FEW INVESTORS in financial markets have avoided major losses recently and the National Pension Reserve Fund (NPRF) is no exception. In the half year to June the fund, which is managed by the National Treasury Management Agency (NTMA) and was set up to help finance future State and public service pensions, lost 12 per cent of its value. The reduction in the fund's net assets was explained by the decline in equity markets.
In countries such as Norway and Kuwait, such state-owned investment funds - often called sovereign wealth funds - are financed from surplus oil revenues. In Ireland, the taxpayer provides the money via an annual Exchequer contribution of 1 per cent of GNP, €1.6 billion last year. Since 2001, the fund has produced a 4 per cent annualised rate of investment return.
Because sizeable budget surpluses have more recently given way to mounting budget deficits, there is need to reassess the annual contribution to the fund. Borrowing to invest in equities is never recommended, at least for individual investors. Neither, given current fiscal constraints, does it make financial sense to increase the national debt to finance the Exchequer's annual contribution to the NPRF. The Government, however, hopes to improve its financial position by some €2 billion next year by assuming the assets of some pension funds in the semi-state sector and accepting their liabilities. It means that these future liabilities - pension payments - will be met by the taxpayer as they arise and financed on a pay-as-you go basis. If the EU approves, it would allow the Government to spend more next year without breaching the 3 per cent borrowing limit set by the Stability and Growth Pact.
The NPRF's statutory aim is to meet as much of the cost of social welfare and public service pensions as it can manage from 2025. But it remains unclear how the payouts from the reserve fund to both classes of pensioners, social welfare and public service, will be decided. Public service pensions are indexed to public service pay rates and paid for out of general tax revenue. Recently, the OECD has recommended a change to reduce their future cost. Public service pensions, it suggested, should no longer be fully indexed to wages. Private sector pensions are, at best, partially indexed to inflation, while many defined benefit company pension schemes are being closed to new members. The Government has been slow to recognise this growing inequity between the costs and benefits of private and public service pensions. It cannot continue to do so.