The decision by the Minister for Finance, Mr McCreevy, and the Coalition Government to establish a Social Welfare Pension Reserve Fund to meet the future costs of public pensions has received a generally favourable welcome from the social partners and the financial institutions. Mr McCreevy's decision to use a sizeable portion of the proceeds from the Telecom Eireann flotation to establish the new fund and, in addition, to set aside one per cent of GNP annually for pension provisions is a significant departure in terms of forward planning. But many key and controversial decisions remain to be taken. Traditionally, governments have operated a pay-as-you-go system of funding for social welfare pensions, whereby money is provided by the working population to pay for the dependent sector. Thus the obligation falls on each generation of workers to provide for the generation that went before. A similar arrangement applies to public servants, except that the money needed to finance pensions in any year is simply a part of current government expenditure, financed from general taxation. Such a system has many attractions when a balance exists between the number of workers and the number of dependants. But when the demographic trend runs strongly in favour of dependants - as is happening at the moment in many European countries - it causes serious financial difficulties for governments and leads to reduced social welfare benefits and/or later retirement ages.
This State is fortunate in that we have had time to learn from the difficulties of our EU partners. The balance between workers and dependants now stands at a ratio of five to one and would not have begun to create funding difficulties until after 2015. After that, the situation would rapidly disimprove until by about 2056 there would be one pensioner for every two people at work.
The Minister decided to address those future difficulties and uncertainties by establishing a special fund, following the 1997 recommendations of the Actuarial Review of Social Welfare Pensions and in line with the National Pensions Policy Initiative. He received strong encouragement and support within Government from the Minister for Social Welfare, Mr Dermot Ahern. The cost of maintaining the current level of pension and health service provision will cost an estimated 7 per cent more in 2056; the Telecom funds, along with 1 per cent of GNP, will only meet about one-third of that cost. The latest figures from the Central Statistic Office suggest a marginally higher dependency ratio than had been anticipated.
Huge sums of money are at stake. Already, intensive lobbying is taking place as various financial institutions compete for control of the new fund. The Irish Association of Pension Funds has called for the new pension reserve fund to be managed in "a commercial fashion". The National Treasury Management Agency, which looks after the national debt, is a keen competitor for the position. Certainly, there should be competition, and transparency about the actual returns secured on investments. The Government has also to decide where the money may be invested as, in normal circumstances, much of it would flow out of the country. In that regard, long-term commercial investments in Coillte and in various infrastructural projects, could make sense. These matters have to be evaluated and debated before the Government produces its legislation in the autumn.