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Monday, 10th August 2020
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Strong views heard at IAPF pensions conference Back  
As work continues in the Department of Finance on the preparation of a bill to establish funded public pensions, with a target of publication this summer, the debate on the approach to be taken to investment management and governance opens up.
The investment management of the Irish Stability Fund should be delegated to an independent body that is free to determine investment strategy within the confines of a broad legislative mandate, Jimmy Joyce, President of the Society of Actuaries (SA) told the recent Irish Association of Pension Funds (IAPF) Investment Conference 2000
in May.

In addition, there should also be some legislative obligation on the Stability Fund management team to make regular reports to the Oireachtas on the financial state and performance of the Fund, he said.

In a speech titled ‘An Irish Solution’, the SA President and consultant to the Department of Enterprise, Trade and Employment, noted that the Minister for Finance’s proposals for the Fund ‘seem to me to have been well received, perhaps uncritically so.’

Joyce noted there was a school of thought which argued that funding for future national security provision does not make a lot of sense. Likewise there was an argument that investing in stocks and shares rather than repaying part of the national debt, simply added to administration costs without producing any economic gain.

He went on to list a number of arguments against establishing a fund from an investment perspective. These included the unhealthy dominance on national financial markets, the political restraints on the nature of possible investments, the pressure to minimise volatility, the likelihood of bureaucracy impeding decision-making and the exposure to stock market risk.

Demographics static
With regard to the demographic projections, which spurred the Minister of Finance into setting up the Stability Fund, Joyce pointed out that while population growth is a dynamic variable, projections are at the end of the day essentially static.

The Minister of Finance’s figures estimated that in 2050 there would be one person over 65 for every two persons of working age, compared with the one person over 65 for every five persons of working age at the moment.

However favourable demographic developments such as reduced child dependency, increasing female labour force participation and net immigration ensure that any ageing of the population is counter-balanced, he argued.

Joyce traced the movement in thinking from the 1993 report of the National Pensions Board, which recommended any fund should be financed by excess in equalised rates of contribution, to the 1998 report which called for explicit Exchequer funding.

He asserted that the main reason for the establishment of the fund at the moment is that public finances are currently and look likely to continue to show significant surpluses, but the economy is overheating and something has to be done with the money.

In relation to the stability fund, Joyce said a clear line must be drawn between the funding rate, which must be decided by the government, and fund management, which should be handled by an independent body.

The SA President said he would envisage the investment mandate specifying general parameters such as prudence and diversification and noted that there could be a case for making the concentration of investment provisions more prescriptive. Regarding the Oireachtas reporting framework, he would like to see an obligation on the fund for quarterly audited reports.

In conclusion, Joyce said that the minister of finance should have transparent ‘fallback powers’ to issue directions to the fund administrator in appropriate circumstances.

Canadian experience
Joyce’s aspirations for the management of the new fund were very similar to the current mandate of the Canadian Pension Plan Investment Board, as told to the conference by their chief executive John McNaughton.

He said they had a legislative mandate to manage the assets entrusted to them in the best interests of the CPP’s contributors and beneficiaries, by maximising returns without incurring undue risk.

McNaughton noted that the CPP investment board were restricted from investing more than 25 per cent of their funds in foreign assets and revealed that all new funds will be invested in equities for the foreseeable future to offset the predominance of fixed income assets in the overall CPP fund.

In time, the CCP investment board will examine the benefits of investing in private equity, infrastructure projects, venture capital ideas, property and derivatives, he said.

The CCP investment board chief executive said while the CPP investment board is accountable to both provincial and federal layers of government, it has a significant degree of independence from both them and the CPP in its implementation of its investment mandate.

He then outlined the various checks and balances between federal and provincial government which ensure that the 12 directors of the investment board are non-partisan. Importantly any change in the mandate must be approved by the federal parliament, two-thirds of the provinces with two-thirds of the population, he said.

To ensure accountability the CPP investment board must publish an annual report, quarterly financial statements and hold regular public meetings across Canada, McNaughton said.

NTMA upskilling
Speaking at the same conference, John Corrigan, director of the National Treasury Management Agency, likened the role of the NTMA in managing the Stability fund to that of a ringmaster.

He said the NTMA had considerable competency in capital markets, forecasting economic cycles and risk management, from its experience of managing the national debt. However, he conceded that they would ‘need to enhance their skill set’ in the areas of asset allocation and sectoral analysis.

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