IRELAND - The National Pension Reserve Fund (NPRF) Commission told the Minister of Finance it could not justify investing €7bn to recapitalise two banks in relation to its investment remit, which resulted in legislation enabling the Minister to direct the Commission to make the investment.

Evidence provided to the Committee of Public Accounts' session on the 2007 annual report of the Comptroller and Auditor General - in particular the annual reports for the National Treasury Management Agency (NTMA) and the NPRF - confirmed the fund lost around €6.5bn over the 15 months to the end of March 2009. 

John Buckley, the comptroller and auditor general, told committee members the NPRF was valued at €21.2bn at the end of 2007 but following the financial market turmoil and economic downturn this had fallen to €16.2bn by the end of 2008, although this included an additional state contribution of €1.7bn.

However, Dr Michael Somers, chief executive of the NTMA - which manages the NPRF as an agent for the Commission - revealed in his opening statement to the session last week: "The fund is currently valued at around €17.2bn and has earned a return of 3.8% to date this year."

This follows the negative return reported for the first quarter of 2009 as at the end of March 2009 the NPRF revealed a -6.7% return resulting in a decline in the value of the fund to €15.5bn. (See earlier IPE article: NPRF falls to €15.5bn as Q1 returns -6.7%)

The Committee was told the NPRF had held 10% of its assets in cash balances at the beginning of 2009 however this €1.5bn, and €2.5bn of liquidated bond holdings, were invested into the Bank of Ireland and AIB on the direction of Brian Lenihan, the Minister of Finance.

Paul Carty, chairperson of the NPRF Commission, highlighted a "root and branch review" of the fund's long-term investment strategy was scheduled for 2009, but following the "very significant investment" in the banks he admitted the review would "have to consider the direction we have received form the minister to invest in the banks. Effectively this investment in the banking sector represents 35% of the pension fund".

Carty confirmed the investment in the banks will not change the first date of drawdown from the NPRF - expected in 2025 - but added the recapitalisation had meant the "role of the commission has changed and in a way none could have foreseen only a year ago".

In response to criticism from committee member Deputy Thomas Broughan, suggesting over €6bn had been "frittered away" while another €7bn had been invested in the recapitalisation programme, Somers said the NPRF had "got very jumpy" about international markets in August 2007 so it started to build up cash reserves by placing it in the "Risk averse" Central Bank.

He also told the committee: "The view of the NPRF Commission was that we could not justify investing €7bn in two financial institutions because, in light of our remit under the relevant legislation, there were no circumstances under which we could take that kind of risk. We told that to the Minister for Finance. The result was the Oireachtas passed legislation just this year enabling the Minister to give the pension commission a direction to place this money in the two banks."

Somers confirmed the €7bn consisted of €4bn from the NPRF and €3bn of pre-funded future State NPRF contributions for the next two years, and added: "On the instructions of the minister we put €3.5bn into Bank of Ireland and €3.5bn into AIB but that was based on a direct instruction from the Minister given under legislation passed by the Oireachtas. It was not our decision. We did what we were told."

However, when questioned whether the chances of the NPRF achieving a fund level of €140bn in 2025 were a "total pipe-dream", Carty claimed, "nothing is a pipe-dream. We are not in pipe dreams, we are in reality and we must face up to it. We have invested in global markets, which will come out of recession. The share prices will move up". 

And in response to questioning from Deputy Róisín Shortall regarding the value of the pension fund excluding the recapitalisation investment, Carty revealed, "there is roughly €13bn and €7bn in the banks. The fund stands at €20bn, represented by the €7bn that has gone into the banks and the residual sum of €13bn."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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