THE NATIONAL Pensions Reserve Fund (NPRF), set up by the Government to fund future State and public service pensions, lost 12 per cent of its value – about €1.7 billion – in the first half of the year due to the turmoil in global equity markets.
The State’s annual contributions to the fund are under review in light of the exchequer’s move from a surplus to a deficit, Minister for Finance Brian Lenihan said yesterday.
The State’s contribution of 1 per cent of gross national product (GNP), a sum of €1.6 billion in 2007, is being funded through borrowings, meaning it is effectively paying interest on an investment that is currently making negative returns.
“There’s no doubt that the origin of the pension fund was in an era of surpluses,” he said.
“Going forward, of course we will have to monitor the position if it is the case that we have to borrow to fund the pension fund,” he said.
“Can you be sure that your investments outdistance your borrowings? That is a question that will have to be monitored.”
But Mr Lenihan also ruled out “raiding” the fund to prop up public finances. “This is a raid that cannot happen,” he said, as it would be classed as borrowing under EU rules.
“I don’t succumb to temptations like that,” he added.
The pension fund, which was set up in 2001 by then minister for finance Charlie McCreevy, is designed to meet the costs of social welfare and public service pensions from 2025 until at least 2055 – an era when the number of working-age taxpayers available to fund the pensions of the bulging over-65 age group is set to drop.
The fund is managed by the National Treasury Management Agency (NTMA), which yesterday published its 2007 annual report, showing that the Republic’s ratio of general Government debt to gross domestic product (GDP) ended the year at 24.8 per cent, one of the lowest ratios in the EU. However, Mr Lenihan said it would climb to 27 per cent by the end of 2008.
NTMA chief executive Michael Somers said pensions were always expensive to fund, but that “hopefully, future generations will thank us” for the foresight of maintaining “a big kitty”. But he added that global stock markets have been in “absolute rag order . . . so it’s not a happy time”.
The agency said the “disappointing” performance reflected “the challenging conditions that have marked 2008”. It added that it was taking “a cautious approach” to investing the quarterly exchequer contributions.
Most of its losses were incurred in the first three months, when the fund lost 10.5 per cent of its value. Markets rallied in April and early May, reversing some of the losses, but plunged again in June as concerns grew about a slowdown in the global economy. The pension fund’s annualised rate of return since 2001 has now fallen to 3.8 per cent, down from 6 per cent at the end of 2007, while its balance at the end of June 2008 stood at €19.4 billion.
Despite its losses, the fund has still performed better than the average Irish managed pension fund, which dropped 14.7 per cent in the first six months.
The NPRF has not recorded an annual loss since 2002, when stock values fell in the dotcom collapse.
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