Strict criteria for £5bn pension war chest

The £5 billion (€6.35 billion) fund set aside by the Government to fund social welfare and public service pensions after 2025 will not be used to "bale out" stocks on the Dublin market, the chief executive of the National Treasury Management Agency (NTMA) has said. But while Dr Michael Somers said it was likely that much of the money would be invested outside the State, he declined to reveal his projections for the level of funds which the NTMA would invest in the domestic market.

The fund, to be controlled by an independent commission whose decisions will be implemented by the NTMA, will be formally established once legislation is enacted by the Oireachtas. This is expected later in the year.

The Government decided a year ago to set the money aside to meet future pension liabilities because demographic projections suggest that the proportion of people aged over 65 will rise significantly after 2020. This is important because State pensions are usually paid from current income - a rise in the number of pension claimants could lead to higher taxes in 20 years if no special provision is made now.

Funds from the sale of State assets - possibly from the proposed flotation of Aer Lingus and other semi-States - together with a sum equivalent to 1 per cent of annual GNP will be invested each year to meet the pension liability in the future.

The £5 billion includes the proceeds in 1999 from the flotation of Telecom Eireann, now Eircom, and a £1.85 billion payment due later this year, largely derived from the Government's budget surplus.

Yet the pension scheme is just one of five new businesses which the NTMA will enter in the near future.

Legislation planned by the Government and bills before the Oireachtas provide that the body, which was set up in 1990 to manage the National Debt, will operate a central claims management service for public bodies. Excluding Army deafness cases, such claims cost the State £100 million last year.

The agency will also provide a Treasury service to effectively pool the funds of public bodies. The idea here is that one authority will not place large deposits in a bank on a low rate of interest while another borrows from the same bank at a higher rate. Bodies will not be obliged to use this service, though the agency hopes to offer competitive rates.

In addition, the NTMA will formalise its international consulting business, which already has links with Russia, Brazil and other states in eastern Europe. The body will also assume responsibility for the management of funds held in "dormant" bank accounts although the Minister for Finance, Mr McCreevy, has yet to specify the period of dormancy which will elapse before the NTMA takes control of the funds.

Dr Somers said the expanded scope of the NTMA's business arose after a "two-way" process between the agency and Mr McCreevy.

The body will retain responsibility for the National Debt, which stood at £34.7 billion at the end of last year. Forecast to decline to £33.3 billion this year, the NTMA believes it can reduce the debt by £1.5 billion in each of the following two years if economic conditions remain constant. This will depend, however, on the size of future budget surplus recorded by the Government.

While the absolute debt level has remained within a narrow range in recent years - it increased by £1.4 billion last year - common measures of indebtedness indicate that the State's future liability has decreased sharply in relative terms.

The debt to Gross Domestic Product (GDP) ratio is forecast to reach 45 per cent this year less than half the rate in 1993 when it stood at 96 per cent. Achieved on the back of the recent boom, this significant reduction means the Republic had the fourth-lowest debt-GDP ratio in the EU at the end of 1999.

This contrasts with the difficult days of the 1970s and 1980s, when governments borrowed funds in attempts to spend their way out of recession.

The Department of Finance and the Central Bank, who previously managed the debt, were unable to retain financial staff because debt experts were in great demand in private sector, where wages were higher.

Crucial to the NTMA, which had an administrative budget last year of £6.3 million, was its ability to hire staff on contract, outside the strictures of public sector pay guidelines.

While a considerable degree of planning has gone into the development of the NTMA's new business units, Dr Somers said the likely effect on its size is still unclear.

He favours staying small - the agency had 52 staff at the end of last year - though he acknowledges that the agency's size in the future will be largely dictated by the decisions of the commission whose members will control the pension fund.

Appointments to the commission will be in the gift of Mr McCreevy once the legislation is enacted. Dr Somers declined to speculate on who its likely members will be.

Only when the commission is appointed will crucial decisions on the investment of the £5 billion and other funds be made. Key questions on matters such as the investment strategy to be adopted, the weighting of portfolios and the use of outside expertise will then be addressed.

However, a number of issues are already clear. Dr Somers said the new fund will provide money for only one-third of the State's liability in 2025. In addition, there will be a statutory prohibition on drawdowns from the fund before that time.

Of the proposed management of claims against the State, Dr Somers said that it was "up to the Government to decide what claims will be dealt with." The broad plan, however, is for the agency to settle claims quickly in cases of genuine injury - reducing legal expenses which increase with the time spent processing a case. The body would "resist" or challenge suspect claims, said Dr Somers. "Judgment calls will have to be made."

This is costly area for the State. Of the £100 million last year, some £30 million was was spent on legal and other expenses.

On the management of dormant accounts, Dr Somers said he does not see this as a major activity. While the new business will represent a significant expansion of the NTMA's activities, Dr Somers said it was unlikely to add greatly to its turnover, which ran last year at more than £200 million. "I don't see it going up enormously because the business is different."