Budgetary policy is all too often dictated by short-term political considerations. The Minister for Finance of the day typically presents a package concentrating on the cash moving in and out of the Exchequer for the forthcoming year. For this reason, the establishment of the National Pensions Reserve Fund is a welcome indication of a longer-term perspective.
To date, the State's pension liabilities have been funded on a "pay-as-you-go" basis, with the cost each year falling on the Exchequer's current budget. Because of demographic trends, this is not sustainable in the long term. The proportion of people of working age, relative to those over 65 years of age, will fall from 5:1 now to 2:1 by the middle of this century. The annual cost to the Exchequer will rise from 4.7 per cent now to more than 12 per cent by 2050. It is thus prudent to put some money aside now. The legislation will ensure that one per cent of GNP will be paid into the fund each year by the Government. Already some £5 billion is invested in it, comprising the contributions for 1999 and 2000 and the proceeds of the Telecom Eireann privatisation. The assets will start to be drawn down in 2025, with the amounts dictated by the percentage of the population reaching 65 years of age.
The minister has established a seven-member commission to oversee the fund. They alone will have discretionary authority to determine and implement its investment strategy. The commission - chaired by Mr Donal Geaney, chairman and chief executive of Elan - will have a heavy responsibility. Their key task will be to develop a solid investment strategy to win the confidence of the public. The commission will have to navigate the inevitable conflicts of interest which will arise - some members work for companies in which the fund may wish to invest and others for investment banks with which it might want to do business. It goes without saying that its operations must be transparent and that the commitment to remain free of political interference must be strictly adhered to.
A heavy responsibility will also fall on the National Treasury Management Agency, which will undertake the day-to-day management of the fund. The NTMA has an enviable record in managing the national debt - effectively looking after the State's liabilities. Now it must turn its talents to investing assets. It should have the expertise for the job. Like the commission members, however, it is essential that the NTMA conducts the management of the fund in an obviously fair and open way.
The Exchequer is currently running a strong surplus and thus putting money aside to invest in the fund is not unduly onerous. However the real test will come when there is less money available. But putting money aside for pension liabilities must remain a priority; otherwise the consequences of an ageing population could have even more serious consequences for the Exchequer in the longer term.