IRELAND - Brian Lenihan, the minister for finance has confirmed the government could use the National Pension Reserve Fund (NPRF) "in certain circumstances" to shore up its banking industry and financial system.

His comments followed the publication of a recapitalisation proposal put forward by the Irish Association of Investment Managers (IAIM) last week to combine private investment from institutional investors - including large pension funds - with investment by the State.

After a meeting with representatives from the banking institutions covered by the government's guarantee scheme on Friday, Lenihan issued a statement in which he revealed an assessment of the institutions had determined the capital position of each one to be "in excess of regulatory requirements as at 30 September 2008", and said even in "certain stress scenarios" the capital levels will remain within these requirements up to 2011.

Despite the findings of the report, the minister for finance admitted "international capital market expectations in relation to capital levels in the banking sector have altered", and pointed out for some institutions the additional capital needed "may be very modest, whereas for others the need may be greater".

He said some institutions are already in discussions with potential investors while the Bank of Ireland (BoI) confirmed in November it had "received unsolicited approaches from a number of parties wishing to make an investment in the Group, adding "no decision on these approaches has been made".

Lenihan confirmed "in certain circumstances it would be appropriate for the State, through the NPRF or otherwise, to consider supplementing private investment with state participation, where in doing so the aim of securing the financial system can be better met".

He also added State involvement "will be assessed on a case-by-case basis in view of the overarching objective to preserve financial stability", and in line with EU state aid rules and best practice.

Confirmation that the government is considering using the NPRF to shore up the troubled banking system has supported by trade unions, such as Unite, which pointed out the NPRF invests in 170 banks of which only four are Irish.

Jerry Shanahan, Unite national officer and member of the ICTU banking group, said: "The government is standing by, allowing rumour and speculation concerning private equity and sovereign wealth fund (SWF) investment to destabilise our banks and to create massive uncertainty among staff and management at the banks.

"If it is deemed perfectly acceptable to invest our NPRF in 166 overseas banks, we should ask why it seems so uncertain to act swiftly in a domestic crisis. The minister for finance has it within his power to act today to send these economic vultures' packing and use the NPRF as the basis for producing solutions to the current difficulties," added Shanahan.

Meanwhile, Larry Broderick, general secretary of the Irish Bank Officials Association (IBOA), said: "Surely it is not unreasonable to suggest that some or all of the €1.5bn in cash it [the NPRF] has available at present ­ not to mention the additional funds it holds elsewhere - could be invested in the Irish banking system. Likewise Irish-based pension funds - which already have a major stake in the Irish economy - should also be persuaded to provide further support for Irish financial institutions."

That said, calls for pension funds to rescue the financial sector have been followed by reports claiming a number of defined benefit (DB) schemes are on the verge of collapse because of stringent funding rules.

Turlough O'Sullivan, director general of the Irish Business and Employers Confederation (IBEC), said: "It is time that the government and the Pensions Board as the regulator, faced up to the serious difficulties that DB pension schemes are facing. The current obligation on schemes to be 100% funded on a discontinuance basis is not sustainable."

The rules currently require pension schemes to be able to meet all of their liabilities should the pension scheme have to wind-up, however IBEC noted the industry has already estimated three our of four DB schemes could fail to meet the funding standard compared to just one in four at the end of 2006.

O'Sullivan said: "The problems facing employers are being exacerbated by poor investment returns, declining asset values and longer life expectancy. Employer contributions have had to rise significantly in recent years simply to meet the draconian discontinuance funding standard. DB pension costs are increasingly regarded as a ‘bottomless pit'.

"The funding standard and other regulatory requirements are leading to the demise of DB pensions. Employers have a responsibility to act: if they increase payments beyond what can be afforded, this threatens the viability of employment and of the business," he added.

IBEC's comments follow reports in the Irish media revealing a leaked memo prepared by the department of social and family affairs has estimated the total pension deficit had increased to between €20-30bn as a result of the financial crisis, with 90% of DB schemes expected to be in deficit when they report solvency levels to the Pensions Board.

In response to the reports, Mary Hanafin, minister for social and family affairs, said: "These are turbulent and difficult times for money markets where most pension funds are invested. Pension fund managers have yet to report on their funding standards to the Irish Pension Board, but in public comments they have indicated that funds are subject to market fluctuations."

She stated the government is continuing to "closely monitor the situation" and is preparing proposals on the long-term strategy on pensions following the submissions made to the Green Paper on Pensions earlier this year.

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

Topics