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Tuesday, 4th August 2020
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EDITORIAL Back  
There is a sense of change in the air at this half-way point through the year. There are areas which promise development and significant change to the financial landscape, such as the development of a Pfandbrief market, the placing of the national reserve pension fund on a statutory footing and the ramping up of PPP projects.

At the same time, any sense of complacency or self-congratulation in relation to the economy has been punctured by rising inflation. The latest measures to stem the rise of residential property prices have been launched with a sense that something radical is now being done - but how effective they will be is still being questioned.

Looking back in five years’ time, we will be able to point to these few months as a time either when the great Irish economic experiment was seen to fail, or when it moved into another phase, having made the necessary gear-shift.

Pfandbrief
The proposal to develop a legal framework for Pfandbrief-type bond issuance by banks, as reported in Finance in March and this month, is a very welcome development. It may seem like an esoteric, technical change, but it is one which deserves backing, not only because it keeps Ireland competitive with other European countries beyond Germany, but because it pushes out the developmental frontier in relation to financial services law in the State. The history of the IFSC shows that when industry and government work on developmental projects, which offer a legal framework of broad usefulness, the result is usually a win for the country as a whole.

Pension fund
After a year’s work, the Minister for Finance and his Department have set out details in a bill of how the reserve pension fund will work. The bill is well developed and provides a welcome clarification of institutional and management arrangements. Most importantly, it sets the investment policy ‘to secure the optimal total financial return’ within an acceptable level of risk. The arrangements in relation to a Commission to manage the fund are also well elaborated, with the NTMA acting as its delegated manager for the first ten years. One could quibble that this is a long initial period, but it is hard to envisage any other entity which could perform the role.

The provisions relating to the appointment of investment managers and custodians are sensible. While the members of the Irish Association of Investment Managers will be keen to secure mandates from the fund, there is no way that any slice of business can be set aside for local managers. This will test the competitiveness of Irish investment managers, a challenge, it has to be said, they are confident of meeting. There is a strong chance that we will see joint bids by local managers with international counterparts. That approach has worked for PPP bids in relation to the first major financial advisory contracts, and its attractions to public sector buyers may well apply in investment management too. Much depends, of course, on how the Commission and the NTMA decide to define separate investment management contracts.

Objections to the pension fund plan on the grounds that it will distort the Irish equity market will prove unfounded, assuming the Commission follows the investment policy set out in the draft bill. The weighting in Irish equities should not be so high as to cause distortions in the Irish market. Already £5 billion, a 10 per cent weighting in Irish equities - hugely overweight in relation to the euro market - would channel £500 million into Irish equities, hardly an amount in relation to market capitalisation that would distort the equity sector.

One would expect the NTMA to bear in mind any potential to distort the Irish in recommending an asset allocation strategy. A distorted market would not help any investor, including the national pension fund. It will be up to the Commissioners, but more so the Minister of the day, to resist inevitable calls for the fund to be used to prop up second tier stocks, recently-privatised utilities or socially-desirable, but financially unattractive, schemes.

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