of primary concern to the group was the independence of the trustees. Many members of the group felt that NTMA involvement could be construed as having a conflict of interest and would hinder the independent nature of the trustees," according to the note. They felt that the civil service unions would not fully support the fund - and contribute to it - unless it was completely independent of the Government. Mr McCaffrey then met the Minster, Mr McCreevy, who told him that he had already spoken to Dr Somers and "that the NTMA will be involved in the funds". The Minister said that he saw a role for the agency as a manager of the fund managers contracted to look after the fund on a day to day basis.

"I said that the NTMA's involvement would be likely to cause serious difficulties for the public service unions. . . and the imposition of the NTMA would probably be resisted strongly. The Minister said that this would not alter his decision," the official subsequently wrote in a note.

After discussions with the NTMA the committee remained convinced that "the decision to appoint management/secretarial support to the trustees should be left to the trustees. The legislation should not provide for the NTMA to be given this function. The appointment of the agency would reduce the standing and independence of the trustees in the eyes of the public", according to the documents In October the chairman of the committee wrote to Mr McCreevy saying that it was of the view that it should be left to the trustees to appoint their own investment managers and any role for the NTMA should not be not stipulated in the legislation.

In November McCreevy met his civil servants and Dr Somers. "He indicated that he was disposed to giving the NTMA a role in the operation of the funds," despite his official's concerns, according to a note of the meeting. From early November a representative of the NTMA was co-opted on to the working group.

The Department officials subsequently argued that if the agency was to be involved, then its role should be limited. They also called for the trustees to allowed access third party advice. The matter became an issue of some importance among senior Department officials, as evidenced by a e-mail released by the Department from Mr Michael Tutty, a second secretary in the Department to two of the committee members.

"I see no logic in depriving them [the trustees] of the right to get independent advice without having to send it through the manager and think they should be given this power (will they have power to order coffee for their meetings directly)," he wrote.

In a final submission to MrMcCreevy in April this year, the chairman of the committee accepted the decision to appoint the NTMA as first manager a "good pragmatic one". But the committee argued that the commissioners must have the right to seek third party advice independent of the NTMA.

They also argued for the trustees to have a say in the appointment of the chairman and chief executive officer of the NTMA. A limit of five years to the NTMA appointment was also requested.

Mr McCreevy conceded on the issue of third party advice but has given the NTMA a ten year appointment period in the legislation.