Sovereign wealth funds back on agenda, but many questions remain

Former finance minister Charlie McCreevy set up the National Pension Reserve Fund in 2001. Picture: Rollingnews.ie

The debate over sovereign wealth funds has heated up. Business group Ibec has backed proposals by Finance Minister Michael McGrath to set up two investment funds — a long-term savings fund and an infrastructure fund.

Almost a quarter of a century ago, the National Treasury Management Agency (NTMA) unveiled plans to set up a sovereign wealth fund that was designed to help the State meet its unfunded bills from pensioners.

Established in 2001, the National Pension Reserve Fund was funded annually from tax revenues equivalent to 1% of gross national product.

Just a few years later, the fund had grown to almost €15.5bn and appeared to be on course under official estimates to grow to €140bn by 2025, when it was envisaged the Government could first start drawing down or tapping the fund.

A board under the National Pension Reserve Commission that oversaw the pension fund appointed the NTMA as managers, who in turn mandated at some considerable cost through an elaborate network of banks and investment advisers, to invest the sums.

The money was allocated into big and small companies on global stock markets, government and corporate bonds, as well as property assets and commodities.

Scrutiny fell on the investment returns which — just like any ordinary personal pension plan — broadly reflected the performance of global stock market indices.

In the early years, journalists regularly queried investments in certain industries, investments that ran contrary to espoused government policies at home and abroad.

Charlie McCreevy, Brian Cowen, and Brian Lenihan were the finance ministers during the years of the fund.

However, famously, the National Pension Reserve Fund didn’t get to see its second decade.

The troika of the EU, ECB, and IMF effectively insisted the pension fund was raided as a condition for the State to tap €64bn in international bailout loans.

The bailout helped repay the private bank bond debts and to recapitalise, and keep the doors open at the banks that were designated to survive the financial disaster.

More recently, as the huge corporate tax receipts started to flow into the exchequer, a so-called rainy-day fund morphed into an ad-hoc national reserve fund.

Sovereign wealth funds were firmly back on the agenda.

Two funds in the pipeline

Earlier this year, Mr McGrath formally proposed to set up not one but two investment funds.

This week, the finance minister confirmed he will seek Government approval for a long-term savings fund and for a second investment fund that will ensure that capital spending projects were not the first to be scrapped in any future economic downturn.

His remarks came after the new chair at the fiscal watchdog, the Irish Fiscal Advisory Council (Ifac) trenchantly critiqued Mr McGrath’s plans to breach the Government’s own spending growth ceiling.

In a tweet, Ifac’s Michael McMahon warned about the Government injecting spending into an economy when inflation was elevated and unemployment was near historically low levels.

Business group Ibec yesterday said it favoured Mr McGrath’s plan to set up a savings fund and backed his proposal for an infrastructure fund.

It envisages an infrastructure fund of €10bn by next year that would help ensure infrastructure projects get built.

However, critics say any infrastructure fund is decisively not a savings fund but is a spending fund, by another name.

Like other countries, Ireland is committed to spending on capital projects, the critics say, and the case for such a fund is not clear.

Meanwhile, experience says that even a separate sovereign wealth fund doesn’t protect public finances from disaster.

Nor does a wealth fund safeguard the economy against any government boosting spending and cutting taxes in a budget before an election.