The Irish National Pensions Reserve Fund – the war chest the Irish government hopes will help plug the future hole of its social welfare costs and civil service pensions - should shun domestic investment in favour of overseas securities.
And the Ir£4.8bn (E6bn) fund should initially buy foreign bonds rather than equities due to the extreme valuation ranges of global equity markets, says a research report prepared for the Irish Association of Pension Funds (IAPF) by consultant Shane F. Whelan & Co.
The report, however, stresses the importance of political freedom for the fund’s management commission.
Drawing attention to the experiences of other countries with similar funds, which have mainly invested in government bonds and rarely abroad, the report notes that these have sometimes resulted in returns even lower than those on bank deposit rates.
The reserve fund will only have one restriction: not to invest in Irish government bonds, and its only objective is to secure an optimal financial return at an acceptable level of risk.
Consequently, the report argues that the best idea for the fund would be to select investments that minimise the effects of any shock to Ireland’s economy.
The report argues that during national economic weakness the fund’s investments should be buoyant. As a result, it recommends that allocation to sectors over-weighted in the Irish market should be ‘de-emphasised’ in the reserve fund’s asset allocation, while diversity into industries in which Ireland is deficient, such as oil exploration and refining, should be encouraged.
At present, with equity prices higher than ever, the survey argues, the commission might want to adjust the ratio of exposure to shares down to about 50%, even if its long term benchmark range might be between 50-80%.
This benchmark rate should also be reached as quickly as possible, the report argues.
And considering today’s currency markets the fund should be able to selectively employ hedging techniques, the consultant recommends.
The report also argues that the fund should not necessarily favour investment returns over moral responsibility: “commissioners_should not seek out profit opportunities in areas abhorrent to Irish sentiment,” it argues.
The fund will be under the fiduciary control of an independent commission, with a chairperson and six members.
Ireland’s National Treasury Management Agency (NTMA), however, will administer the fund for the first decade, while investment management will mainly be outsourced.
The fund is set to meet as much as possible the cost of social welfare and public service pensions between 2025 and 2055.