When it comes to pensions, Charlie McCreevy may turn out to be the Ireland’s prudent man. As Irish finance minister he has been a non-stop reformer, but his crowning glory, if republicans can have such, could well be the National Pensions Reserve Fund (NPRF).
The concept was one of the proposals contained in the National Pensions Policy Initiative report from the Pensions Board in Ireland in 1998, it certainly caught McGreevy’s eye and in a few short years this project is fast becoming a reality thanks to his determination that some of the assets released by privatisation and flotation of the Irish telecoms provider, as well as using part of the country’s budget surplus, to build a fund to ease the future strain on public sector pensions, both the burgeoning civil servants scheme and social welfare commitments.
The NPRF has been set up under special legislation with a brief to invest assets on best available terms, with one proviso, that Irish government bonds are off the agenda. The fund is not be used as a cheap way to finance future state spending, by stuffing it full of government paper. Also, there is a determination to ring fence the operation from future predators and to leave the assets to accumulate.
The National Treasury Management Agency(NTMA), which was established to manage the national debt, was the body chosen to implement the NPRF and it did all the preparatory work to pull the pieces together, under the guidance of its chief executive Michael Somers, and will now be responsible for the day to day running of the fund, and has that function for the first 10 years of the fund.
The oversight is provided by an independent commission of seven, which includes Somers and Brid Horan, who runs the pension fund of the Electricity Supply Board, one of the country’s leading funds. The commissioners, who are like part time non-executive directors or trustees, will be responsible for setting strategy and overall control of the fund, as well as the appointment of the advisers, including asset managers.
Already a number of appointments have been made, with consultants Bacon & Woodrow charged with helping the NTMA search for a global custodian for the E6.5bn fund.
In an unusual brief, international consultants Mercers was chosen to provide regulations as to how the fund’s portfolio be constructed, covering such issues as the bond/ equity split, the active and passive split, benchmarks and so on. Following this Frank Russell were chosen to advise on the selection of the investment managers, while Watson Wyatt was given the task of finding a transition manager.
Then in the middle of summer, the NTMA unveiled the E6bn array of investment mandates it was putting into the marketplace though the EC tendering arrangements. In a novel step for such an exercise, the NTMA used a web-based platform, in conjunction with the IPE-Quest system.
The huge RFP, comprises an E2bn Euro-zone equity brief with a number of active mandates, also including E700m active global equities and E900m active pan- European briefs, as well as those for US, Japan, and Pacific Basin. The upshot is that at the time of the money being actually committed to the market, the fund will be invested 40% in Euro-zone equity, 40% in RoW equities and have a 20% commitment to Euro-fixed income.
There had been considerable speculation as to what extent there could and would be investment in Irish equities. Somers said at the beginning of the year: “Probably very little will end up in Irish equities, since Irish stocks come to just 1% of Euroland equities.” A study undertaken for the Irish Association of Pensions Funds also robustly declared that domestic assets should be shunned in favour of overseas securities. The selection of a new battery of managers coming through the selection process should be completed by early winter all going well. The fund can take some comfort from the fact that it is getting its money into the markets at a time where the gloom about markets means they are well off their peaks of last year.
The Irish government is committed to setting aside 1% of GDP each year into the NPRF until 2050. At that point, depending on assumptions, assets could have grown to 50% of GDP.