With the good times rolling – at least for the public finances, if not our own – figuring out what to do with this largesse has become something to think about.
Bankrolled by bumper corporate tax receipts, the exchequer’s budget surplus this year is expected to be about €10 billion. And it could be more than double that, at some €21 billion, by 2026, based on current forecasts. Indeed between now and 2026, about €65 billion could be generated in budget surpluses – proportionally the largest in the euro zone.
But what are we to do with it? Ireland already has a rainy-day fund, but such budgetary excesses suggest there is scope for a further savings fund. Setting up a new long-term reserve fund has been hailed by Minister for Finance Michael McGrath as “a once-in-a-generation opportunity to make our nation’s finances safer”.
Further details are expected to emerge over the summer, in the Summer Economic Statement, but in advance of this, we take a look at what might our very own sovereign wealth fund spend its money on.
Sovereign wealth funds
While not new, sovereign wealth funds have undoubtedly grown in influence and size in recent years. Recent figures suggest almost 200 funds worldwide have more than $11.5 trillion in assets – a sharp increase on the $1 trillion held just 20 short years ago.
The most famous, perhaps, and the largest is the fund Norway created from the sale of its oil reserves, with other oil rich countries – such as Kuwait United Arab Emirates, Qatar and Saudi Arabia – also having significant state vehicles.
The National Pensions Reserve Fund was set up in 2001 to provide funding for the cost of ageing. However, it was raided during the financial crisis
Though some way short of Norway’s $1.3 trillion, Ireland’s expected windfall could lend itself to the creation of a substantial fund. Alaska’s Permanent Fund Corporation, for example, created as a way of saving a portion of the state’s oil revenues for future generations, has total assets of some $79 billion, which ranks it as the 21st largest such fund.
It wouldn’t be the first such type of fund established in Ireland. The National Pensions Reserve Fund was set up in 2001 to provide funding for the cost of ageing. However, it was raided during the financial crisis. Most of the funds that had built up were used to recapitalise the domestic banking sector, with the remainder transferred to its successor, the Irish Strategic Investment Fund (ISIF), a sovereign development fund that invests on a commercial basis to support economic activity and employment in Ireland.
And we also have a so-called rainy day fund, the National Surplus (Exceptional Contingencies) Reserve Fund, or NRF. This was set up in 2019 to support the economy in the event of a severe shock. This fund is also primarily invested in liquid assets, which can be called upon in a hurry if needed.
It was recently replenished to the tune of €6 billion (it has a ceiling of €8 billion) after having been called upon during the Covid-19 crisis, when a withdrawal of some €1.5 billion was made.
The new fund is expected to have a much broader and longer-term investment remit, making it very different in scope to the National Reserve Fund. So what might it do?
Fund our retirement
An ageing population is storing up potential problems in the future. As noted in the Department of Finance’s recent briefing report “Future proofing the public finances”, increased longevity means higher healthcare, pension, and long-term care spending. And with fewer people working to support a higher number of people retired due to the demographic configuration of the population, this is expected to put a crunch on the exchequer’s coffers.
According to the report, age-related spending is expected to be about €7 billion-€8 billion higher by the end of this decade than it was at its start. And this is simply the “standstill” cost; thereafter costs are expected to increase “exponentially”.
While the National Pensions Reserve Fund was expected to meet part of the cost of population ageing, as already mentioned, it ended up being liquidated during the financial crisis post-2008.
As such, it is likely that one of the roles of the new fund will be to provide funding for future pension costs. After the Government last year opted not to increase the state pension age, from 66, there are fears that mounting retirement costs are a ticking time bomb. While the fund wouldn’t be big enough to deal entirely with these costs – the department has estimated that the cumulative cost of keeping the State pension age at 66 could be about €50 billion by 2070 – it could offer some help.
Some countries have established sovereign-type funds with a sole focus of helping to cover pension shortfalls. The Japanese government pension investment fund, for example, is one of the world’s largest, with a value of some €1.35 billion.
Give money back to us
Where sovereign wealth funds can get interesting, perhaps, is when they decide to pay out to residents. While the vast majority don’t, some do. Every year, for example, the Alaska Permanent Fund pays out an annual dividend to every state resident, sometimes called an “oil wealth check”.
The fund was established in 1976 as a way of redistributing wealth generated from the state’s oil rich reserves. It was worth about $80 billion as of 2021.
To qualify for the payment, you have to be resident for the year preceding your application. The payment typically is in the $1,000-$2,000 range, but last year it reached $3,284 (€3,049), or about €250 a month.
For many Alaskans, the payment is akin to a universal basic income, with a poll showing that almost three-quarters used it for essentials, emergencies, paying off debt, or for future activities like retirement or education
This was due in part to rising oil prices, but also because the state rolled in a $662 energy relief payment to help people cope with rising energy prices to the dividend.
And it wasn’t the largest ever payment; when adjusted for inflation, the largest payment came in 2008, at $4,352, according to Alaska’s Legislative Finance Division.
For many Alaskans, the payment is akin to a universal basic income, with a poll showing that almost three-quarters used it for essentials, emergencies, paying off debt, or for future activities like retirement or education. Moreover, it is not seen as a disincentive to work; just 1 per cent of recipients said it made them work less.
Invest outside Ireland
While Irish residents might stand to benefit from a sovereign wealth fund, it’s likely that such a fund won’t look to invest in Ireland. Take Norway’s fund: it only invests abroad to ensure that it doesn’t overheat the local economy.
With some $1.3 trillion in assets, it is invested in 69 countries. It invests in a host of Irish assets, including Ryanair, AIB, Bank of Ireland, Dalata, and Cairn Homes.
So perhaps a new Irish fund could return the favour. Equinor, the state-owned oil exploration company, or Mowi ASA, a fishing company headquartered in Bergen with an Irish operation, are potential targets.
Buy a soccer club
Unlikely perhaps, but it is a route adopted by many Middle Eastern funds to gain so-called soft power in the West – as well as turn a profit.
Yes, sovereign wealth funds now play a big role in soccer, with Paris Saint-Germain owned by Qatar Sports Investments, a subsidiary of the Qatar Investment Authority, for example. Manchester City owner Sheikh Mansour is also chief executive of Abu Dhabi’s sovereign wealth fund. More recently, Saudi Arabia’s Public Investment Fund paid £350 million back in 2021 for an 80 per cent stake in Newcastle.
And now, Qatar is said to be targeting top Premier League clubs, including Manchester United.
However, there have been concerns about the appropriateness of such funds investing in sport. In the case of Newcastle, there have been calls for the Premier League to reconsider the Saudi fund’s takeover of the club, due to queries as to how separate the fund is from the Saudi state. The governor of the Public Investment Fund, Yasir Al Rumayyan, is also chairman of Newcastle – and the chairman of the fund is Saudi crown prince Mohammed bin Salman.
The Saudi fund is also heavily invested in golf, with the controversial LIV Golf tour almost exclusively financed by it.