A remarkable recommendation from An Bord Snip Nua is to suspend payments into the National Pension Reserve Fund (NPRF). In today’s Irish Times, Fintan O’Toole comes out in support of this proposal (see his article here). The relevant text from the report is:
D.2 Suspend payments into the National Pension Reserve Fund
Under the National Pensions Reserve Fund Act 2000, one per cent of GNP is paid into the NPRF each year. The Group considers that continuation of this annual payment is difficult to justify at this time, given the rate of growth of the public sector borrowing requirement. These payments were affordable when the budget was generally in balance but the Group considers they should be suspended as the State is in effect borrowing to finance the purchase of financial instruments.Transfers to the NPRF amount to approximately €1.6bn a year. Suspending this €1.6bn transfer would have no impact on the General Government Balance, but would reduce the annual Exchequer Borrowing Requirement.
(page 182 of second part of report)
It is odd that the NPRF falls within the remit of a report on public expenditure, since payments into the Fund do not constitute public spending as it is normally understood. Rather, the Fund is a vehicle to enable partial pre-funding of the projected sizeable increase in future public spending that is connected to the ageing of the population. The logic of pre-funding follows from ‘tax smoothing’ principles – it is better to have a higher tax burden now in order to make payments into the Fund rather than to experience a discrete jump in the tax burden in the future. The annual payment into the Fund is also an important commitment device, especially during periods of scarce fiscal resources. In particular, the Fund protects the interests of those who will be paying taxes in the post-2020 period versus those who have a much shorter horizon.
There is certainly plenty of room to discuss the appropriate investment strategy for the Fund, especially when the government is running a deficit and there is a sizeable risk premium embedded in the yield on Irish sovereign debt. Moreover, the ad hoc revision of the Fund’s investment strategy to enable its investments in the main Irish banks provides a further reason to re-think the strategy for the Fund.
One dimension of this review could include the Fund’s strategy vis-a-vis Irish government debt. Although the founding legislation for the Fund prohibited the purchase of Irish government debt, this prohibition could be reviewed. Just as the US Social Security Fund holds only US treasury bonds and retirement funds in other countries have a heavy concentration in domestic government debt, it may make sense for the Fund to have the option to purchase Irish government debt under certain conditions. This is also in line with the trend towards localisation in investment decisions, as described by Gillian Tett in the FT yesterday (her article is here).