Dr. Ronan O’Connor has been appointed as Head of Risk Management & Asset Allocation at the National Pension Reserve Fund of the NTMA.
O’Connor said his role will be to set up and monitor the risk guidelines, which will govern the performance of the fund managers mandated to manage the portfolio, which will include equities and bond.
O’Connor is aware of the responsibility of the position and said, ‘it will be 25 years before any money will be drawn down, and it’s impossible to predict investment returns over 25 years so it’s imperative to control the risk.’ He will report to the Commission who is ultimately responsible for the management of the fund.
The National Pension Reserve Fund was established as a home for the funds drawn from the budget surplus of the Irish Exchequer. It is designed to meet part of the escalating Exchequer cost of social welfare and public service pensions arising from projected aging of the population.
The value of the fund currently stands at E7.5 billion, and will increase by one per cent of GDP annually or approximately E1 billion per year. The funds will come mainly from the budget surplus, but O’Connor states it is also possible for funds to be procured from future privatisations. Even in years of a budget deficit, one per cent of GDP will still be credited to the pension reserve fund.
Any future government would have to change the legislation before deciding to not contribute money to the national pension fund. O’Connor cautioned ‘a government at some future stage could effectively change the law, and therefore suspend the contributions.’ He added though that ‘If the pension fund were to be drawn down, for example if an emergency should arise, the chances are that the prices of Irish government securities would not be particularly favorable. It’s directly analogous to investing the proceeds of a pension fund in your own business - it makes no sense.’
In deciding how assets of the fund would be allocated the Commission used a theoretical approach, Modern Portfolio Theory, a practice used by most investment managers. According to O’Connor a number of comparable funds were also surveyed, which are analogous with the National Pension Reserve Fund, such as the Welcome Trust, which is a charity run pension fund in the UK, and the Norwegian Petroleum fund, which was set up to invest oil proceeds. O’Connor says that both a passive and active management strategy will be pursued.
The fund will invest in sovereign bonds, corporate bonds, property, currency and quoted equities amongst other securities. However the Fund will avoid Government securities O’Connor said.
As the fund will initially consist entirely of cash, the commission has chosen an averaging-in approach as this decreases exposure to market risks. They are presently discussing the time-period, and it has yet to be confirmed, but all the cash would be invested within a year.
The NTMA will manage a passive eurozone bond portfolio, but will outsource the management of the remainder of the funds. They are currently in the process of sorting mandates, and are working their way through tenders. They will then create a shortlist by mid September, and those shortlisted will then have 42 days to come up with another more detailed proposal. Following on from this proposal, another shortlist will be drafted and those selected will be interviewed. Approximately 200 fund managers have tendered applications for 13 different mandates, and the application process is now closed. The mandates include:
• Three Pan European Equity Active Core portfolios valued at around E300 million each
• One US Equity Enhanced Index portfolio valued at about E350 million
US based fund managers Frank Russell are assisting the NTMA in selecting fund managers, and the successful fund managers will be announced before Christmas. Fund managers will be selected on the basis of nine/ten criteria including past performance. Full details of the performance criteria can be found in the Official Journal of the European Community.
Bacon & Woodrow have been appointed to advise on the selection of a Global Custodian, for which expressions of interest have also been sought.
The success of the National Pension Reserve Fund will obviously be measured by the degree to which it meets the benchmarks the commission has set in each market in which they intend to invest. It will also be measured by how successfully it addresses the demographic problem.
‘Social welfare benefits and public service pay will rise to a certain extent, so the second measure is the proportion of the problem we succeed in addressing, but to a certain extent, part of that is beyond our control’, he said.
The National Pension Reserve Fund will be located in the NTMA building in Dublin’s Grand Canal, and when fully staffed will employ approximately 10 people. Two additional employees are to join in the next six weeks, with perhaps more to follow says O’Connor. |
