Oireachtas Joint and Select Committees
Thursday, 22 November 2012
Public Accounts Committee
2011 Annual Report of the Comptroller and Auditor General and Appropriation Accounts
Chapter 2 - Government Debt
Chapter 4 - National Pensions Reserve Fund
Chapter 25 - Accounts of the National Treasury Management Agency
National Treasury Management Agency - Financial Statements 2011
National Pensions Reserve Fund Commission - Financial Statements 2011
10:10 am
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I ask the witnesses and those in the Visitors Gallery to turn off their telephones because the interference affects the sound quality of the transmission of the meeting. It applies particularly to those who leave their telephones on the desk in front of the microphone, which picks up the noise and means the proceedings cannot be transmitted properly. I ask members and witnesses to observe that request during the meeting.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give this committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against a Member of either House, a person outside the Houses or an official either by name or in such a way as to make him or her identifiable. I remind members of the provision within Standing Order 163 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policy or policies.
I welcome Mr. John Corrigan, chief executive of the National Treasury Management Agency, NTMA, and invite him to introduce his officials.
10:20 am
Mr. John Corrigan:
I am accompanied by Mr. Eugene O'Callaghan, who heads up the National Pensions Reserve Fund, Mr. Paul Carty, who is chairman of the National Pensions Reserve Fund Commission, Mr. Oliver Whelan, who is responsible for funding and debt management in the agency, Mr. Brendan Murphy, who is head of risk and finance in the agency, Ms Eileen Fitzpatrick, who is responsible for the NewERA project, and Mr. Ciarán Breen, who is head of the State Claims Agency.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I ask the Comptroller and Auditor General to introduce the chapter.
Mr. Seamus McCarthy:
The National Treasury Management Agency's primary function is to manage borrowing on behalf of the State. The results of that borrowing activity are reported in the agency's national debt account, which is also reproduced as part of the finance accounts. However, the account does not reflect the total indebtedness of the State. Consequently, one of the main objectives of chapter 2 is to provide a more complete picture of Government debt than that reported in the accounts of the NTMA.
General Government debt is the standard measure used to report Government debt under the Maastricht treaty. At the end of 2011, the general Government debt stood at approximately €169 billion - an increase of €25 billion, or 17%, year-on-year. The end-2011 debt represented 106% of gross domestic product, compared with 92% a year earlier.
The principal components of the general Government debt are borrowing by the NTMA on behalf of the State and promissory notes issued in 2010 by the Minister for Finance to the Irish Bank Resolution Corporation and the EBS. The balance outstanding on the promissory notes at end-2011 was just over €28 billion.
Borrowing by the NTMA is referred to as the national debt. The gross national debt stood at €137 billion at the end of 2011 and increased to just under €151 billion by the end of June 2012. The first tranche of funding under the EU-IMF programme of financial support for Ireland was provided in early 2011 and by mid-2012 borrowing from this source accounted for a third of the gross national debt.
Approximately 90% of the debt is now in the form of medium to long-term debt. Figure 2.4 in chapter 2 presents a maturity profile of that debt as at June 2012. This indicates that approximately €42 billion falls due for repayment between now and 2016. A further €58 billion falls due for repayment in the period 2018 to 2020. I should point out that repayments due on the promissory notes are not included in this analysis since they do not form part of the borrowing by the NTMA.
Between September 2010 and July 2012, the NTMA did not actively seek funding in the bond markets because the cost of borrowing would have been too high. Since mid-2011, there has been a sharp fall in the cost of borrowing. For example, yields on Irish ten-year bonds declined from a high of 14% in July 2011 to just over 6% by the end of June 2012. This has allowed the agency to re-enter the market. The Accounting Officer will be able to update the committee on the current position in that regard.
At the end of June 2012, the NTMA estimated that the weighted average cost of servicing the national debt stood at approximately 4.1% per annum. The average interest rate on Government bonds was estimated to be just under 4.8%, and the average rate on borrowing under the EU-IMF programme at 3.35%. In contrast, the average annual interest rate on the promissory notes is estimated at just under 6%.
As the committee is aware, the National Treasury Management Agency is a complex organisation with multiple functions that extend beyond its original and core role in managing Ireland's national debt. The additional functions include management of compensation claims on behalf of certain State authorities through the State Claims Agency. Awards and costs of settling claims amounted to €110 million in 2011. At the end of 2011, the estimated future costs for settling outstanding claims was estimated at almost €1 billion.
The NTMA also carried out certain banking functions on behalf of the Minister for Finance in the period March 2010 to early August 2011. In August 2011, the delegation to carry out those functions was revoked and the NTMA banking unit was seconded to the Department of Finance. Under a direction from the Minister, all costs of the unit, comprising staff and certain consultancy costs, continued to be met by the NTMA until the end of 2011. The unit's costs for the final five months of 2011 amounted to €6.3 million. The NTMA continues to bear the salary costs of the staff seconded to the Department while the unit's consultancy and other costs are borne by the Department since the start of this year.
Other functions and services of the NTMA, which are outlined in chapter 25 of my report, include: the management of the National Pensions Reserve Fund; provision of staff and services to the National Asset Management Agency; and the provision of financial advice in respect of PPP and other large capital projects through the National Development Finance Agency whose role now also includes the procurement on an agency basis of certain PPP projects.
The New Economy and Recovery Authority, called NewERA, was established within the NTMA in late 2011 on a non-statutory basis. The total costs of running the NTMA, as reported in its administration account, amounted to almost €95 million, of which the agency recouped €51 million. This comprised just under €28 million from the National Asset Management Agency and €23 million recovered from credit institutions receiving State support.
The third chapter under review by the committee concerns the National Pensions Reserve Fund. I will deal first with contributions to the pensions fund. The 2000 Act which established the fund required an annual Exchequer contribution of 1% of gross national product. For the period 2009 to 2011, this requirement was met through the provision in 2009 of €3 billion in Exchequer funding towards the cost of the fund's recapitalisation of Bank of Ireland and AIB and by the transfer to the fund in 2009 and 2010 of €2.1 billion in pension scheme assets from universities and some non-commercial semi-State bodies. Some €1 billion was repaid from the fund to the Exchequer in 2011 at the direction of the Minister for Finance. Under the Credit Institutions Stabilisation Act 2010, the Minister may direct that no contribution be paid into the pensions fund in 2012 and-or in 2013.
The value of the fund at the end of 2011 stood at €13.4 billion. The NPRF holds two types of investments. First, it holds a discretionary portfolio where investments are made in accordance with a strategy determined by the National Pensions Reserve Fund Commission. This portfolio delivered a return of 2.1% during 2011 and its value was just under €5.5 billion at the end of the year. Second, it holds a directed investment portfolio used to fund investments in Bank of Ireland and AIB at the direction of the Minister.
During 2011, €10 billion was transferred out of the discretionary portfolio to the directed investment portfolio. This was used to bring the fund's gross investment in the two banks to €21.6 billion, including the effective investment of €819 million in dividend returns received in the form of ordinary bank shares.
Following the disposal of shares to the value of €1 billion in Bank of Ireland in July 2011, the fund's net investment at cost amounted to €20.6 billion. By the end of 2011, the value of the holdings in the two banks stood at just under €8 billion - a drop of 61% relative to the net investment amount. When income, gains and proceeds of sales of warrants attached to preference shares are taken into account, the decline in value was 53% of the net investment.
In order to raise the €10 billion required to meet the 2011 investment in the two banks, the NPRF was required to liquidate the assets transferred out of its discretionary portfolio. When a large-scale liquidation of this nature occurs, the NTMA, following standard fund management practice, engages transition managers to dispose of the assets. The purpose is to enable market risks, operational risks and costs to be minimised and managed systematically.
Chapter 4 reports on charges applied by one of the firms appointed as transition managers. The firm was selected from a panel created by NTMA following a 2007 tender competition. The transition management firm - UK-based State Street Bank Europe Limited - was contracted to liquidate €4.7 billion of assets.
The disposals took place between February and May 2011 and the agreed fixed rate for the service was €698,000.
However, in addition, the firm applied commissions of €2.6 million for which there was no contractual provision and earned a further $790,000, equivalent to €600,000, in profits from the disposal of NPRF’s holding in an index fund. In doing this, it acted as a principal, rather than as an agent, but without taking the risk of loss. The additional charges were deducted from the disposal proceeds before these were remitted to the NPRF. The effect of the additional charges, while representing just 0.07% of the value of the assets sold, was to increase the amount earned by the transition manager to over five and a half times the contractual payment.
The unauthorised commissions came to light in late 2011 in response to inquiries made to the transition manager by the NPRF, arising from media reports about problems with transition services they had provided to other customers. The profits earned from the disposal of the holding in the index fund were notified by the transition manager to the NPRF in July 2012 following internal investigations the firm carried out. The transition manager has refunded the NPRF in respect of both of these amounts, a total of €3.2 million.
The performance of transition managers is generally measured by what is referred to as an implementation shortfall outcome. This compares the outcome against a pre-transition estimate within an acceptable level of deviation. The NPRF’s review of the transition executed by the transition manager found that the outcome was comfortably within the estimated range. Our examination concluded that while the implementation shortfall outcome provides a reasonable basis for benchmarking and evaluating the overall performance of a transition, its suitability for checking commission costs is questionable, given what occurred in this case. In addition, reliance by NPRF on the normal internal controls of regulated service providers may not be sufficient to prevent or detect non-contractual charges when assets are disposed of.
Chapter 4 contains a number of recommendations that aim to address this situation, in particular the commissioning of independent third-party reviews of the outcome of a sample of transactions.
10:30 am
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I ask Mr. Corrigan for his opening statement.
Mr. John Corrigan:
On my own behalf and on behalf of the NPRF commission chairman, Paul Carty, I welcome the opportunity to meet with the committee today. We have already forwarded a briefing note to update the committee on recent developments relating to the NTMA and the NPRF. I propose to make a few short opening remarks highlighting some of the main issues dealt with in the brief.
I would like to refer to the debt management area. It is a little over a year since I and members of my team last appeared before this committee and we have made very considerable progress in our re-engagement with the markets over the year. The NTMA's funding goal is to achieve a sustainable re-entry to the markets. Our working plan throughout 2012 has been to begin to return to the markets on a phased basis, mainly through shorter-term issuance but also by taking advantage of suitable opportunities to issue long-term debt, as and when they arise.
During 2012, our engagements with the debt markets have included bond switches; the issuing of conventional bonds; the issuing of a completely new debt instrument, Irish amortising bonds, tailored to meet the needs of the domestic pensions industry; and a return to the short-term debt markets through the regular holding of three month treasury bill auctions. We began these T-bill auctions in July and have conducted four in total this year, the most recent of which took place only last week. It is illustrative of improving market sentiment that while the yield on the July bill was 1.8% and the cover was 2.8%, the yield on last week's bill had fallen to 0.55% and the cover had risen to 4.1%.
Our re-engagement with the markets needs to be viewed in the context of the EU-IMF programme, which provides funding to the end of 2013. A smooth exit from the programme requires a parallel programme of market funding alongside funding under the programme.
A key concern for investors had been the fact that in mid-January 2014 and just after the end of the programme, Ireland was faced with a maturing bond of €11 .9 billion. Addressing this funding cliff has been a priority for the NTMA. The successful long-term capital market operations we have undertaken during the course of the year have effectively reduced this funding cliff to just €2.4 billion, a reduction of €9.5 billion. This has been viewed very positively within the investment community and has given many investors greater confidence to lend money to us. Addressing the funding cliff and demonstrating that we can raise funds in the market have been factors in the continuing fall in Irish bond yields.
The amortising bond that we issued for the first time in August aims to meet investor demand for products that enable pension funds match their pensions in payment and also that could help with the construction of sovereign annuities. These annuities, based on Irish Government bond yields, will be less expensive to purchase than annuities based on French and German Government bond yields which have been the norm for pension annuities up to now. In response to investor demand, particularly from the Irish pensions industry, the NTMA is also planning its first issue of an inflation-linked Irish Government bond. Between amortising bonds and inflation-linked bonds we estimate there is potential demand for combined issuance in these categories of some €3 billion to €5 billion over the medium term.
There has been some public discussion about domestic investment in our bonds. In keeping with every country issuing bonds, we need a diversified investor base which includes both domestic and international investors. An active and stable domestic investor base is not only important in its own right, but is also an important signal to overseas investors considering investment in Irish bonds. From our experience, it can make our job to persuade some foreign investors to buy Irish paper more difficult if they do not see Irish investors doing so. During the years of the economic bubble , some investors in Irish debt were not "natural holders" of the product and sold when the crisis hit. It is in our interest to have as deep a pool of buyers of our bonds as we can, the more diversified the better.
Of course, there are risks to achieving sustainable market re-entry. Some are within our control, such as the country continuing to meet its commitments to the troika. Others, particularly those affecting the wider eurozone area, are not. That said, we have made very significant progress since July 2011, when Moody's downgraded Ireland to sub-investment grade. Indeed the announcement by Fitch Ratings last week that it was revising Ireland's outlook from negative to stable was the first positive action by a ratings agency on Ireland since the start of the financial crisis. We will continue to engage with investors at home and abroad, presenting the case for investing in Irish paper in an open and upfront manner, and act as flexibly and imaginatively as we can to achieve our goal of a sustainable market re-entry at the earliest possible opportunity.
Turning to the NPRF, the discretionary portfolio, the fund excluding the public policy investments in Bank of Ireland and Allied Irish Banks, was valued at €6 billion at 31 October 2012. In light of the Government's stated intention to refocus the fund's investment towards Ireland, in mid-2011 the NPRF commission determined that management of the fund should become more focused on capital preservation while still having the capacity to participate in gains if markets performed well. This de-risking strategy is being implemented through the purchase of options. From the fund's inception in April 2001 to 31 October 2012, the annualised performance of the discretionary portfolio was +3.6% per annum. This compares over the same period with the performance of the average Irish pension fund, as published by Mercer, of +2.0% per annum and with Irish inflation of +2.3% per annum.
The NPRF has taken a lead role in the development and implementation of a number of investment initiatives in Ireland. These include the Irish infrastructure fund, Innovation Fund Ireland, the Silicon Valley Bank transaction, a commitment to the financing of water meters and the provision of a stand-by facility to enable the recently announced schools bundle 3 PPP project to proceed with EIB financing. The Minister for Finance has announced that he will propose amendments to the NPRF statutory investment mandate to enable it to focus its investments in Ireland.
With regard to the State Claims Agency, the recent decision by the Government to establish a legal costs unit within the agency is significant.
The purpose of the unit will be to deal with third party costs arising from the Mahon and Moriarty tribunals with a view to ultimately extending the unit's remit to the Smithwick tribunal. Recruitment to the unit is under way.
NewERA has been operating on a non-statutory basis within the NTMA for just over a year. It is providing advice for Departments on a range of financial activities in the commercial State companies within its remit, including investment proposals, corporate plans, capital expenditure projects and funding proposals. It is also assisting in the development and implementation of Government plans for investment in energy, water and next generation telecommunications projects. In addition, it is carrying out advisory and oversight roles in the possible restructuring or disposal of commercial State company assets. Its role in disposal processes is to represent the Government's financial interest and ensure Government agreed timelines on financial objectives are clearly communicated to the relevant parties and achieved.
While representatives of the National Development Finance Agency will appear separately before the committee on 13 December, it recently awarded the contract for schools public private partnerships bundle 3. When completed, the eight schools in the bundle will provide accommodation for approximately 5,700 students and the project is expected to provide employment for up to 1,100 people. The agency was also instrumental in securing the €100 million loan from the European Investment Bank for the traditional schools capital programme which was drawn down in August. It is actively preparing to procure PPPs announced under the Government's stimulus package.
While it is not the subject of the meeting, the NTMA continues to provide staff and business supports for NAMA. Of our overall staff of 500 at the end of October, 227 were assigned to NAMA. I trust my remarks and the more extensive briefing note which we forwarded to the committee last week, have given members an overview of developments and the range of activities engaged in at the agency. I look forward to answering their questions.
10:40 am
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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May we publish the statement?
Derek Nolan (Galway West, Labour)
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I welcome Mr. Corrigan and his officials. The NTMA has assumed a role in society it probably did not foresee five or six years ago. Its name is well known and the agency is very much in the public eye. I refer to an issue mentioned in the Comptroller and Auditor General's opening statement regarding transition management services and the State Street corporation. It is a complex issue, but my understanding is that a decision was taken in 2010 to liquidate some of the assets in the National Pensions Reserve Fund for investment in the banking sector. To do this, the NTMA used a panel of fund managers to transition them, one of which was State Street. Its employees were responsible for €4.7 billion in funds and the NTMA agreed a price with them for that work of €698,000. In October 2011 the NTMA wrote to State Street asking it to clarify the fee that had been paid based on reports. Why did the agency write at the time asking for further information?
Mr. John Corrigan:
I would like to comment generally in the first instance on the State Street transaction to put it in context. To be clear, what had happened was fraudulent in nature and totally unacceptable. That is the view of the commission which oversees the pension fund and also the view of the NTMA. We have communicated this view regarding the fraudulent nature of the transactions very clearly and in unequivocal terms to State Street. I have personally met the global vice chairman of State Street who came to Dublin to explain the circumstances and apologise for what had happened. Nonetheless, State Street, in its performance of this transaction, fell well below what was expected of it.
What happened, as the Deputy said, was that a decision was taken to liquidate a sizeable portfolio in connection with the recapitalisation of the banks. Again, as acknowledged in the Comptroller and Auditor General's statement, State Street was appointed from a panel of transition managers, managers who specialise in dealing with large transactions to ensure that in executing these transactions, the market does not move against them. By any definition, a sum of €4.7 billion is a big transaction and, as acknowledged in the Comptroller and Auditor General's report, it was clearly employed in an agency capacity. To be clear about it, an agent is somebody who is employed for a fee who takes no position in the matter and passes straight back to the client the sale proceeds if the transition involves a sale. In this case, fraudulently, within State Street, approximately 0.7% was clipped off the sale price when it went to the open market to transition the shares. To put it simply, if it realised €100 from a sale, only €99.30 would find its way back into the National Pensions Reserve Fund. This clipping applied not only to the fund but also to a number of other major clients which were being transitioned by State Street at the same time.
We received an invoice in the agreed amount from State Street and having verified that there was no commission charged, we paid the invoice. It became apparent in late 2011 that there was an issue with the transition management arrangements in State Street which wrote to us to notify us of the issue. We had already heard about it in press speculation and, in answer to the Deputy's question, then took it up with State Street.
Derek Nolan (Galway West, Labour)
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Therefore, the first contact was from Mr. Corrigan's side. State Street did not come to the NTMA first.
Mr. John Corrigan:
The initial telephone call was from our side. State Street states - I have only at this point in time the bank's account of what happened - it was following up various internal investigations at the request of the UK Financial Services Authority, FSA, which regulates it and that any delay in notifying clients was accounted for by their giving attention to the internal investigation requested by the FSA. The first contact was by us.
State Street has refunded us the amount improperly taken, but we have taken that refund without prejudice. As far as we are concerned, the matter is not closed. The issue is being investigated by the FSA in the United Kingdom. As of now, we only have the ex parte account of the bank of what happened and have reserved our position until we see where the FSA lands on this question.
Derek Nolan (Galway West, Labour)
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That was a forthright answer; we do not normally receive such forthright answers. Mr. Corrigan has said State Street, a company the NTMA hired, defrauded the State of €3.2 million, that the agency has got the money back and that an investigation is under way. Fraud is specific. The word "fraudulent" was used. It implies this was intentional, that State Street employees knew what they were doing and that there was a premeditated plan to steal or engage in theft of money. Who was responsible for this? Was it a rogue person within the transition management team or somebody higher up? Was it company policy? What does Mr. Corrigan know?
10:50 am
Mr. John Corrigan:
The Deputy's question is an excellent one. This was certainly a fraudulent activity. As the Deputy has suggested, the key issue is whether this was a relatively isolated incident. It was perpetrated on other clients. How high up in the corporate structure did this go? What are the governance and control implications of this? Those questions need to be answered, but we cannot answer them. That is why I referred to the report of the FSA, as the regulator. We have written to the FSA to establish formally our interest in its investigations. The view we have taken is that we have to wait. It is important to emphasise that we have reserved our position.
Derek Nolan (Galway West, Labour)
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Mr. Corrigan said he has met the vice-president of State Street.
Derek Nolan (Galway West, Labour)
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He flew over to Dublin to talk to Mr. Corrigan.
Derek Nolan (Galway West, Labour)
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What reason did he give Mr. Corrigan? What was his explanation? Surely he would have given his view, on behalf of State Street, of what happened. Surely he would have allocated blame, responsibility or cause to somebody. What did he say to Mr. Corrigan?
Mr. John Corrigan:
He advised me that there are legal proceedings between State Street and a number of people who exited State Street on the back of this issue. He was quite guarded in what he said. The implication of what he said was that the direction with respect to these improper reductions did not go high up in the corporate chain of responsibility within State Street. I emphasise that this is an ex parte statement. While I have no reason to doubt what the vice-chairman told me, it would be prudent to wait and see where the FSA lands on this issue.
Derek Nolan (Galway West, Labour)
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State Street is a very large provider of pension fund services. It is also involved in transition services. Is the NTMA engaged with State Street with regard to other aspects of its business?
Derek Nolan (Galway West, Labour)
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What is the value of the portfolio that is under the management of State Street?
Derek Nolan (Galway West, Labour)
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Mr. Corrigan can see why people might be quite annoyed. I understand it is not easy for the NTMA to change its investments. State Street has admitted it ripped us off to the tune of more than €3 million. It has not yet given the NTMA a full explanation of the reason for that. I assume it is taking fees, charges and management costs for the significant business it is continuing to do with us. Is Mr. Corrigan satisfied with that situation?
Mr. John Corrigan:
The wider relationship with State Street remains to be settled. The indexed service is provided by a business unit that is separate from the transition unit. It has been provided in a satisfactory manner over a number of years. The Deputy's point is well made. The relationship will be reviewed in light of where the FSA lands in relation to the other matter.
Derek Nolan (Galway West, Labour)
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Does the NTMA have any idea when the FSA will conclude its investigation?
Derek Nolan (Galway West, Labour)
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Has State Street given the NTMA any indication of what it thinks the process will involve?
Derek Nolan (Galway West, Labour)
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This specific incident relates to transition 14, which is what it is called in the reports. The NTMA asked State Street to review some other engagements it had with it, specifically transitions 3 and 4. State Street wrote back to say it was satisfied that transitions 3 and 4 were done correctly. When the NTMA subsequently reviewed the matter, it was unhappy with the transactions in question. It informed State Street that it had a problem with one of these transactions. What was the issue in that case? What is the status of the investigation in this instance?
Mr. John Corrigan:
That case involved the transition of a bond portfolio. We have since concluded our investigations in that regard. We are happy that State Street performed in accordance with the contract. We have communicated that to the company. We have gone back through all the State Street transactions, and indeed all other transition transactions, with a fine-tooth comb to satisfy ourselves that they were done in accordance with the contract. Given that this was unfinished business at the time of the Comptroller and Auditor General's report, we thought it was appropriate to flag it up. We have indicated to the company that we are happy.
Derek Nolan (Galway West, Labour)
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State Street is one of three transition managers on the panel. Who are the other two transition managers?
Mr. John Corrigan:
The other two are Nomura and Citigroup. I should add that as far as we are concerned, that panel has now lapsed. We will re-tender for transition managers. In that respect, we will be mindful of the recommendations in the Comptroller and Auditor General's report and we will implement them to the extent that we can.
Derek Nolan (Galway West, Labour)
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My understanding of the way the personnel structure works in these transition management companies is that entire groups of transition managers leave one company and go to another one. I think that is what happened in the case of State Street. An entire office was head-hunted and moved over. Is the NTMA satisfied that the individuals who may have been responsible for the transition 14 incident were not involved in other transactions at Citigroup or other institutions with which the NTMA was doing business?
Derek Nolan (Galway West, Labour)
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I want to tease that out a little. According to what I read in the Comptroller and Auditor General's report, the issue with transition 14 was that it was impossible to spot because it was not a traceable amount. It was within the margin of error for the NTMA's performance. The nature of the transaction means that it could not easily be checked or verified. It was not verifiable. The only reason the NTMA found out about it was that it had the good sense to inquire into a media report it had seen and State Street responded to its inquiries. Given that this transition was untraceable, how can the NTMA be certain that the other transitions were done properly?
Mr. John Corrigan:
We contacted the compliance departments in each of the other three transition managers. They signed off formally to the effect that they performed in accordance with the terms of their contracts and discharged their agency responsibilities. As I have said, that required the institution concerned to pass straight through to us the prices they achieved in each case.
Derek Nolan (Galway West, Labour)
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Is it a matter of taking the compliance departments of these companies at their word?
Mr. John Corrigan:
At some point, one has to take people at their word. I have to say it is an eye-opener to find that an amount was siphoned off while one was dealing with an institution of very high international repute. There comes a point when one has to accept what people say to one. There is a lesson here.
Derek Nolan (Galway West, Labour)
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I suppose there is. The point is that the NTMA accepted what State Street was saying. If another company had not been able to verify the information, it is likely that we would have been caught out.
11:00 am
Mr. John Corrigan:
That is true, but knowing what we know now and writing in the context of what we know now to the heads of compliance, who are senior people and answerable directly to their regulator, we were clearly putting them on notice if there were any issues. We have let the matter rest there.
Derek Nolan (Galway West, Labour)
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Reference is made to standard market practice for transition managers' performance and an implementation shortfall. The witnesses will have to forgive me if I butcher the language used, which I am sure is industry terminology. The implementation shortfall appears to refer to a margin which applies when the transition is taking place and the asset is being liquidated. In other words, while one may not get exactly the price one expected, a price within a certain margin is considered okay. Was this information or details of the test used in this regard shared with the bank? Did the bank know what was the National Treasury Management Agency's implementation shortfall guideline within which it would not start asking questions?
Mr. John Corrigan:
It would have been agreed in advance that this was our expectation. My colleague, Eugene O'Callaghan, will correct me if I am wrong because I may also butcher the terminology. In simple terms, if one were doing a large share trade today, the implementation shortfall would measure the deviation between the actual share price secured and the opening share price. In other words, it seeks to measure in simple terms the market impact of unloading a large number of shares onto the market. It takes as a starting point the opening price, although one will not achieve this price if one sets out to sell more than 4 million shares. Not only would the bank have known the implementation shortfall; it would have been agreed with the bank.
Derek Nolan (Galway West, Labour)
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The bank took advantage of it.
Derek Nolan (Galway West, Labour)
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The bank used it to hide its hidden costs.
Derek Nolan (Galway West, Labour)
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I assume that is how it was done. Surely at this stage Mr. Corrigan knows where and how the money that was skimmed off was hidden.
Mr. John Corrigan:
I will explain what happened when it sold the shares on the market. Let us say the shares were sold to broker X. Broker X then sent the contract note into the internal brokerage in State Street, which then clipped 0.7%, on average, off the price. In the case of a normal investment manager who is not a transition manager, the process is different. In the case of an investment manager who is managing funds on a day-to-day basis, if he, as the investment manager, buys or sells securities on one's behalf, the contract note goes to an independent corporate set of eyes known as the funds custodian. There is, therefore, a check in place to make sure the price reported is the price secured. Until now, market practice in the transition management area has not involved this second set of corporate eyes. One of the proposals we made in our response to the Comptroller and Auditor General was to move away from industry practice which did not involve the custodian and to require in any future transitions that the contract notes be routed back through the global custodian. This would give us a triangulation and would have meant that the 0.7% could not have been clipped off the price.
Derek Nolan (Galway West, Labour)
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On the issue of fraud, has the National Treasury Management Agency had any contact with the Garda or the police in the United Kingdom?
Mr. John Corrigan:
On legal advice, we formally advised the Garda Síochána of what occurred. The Garda's inquiry is awaiting further instructions from us, if one likes, and is on hold until we see where the Financial Services Authority in the United Kingdom lands. However, we certainly reported the matter to the Garda Síochána and the Financial Services Authority in the United Kingdom, which is the responsible regulator for State Street in this matter.
Derek Nolan (Galway West, Labour)
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If someone had broken into the National Treasury Management Agency and stolen €3.2 million or removed this sum from an account, it would have been considered a major crime and caused a serious scandal. While I am not arguing that this is the approach being taken by the NTMA, in the case of €3.2 million going missing, the approach appears to be much more relaxed than it would have been had the money been taken from a bank or household, the reason being that it was taken in a roundabout fashion. State Street is in suspension and no action is being taken against the company. Regardless of the outcome or which individuals have admitted responsibility, State Street has admitted to defrauding the State but continues to have business through the other index bond shares to which Mr. Corrigan referred. People will want to see action taken. I encourage the NTMA to press the Financial Services Authority and State Street on this matter and rethink its relationship with the company. While I am aware State Street employs approximately 2,000 people in Ireland, this practice cannot be addressed by having an investigation and no action. There must be some consequences for State Street, either for causing this problem or allowing it to happen. It is unprofessional, and I am sure it has taken up much time in the NTMA and Office of the Comptroller and Auditor General and cost the State significantly more than the €3.2 million involved in the fraud attempt. The relationship between the NTMA and State Street must change.
Mr. John Corrigan:
I will make one further point. While I do not have an issue with what Deputy Nolan has said, it is not strictly accurate to say State Street has admitted fraud. We believe this to be fraudulent behaviour. In our conversations - I am speaking for the record here - the company has not admitted fraud to us. As I stated, we have reserved our position on this matter. As far as we are concerned, the behaviour was fraudulent.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is Mr. Corrigan aware of any disciplinary action having been taken against employees in State Street? I return to the question raised by Deputy Nolan as to how these employees move from one company to another, almost en bloc. Has State Street identified the person or persons involved and has action been taken? The National Treasury Management Agency has pressed State Street on this issue. Has it also pressed the Financial Services Authority on the timeframe for completing its investigation? If so, has the FSA responded?
Mr. John Corrigan:
In relation to the Chairman's first question, we understand a number of people have exited the relevant units. The circumstances of their exit are not fully clear to us and we understand legal challenges are being mounted to their exit, although not necessarily in the case of all three individuals concerned. Whether the matter rests there, I can only speculate, which brings us back to the FSA report. While we have not pressed the FSA, in light of this discussion and the Chairman's comments, we will press it on the matter.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Was the information on the three individuals concerned received from State Street in the explanation provided when a senior executive of the company flew into Ireland to discuss this matter with the NTMA? Having notified the Garda of the matter, will the NTMA pursue a Garda investigation to bring it to a conclusion? Arising from this hearing, the NTMA should write to the FSA in the UK to determine how long its investigation will take.
As is obvious from Deputy Nolan's questions there is serious concern around the issue and the fact it continued to manage €900 million of taxpayers' money. While all of that may be safe, people would feel safer if definite explanations were given arising from what we have heard this morning.
11:10 am
Mr. John Corrigan:
We will formally press the FSA in this matter because its role is vital to us getting independent information on what happened and on getting closure in the context of our relationship with State Street. On the exits, as I refer to them, that issue arose in the discussions with the vice chairman of State Street when he met us in Dublin. We asked him the same question that has been asked here, which was, frankly, did heads roll as a result of this? Given that there are legal issues between State Street and certain individuals, he was somewhat circumspect in his reply, but it is clear that three individuals exited the organisation.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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When was the issue notified to the Garda and how long ago? Does the NTMA intend to pursue the issue with the Garda and, if so, what would the process entail, given that-----
Mr. John Corrigan:
What that process would entail in the first instance is getting the regulator's report in order that we can find out what happened, chapter and verse. Frankly, that is where it is left with the Garda. It comes back to the committee's recommendation which, certainly, we will pursue immediately and we formally press the FSA. The point is well taken.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Perhaps using a transcript of the meeting this morning would be of assistance.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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The outcome of this is that we would expect a report back as soon as possible.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I call Deputy O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
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I thank the Chairman and welcome Mr. Corrigan and his colleagues. Was the €4.7 billion that the NTMA disposed out of the National Pensions Reserve Fund the largest disposal of its type?
Mr. John Corrigan:
Yes, it was the largest disposal because it was part of the €10 billion which had to go into the banks to recapitalise them. In the normal course we would have had smaller transitions which would reflect changes in the investment outlook within the NTMA, where we would switch from one category of investments to another. However, in the normal course of business, we would never have transitioned a block of this order of magnitude.
Kieran O'Donnell (Limerick City, Fine Gael)
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I want to discuss it from the transition manager's side. In the context of the NTMA, €4.7 billion of taxpayers' money has been disposed of to put into banks. Some €2.65 million was involved. In a transaction of that size, obviously the higher the amount the higher the materiality falls. The ordinary taxpayer will ask how the National Treasury Management Agency did not pick this up with its own controls given that €2.65 million is about one third of the €8 million required for home helps and is a significant amount of money. Please explain the process whereby this was signed off within the NTMA and the procedures in terms of disposals taking place and how the NTMA did not pick this up. Effectively, €2.65 million is the amount of taxpayers' money that was given back, or whatever one wants to describe it. How is it that this was not picked up by NTMA's internal procedures? What procedures are now in place? I note the NTMA has very specialised staff. Some 259 people are employed in the NTMA, some 22% of whom, that is, 57, are earning €100,000 or more. How did the NTMA agree to a materiality level in terms of the implementation shortfall when, within that range, it facilitated such an amount of this magnitude? Why did the internal procedures not pick up on this and what has the NTMA done to assure taxpayers this will never happen again?
The NTMA has suggested, in essence that, from now, transition managers transactions would be examined by the global custodian. As the NTMA cannot impose that, I presume this is something the regulators will have to agree to. The NTMA is in charge of managing public funds. Please explain why it was not picked up on and the procedure by which the payment was allowed. Who in the NTMA signed off on the payment? How can the NTMA ensure this never happens again because this is a very large amount of money from the taxpayers' viewpoint?
Mr. John Corrigan:
What we are dealing with is, as I said at the outset, fraud. That is our view of it. I am entering the realm, to some extent, of speculation but I will enter it. For fraud to be successful - if that is the correct word - there has to be internal collusion. Clearly, there was collusion within State Street of some form or fashion that enabled €100 million which was the proceeds which came in from the external broker when it sold the shares to be transformed into €99.93 million for on-transmission to us. The price was clipped within State Street in its omnibus brokerage department. The reason we are waiting on the FSA report is that there were three exits, as I explained to the Chairman, around this issue, not particular to the NTMA, but this was perpetrated on a number of major investment funds, including ourselves. We have to see whether the culpability extends beyond certain levels.
Kieran O'Donnell (Limerick City, Fine Gael)
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I accept that and Mr. Corrigan has been over that ground.
Kieran O'Donnell (Limerick City, Fine Gael)
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That invoice came from global custodians.
Mr. John Corrigan:
No, that invoice came from State Street. What we are proposing is that in future if a transition manager sells something to firm X, that firm X issues what is known as a contract note.
In the case of transition management services, the normal industry practice is for that contract note to go back to the transition manager. In the case of conventional investment management services, what we propose for the future is that the contract note be sent to the global custodian.
11:20 am
Kieran O'Donnell (Limerick City, Fine Gael)
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Who is the global custodian?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is that something the NTMA can insist on now or must a regulator or someone else decide whether that is allowed?
Mr. John Corrigan:
We propose insisting on that when we re-tender these services. Regulatory sign-off is not necessary. As acknowledged in the comments we made to the Comptroller and Auditor General, this would represent a significant change in industry practice. Given what we know now, under the old arrangements people cannot be trusted and when €100 million comes in, €7 million is shaved off it. That is clearly unacceptable. If the global custodian arrangement had applied, the invoice from the external broker would have come in to the global custodian. It would have clearly stated €100 million and that would have been it.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can Mr. Corrigan answer one question? Why, with the resources it has, would the NTMA not have been able to do its own check on the share prices achieved? The range agreed in the implementation shortfall clearly fell within the material range. Therefore, the basic structure facilitated what happened. Is the NTMA considering changing the process with regard to the implementation shortfall? If the material range had not been agreed on day one, the €2.61 million shortfall would have been picked up. However, the fact that range was allowed ensured the shortfall would not be picked up using the implementation shortfall formula. Does Mr. Corrigan understand my question?
Mr. John Corrigan:
I do. The implementation shortfall is not an accounting check as such. The implementation shortfall is a wider market way of measuring the success of the transition in terms of its market impact. The fact that the prices fall within the implementation shortfall gives some additional degree of comfort. Let us be clear - when we got the invoice from State Street, we relied on that invoice - not unreasonably - at face value, having confirmed from them there were no commissions or deductions. We confirmed that.
Kieran O'Donnell (Limerick City, Fine Gael)
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Did the NTMA confirm there were no commissions or deductions?
Kieran O'Donnell (Limerick City, Fine Gael)
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Did it get that in writing?
Mr. Eugene O'Callaghan:
It was effectively established through reviewing the trade data that State Street sent. Therefore, yes, it was effectively in writing. In the trade details provided, the commission was down as zero. Therefore, the sale price we achieved had been amended behind the scenes from €100 million to €99.93 million.
Kieran O'Donnell (Limerick City, Fine Gael)
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Did the NTMA consider doing any spot checks on the trade prices at the time?
Mr. Eugene O'Callaghan:
It is extremely difficult to do so because of the volume involved and the timeframe over which trading takes place. For example, we just did a review. The Standard and Poor's 500 index moves by 0.07% about 40 times daily and there would be 200 or 300 trades every second on large US individual stocks. Therefore, it is impossible to do a spot check to establish a shaving of such a small amount. Therefore, in order to deal systematically with the issue that arose, the way to deal with it is through the new arrangements we propose to tender.
Kieran O'Donnell (Limerick City, Fine Gael)
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When will that tendering process get under way?
Kieran O'Donnell (Limerick City, Fine Gael)
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I would like to move on to another area, the banks. The gross investment by the NTMA in the two banks currently is €20.6 billion. This is a staggering amount - almost two thirds of our tax take. Am I correct that the NTMA values the fallen investment currently at approximately €6 billion? This is an approximate 71% fall in the overall investment - €14.6 billion of a fall. Can Mr. Corrigan give me the breakdown between the gross investment in AIB and Bank of Ireland and what he regards as their net value to 31 October? What future does Mr. Corrigan envisage in terms of the value of that particular investment?
Kieran O'Donnell (Limerick City, Fine Gael)
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Will Mr. Corrigan give us his observations on them?
Mr. John Corrigan:
Clearly, there was state aid in those transactions and that is reflected in the discussions with the European Commission. A total of €4.7 billion was invested in the Bank of Ireland by the fund. On foot of various transactions, the cash received from the bank came to €2 billion and the current value of that remaining investment is €1.9 billion. This represents a decline in value of 18%.
The investment in the banks consists of two elements. First is preference shares, which are like fixed rate instruments. The value of those at the end of 2011, and currently in the portfolio, was written down by 20%.
Kieran O'Donnell (Limerick City, Fine Gael)
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What was the original value of preference shares?
Kieran O'Donnell (Limerick City, Fine Gael)
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Am I correct in saying that the NTMA estimates the current cost of the investment in Bank of Ireland at €2.7 billion?
Kieran O'Donnell (Limerick City, Fine Gael)
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Some €4.7 billion was invested initially. Is that correct?
Kieran O'Donnell (Limerick City, Fine Gael)
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Some €2 billion of that has been repaid. Is that correct?
Kieran O'Donnell (Limerick City, Fine Gael)
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Therefore, €2.7 billion is the net investment cost.
Kieran O'Donnell (Limerick City, Fine Gael)
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What about AIB?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is it correct that the €16 billion is worth only €3.3 billion currently?
Kieran O'Donnell (Limerick City, Fine Gael)
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I am just looking at Mr. Corrigan's presentation.
In his presentation he said the NPRF, excluding the public policy investment, was valued at a certain amount but what is the net value? What is the net value of the bank investment overall now?
11:30 am
Kieran O'Donnell (Limerick City, Fine Gael)
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That value is as of what date?
Mr. John Corrigan:
As of 31 October 2012. However, we have not updated the value of the preference shares because they do not trade regularly. They are carried at the external valuation which we got at the end of December 2011. The value of the ordinary shares in Bank of Ireland, because they are relatively freely traded, reflects the price at which they are currently trading.
Kieran O'Donnell (Limerick City, Fine Gael)
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Therefore, the €20.7 billion - with €2 billion back in cash - represents a net investment of €18.7 billion, which is now only worth around €8 billion.
Kieran O'Donnell (Limerick City, Fine Gael)
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We are talking about roughly a 57% or 58% reduction in value of the overall investment.
Kieran O'Donnell (Limerick City, Fine Gael)
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What does Mr. Corrigan expect the value of the two banks will be over the next year or two? Does he have a view on that?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is Mr. Corrigan saying that even though the investments are within the NPRF, the actual responsibility lies with the Department? Surely the NPRF has a responsibility in terms of managing its portfolio of investments.
Mr. John Corrigan:
No, just to be clear, as the Comptroller and Auditor General reflected in his opening statement, the portfolio within the NPRF is divided between a discretionary portfolio, which is under the direct control of the board of the fund and for which the board takes responsibility, and a directed portfolio, which was a public policy decision on the direction of the Minister for Finance. The management of the relationship in respect of that shareholding resides in the Department and is the responsibility of the shareholder management unit of the Department.
Kieran O'Donnell (Limerick City, Fine Gael)
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I commend Mr. Corrigan on reducing the funding cliff but a shortfall of €2.4 billion still remains. When does he anticipate we will close that gap? What does he foresee the yields on Irish Government bonds will be in the future, when does he expect we, as a country, will fully re-enter the bond market and at what rate would he see us achieving independence?
Kieran O'Donnell (Limerick City, Fine Gael)
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That is a pity.
Mr. John Corrigan:
We have consistently done that because it would be unwise to engage in such speculation. Our views on that issue are market sensitive. Coming into 2013, if we are to have good visibility on our funding in respect of 2014, which is the year we come out of the programme, including the €2.4 billion in the bond issue to which the Deputy referred, we believe we will have to do of the order of €10 billion, in round terms, in bond issuance in 2013. It would be our desire during the course of 2013, subject to market conditions, to do some sort of syndicated issue, which we have not done to date. Our funding during the course of 2012, while it was material and materially reduced the funding cliff, it was on what we would describe as an opportunistic basis. We need to get back to a more regular pattern of funding, which we have succeeded in doing on the treasury bill market. We have our monthly auctions there now, which are in a groove-----
Kieran O'Donnell (Limerick City, Fine Gael)
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That is only short-term, though.
Kieran O'Donnell (Limerick City, Fine Gael)
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In 2013.
Kieran O'Donnell (Limerick City, Fine Gael)
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It would be a bit too optimistic to do it in 2012.
Kieran O'Donnell (Limerick City, Fine Gael)
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Is Mr. Corrigan talking about ten-year bonds or longer-terms bonds?
Kieran O'Donnell (Limerick City, Fine Gael)
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How early in 2013 does Mr. Corrigan anticipate we will be in a position to engage in regular market issuance of medium to long-term bonds?
Kieran O'Donnell (Limerick City, Fine Gael)
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I note that the promissory note is included under Government debt. Is Mr. Corrigan directly involved in the discussions and negotiations in that area? How does he see progress being made in that area? I am trying to find a way of framing my questions so that Mr. Corrigan can make some comment on the matter. I am fishing, essentially. In keeping with the positive mood, I very much welcome the plans to raise €10 billion next year. It is very important we, as a nation, will be able to wave the IMF and EU goodbye, hopefully at Shannon Airport in order to drum up some more business there. In terms of the overall management of Government debt, from Mr. Corrigan's perspective, how important is it to get a deal on the promissory note?
Mr. John Corrigan:
In answer to Deputy O'Donnell's first question, the NTMA is not directly involved in the discussions. We are involved to the extent that we are providing important technical support to those discussions regarding what alternative arrangements we would be comfortable with, were they to fly. In our dealings with investors, this is an issue that frequently comes up and we are often asked questions about it. Just to be clear, relief on the promissory notes, while it would clearly be welcome, would not affect the debt-to-GDP ratio in that the promissory note debt is baked into the GDP ratio. What is demanding is the amortising schedule that requires that these notes, in terms of both interest and principal in an amount of approximately €3 billion per annum, be met.
Kieran O'Donnell (Limerick City, Fine Gael)
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The interest load is very heavy for 2014.
Kieran O'Donnell (Limerick City, Fine Gael)
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The example is purely for illustrative purposes.
Mr. John Corrigan:
-----into a long-term bullet deal, which would mean there would be a single capital repayment at the end, that would bring important relief in the amount of bond issuance we would have to do every year in terms of the amount of the capital payments that would be deferred.
This is where the merit arises in the transaction.
It is debatable to what extent the market has priced in a deal. It has to some extent. It is important that we are cautious on this front in our presentations to investors. Our whole approach to investors has generally been to over-deliver and under-promise rather than get it the other way around because, given where are, we have had to rebuild trust with investors. In our investor presentations we have not included any credit, so to speak, for a promissory note. The profile of re-financing required over the years that we use with investors as of now still includes an element for the promissory notes.
11:40 am
Kieran O'Donnell (Limerick City, Fine Gael)
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The issue of Ireland's debt sustainability is the business of the National Treasury Management Agency. How does the agency see it at this stage? I understand the agency's focus is to re-enter the bond markets in a structured, normal way, like that of any independent sovereign country. However in an overall context where does the agency see our debt sustainability?
Mr. John Corrigan:
The key question around debt sustainability is whether there is visibility and a reasonable expectation that the debt as a percentage of GDP will stabilise and begin to fall. If we stick to the troika targets, then based on the current forecasts we will see the debt stabilising in end 2013 and falling through 2014. The markets are taking a positive view of Ireland in this respect. In his opening comments, the Comptroller and Auditor General referred to the fact that ten-year yields during the middle of last year were 14%. Moreover, two-year yields were 22%. We do not have a precise ten-year issue but the read on those now if one were to extrapolate the yield curve is that there would be yield of sub-5% on a ten-year yield and approximately 2% yield on a two-year paper.
Kieran O'Donnell (Limerick City, Fine Gael)
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I read a report in one of the newspapers this morning to the effect that the calculation for Irish ten-year bond yields was approximately 4.47%.
Kieran O'Donnell (Limerick City, Fine Gael)
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Is that a sustainable rate for a country?
Mr. John Corrigan:
There are two dimensions to that question. In absolute terms the yields on Irish Government bonds are now at levels that we did not see when Ireland was a AAA-rated country. The key difference is that the spread over Germany is still extremely elevated. The key question is whether the German yields rise towards us or whether we continue to fall towards German yields. It would be inappropriate of me to comment because that would be getting into the area of speculating the direction and magnitude of Irish Government yields.
Kieran O'Donnell (Limerick City, Fine Gael)
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I am trying to get Mr. Corrigan there.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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An article in the Financial Times referred to Franklin Templeton owning €8.4 billion worth of bonds. Is that skewing the market view? Is the agency concerned that one United States investor holds that level of bonds? Is the agency factoring this into its consideration in terms of the market and how the agency returns to it and so on?
Mr. John Corrigan:
Clearly, Franklin Templeton has placed a big bet on Ireland on its own terms. It is fair to point out that it has accumulated that portfolio over time. Given that we have done little primary insurance, in the main that portfolio has been bought on the secondary market. I hasten to add that it is not as if we are selling paper out the back door to Franklin Templeton. As an investor, Franklin Templeton is welcome given the positive view it has taken of the Irish market. I have no wish to give a glib answer to the question but we would prefer if there were ten Franklin Templetons rather than one.
We have an active programme of investor relations whereby we meet more than 200 investors twice each year in the spring and autumn to discuss where Ireland is going and, equally important, to discuss their views on Ireland. It is clear to us, and it underpins the positive tone which Deputy O'Donnell described with regard to our positive expectations for market re-entry next year, that there is a good spread of interest by investors in Europe and the United States.
At the risk of digressing the one area not up to speed in this respect is probably Asia, where we had enjoyed a good market following in the past. Asian investors tend to be more influenced by credit ratings. The fact that Moody's still has Ireland as a sub-investment grade is a considerable impediment to Asian investors returning to the market. However, there is a large and continuing following in Europe, the United Kingdom, Ireland and in the United States. The Franklin Templeton story is important but we have seen several continental European and American institutions buying Irish Government bonds in size. We do not deal with them directly, but the intelligence we receive from the primary dealers who distribute the bonds supports that view.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Would there be many investors in the market at the same level as Franklin Templeton or is it an outstanding example? Is the spread far greater in terms of the numbers of investors?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I am interested in this. If Franklin Templeton was to take a negative view and begin to sell, would that impact greatly on the agency's efforts or would it simply be a glitch in the market?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is there another investor like that?
Paschal Donohoe (Dublin Central, Fine Gael)
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I thank the deputation for attending this morning and for the presentations. I wish to focus on the broader issues we have been discussing with regard to bond yields, getting back into the market and so on. However, first I wish to touch on the issue raised by Deputy Nolan with regard to the position of the State Street episode we discussed earlier. I have the basic question for the deputation. Where did this €3 million go?
11:50 am
Mr. John Corrigan:
My understanding, based on the explanation given to me by senior people in State Street, is that there was no direct personal gain to the people involved in this. It would just have been reflected in the profitability of the business unit concerned. It accrued, ultimately, to State Street.
Paschal Donohoe (Dublin Central, Fine Gael)
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This was an issue of the unit within the organisation, as opposed to individuals, making additional financial gain.
Mr. John Corrigan:
That is my ex parte understanding from the bank and I have no reason to doubt it is the case. I do not want to flog the FSA to death, but we need to wait to see the regulator's report. I have no reason to disbelieve the bank's account that there was no personal gain to any individual.
Paschal Donohoe (Dublin Central, Fine Gael)
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Would the compensation of these individuals have been tied into the performance of their business unit?
Mr. John Corrigan:
Deputy Donohoe is probably right; there probably were incentivisation arrangements. I do not have immediate knowledge of the basis of those arrangements. I do not know whether they were short-term incentivisation arrangements, or long-term with some sort of vesting period, as would be the norm. I would not dispute the Deputy's speculation, however.
Paschal Donohoe (Dublin Central, Fine Gael)
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Mr. Corrigan has helped me understand that it is unlikely that this money ended up in someone's personal bank account. It is important to clarify that. The question that has been bugging me all day is where the money went. We have eliminated one option. Is it not feasible to suggest that individuals' compensation is tied into the performance of their business unit? This so-called clipping improved the performance of the business unit. The pay levels of the individuals involved would, therefore, have increased as a result of an artificial gain in how the business unit performed.
Mr. John Corrigan:
That is a reasonable speculation. I do not know whether the compensation actually increased or prospectively increased. In other words, was the pay-out under whatever incentivisation arrangements applied to be made over the longer term, and did the discovery of this event put paid to the triggering of that? I do not know the answer to that question. There was no direct personal gain to the individuals but Deputy Donohoe is right in speculating that there could have been indirect gain. I do not dispute that.
Paschal Donohoe (Dublin Central, Fine Gael)
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That is fine.
It was mentioned that the three individuals involved left the bank. Did they leave the bank in its entirety or did they leave the business unit of the bank?
Paschal Donohoe (Dublin Central, Fine Gael)
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They exited the bank fully, as opposed to exiting the unit within the bank?
Paschal Donohoe (Dublin Central, Fine Gael)
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I just wanted to clarify that because I was not clear on it during the discussion.
My next question relates to paragraphs 4.39 and 4.4 of the Comptroller and Auditor General's report. This makes reference to a communication from the bank to the NTMA which arose from a review of transitions undertaken in 2010 and 2011. It was determined that the bank acted as a reckless principal in connection with the liquidation of certain National Pensions Reserve Fund, NPRF, shares in transition No. 14. Is this issue separate from the clipping issue we discussed, or is it the same?
Mr. John Corrigan:
It is the same issue but it is a subset of it. With the agreement of the chairman of the NPRF, I could describe the exchange-traded fund. Among the shares to be transitioned were shares in what is called an exchange-traded fund, ETF. This is a fund that reflects the underlying value in a basket of shares. In this case, the basket of shares consisted of shares in the Russell 2000 Index, which is an index that is traded in the United States. The shares in ETFs trade in their own right. What happened in this case is that we would have got the price of the share at the opening in the morning. The transition manager then decomposed those shares and sold off the 2,000 shares individually. That is to put it simply.
Paschal Donohoe (Dublin Central, Fine Gael)
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May I interject to be sure I understand? The shares were supposed to have been traded as a basket of shares, but they were sold as the components of the basket.
Mr. John Corrigan:
Yes. The sum of the parts was greater than the total, as it turned out. This bank then pocketed the difference between what we got, based on the share price of the unit of shares, and the basket. We do not accept the term "riskless principal". It was a question of "heads they win, tails we lose" in that instance.
Paschal Donohoe (Dublin Central, Fine Gael)
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Was this issue separate from the substantive issue discussed by Deputy Nolan, or is it part of it? Is the €787,000 part of the €3 million, or €2.8 million, that we have discussed?
Paschal Donohoe (Dublin Central, Fine Gael)
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It is part of it.
Paschal Donohoe (Dublin Central, Fine Gael)
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Which makes up the €3 million we have been discussing. That is fine. I just wanted to clarify that.
My colleagues have discussed the fact that this bank continues to be involved in another element of business with the NTMA. How acceptable does Mr. Corrigan think that is? I understand completely that he is waiting for the result from the FSA and that he needs to do that. He used the phrase "collusion within the organisation". If he suspects a business unit of a particular organisation of collusion why does he believe it acceptable to engage with that organisation in any aspect of business?
Paschal Donohoe (Dublin Central, Fine Gael)
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Surely the strongest way of articulating NTMA's displeasure would be to suspend trading with the bank.
Mr. John Corrigan:
We cannot suspend trading with the bank because it manages money on our behalf. The practical considerations of moving away from it should not be an impediment to doing so; I am not pleading that. There is, however, wider unfinished business here. There remain issues. I do not want to go into this, with the committee's agreement. There remain questions of leverage and negotiating positions in terms of when this thing comes to be settled. I will say no more.
Paschal Donohoe (Dublin Central, Fine Gael)
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Okay. I have been genuinely impressed by the forthright way Mr. Corrigan has elaborated on the context of this and on the discussion he has with State Street. It is to his credit and to that of his organisation. I am, however, struggling to reconcile in my mind the manner in which he described it.
The NTMA speculated on internal collusion in an organisation but we continue to do business with it. Mr. Corrigan has stated he wishes to leave the matter as it is. I will respect that view. However, it will definitely be an issue of continuing interest to the committee.
On the more general engagement with the market, Deputy O'Donnell raised some points in his contribution. How critical is a bank deal to our successful re-entry to the financial markets?
12:00 pm
Mr. John Corrigan:
There is little doubt but that a bank deal would enhance our prospects of getting back to the market in the manner we discussed earlier. The promissory notes would give relief if we were to get a deal with regard to the annual re-financing requirements, along with any retrospective refitting of the summit agreement, upon which there has been speculation and which would give relief to the debt-to-GDP ratio. Both of those would be helpful. We meet approximately 200 institutional investors twice a year. When we went into the programme we took the view that we had to redouble our investor relationship efforts rather than crawling under a rock and disappearing. We have been very cautious in those relations with investors. We have not included anything for relief on the banks in the profile of the debt, the re-financing requirements and the debt service charge. That is not to express a view as to whether we expect or do not expect relief but it is important when making presentations to investors that we stick to what is factually the case.
Paschal Donohoe (Dublin Central, Fine Gael)
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In its engagement with investors the NTMA refers to the current state of affairs as opposed to how they could be in the future.
Paschal Donohoe (Dublin Central, Fine Gael)
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I refer to the different components of an improvement in our bank debt. Mr. Corrigan clarified that an arrangement on the promissory notes might not, of itself, improve the debt-to-GDP ratio which is one of the key thresholds of debt sustainability for our country. However, an arrangement on the ownership and value of our stake in the pillar banks could make a difference to the debt-to-GDP ratio. Am I correct in this assumption?
Mr. John Corrigan:
Yes. If we were to sell all or part of our interests in the pillar banks, this would reduce the debt-to-GDP ratio. I do not wish to speculate but the key issue is the price those shares would achieve. As those banks reform and refocus their businesses, they will become more profitable and obviously the price will improve. In any sale negotiations, a key issue is to what extent that would be reflected in the share price.
Paschal Donohoe (Dublin Central, Fine Gael)
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Is it correct to say that what will impact our overall debt-to-GDP ratio is the potential valuation given to the share price of the banks in which the State has a stake if these were disposed of at some point in the future?
Mr. John Corrigan:
If these were to be disposed of. As a postscript to that comment, under the EUROSTAT rules the debt-to-GDP ratio is measured on a gross basis. They do not give us any credit in those measurements for the assets we hold on the other side of the balance sheet. As I have described, if and when the banks get traction on their businesses, the market - whatever about the statisticians in EUROSTAT - would increasingly give credit in its assessment of Ireland for the embedded value of those shares, even though they are not reflected in the formal debt statistics as reported.
Paschal Donohoe (Dublin Central, Fine Gael)
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Has the NTMA a yield figure in mind with regard to a sustainable return to the markets?
Mr. John Corrigan:
We have consistently refused to speculate on where we might come to the market. We are dealing with traded securities. It would be inappropriate to speculate. The question of supply and at what price one would bring supply clearly influences where the price is currently traded. If the Deputy does not mind me saying so, from a business point of view - if one can regard it as a business - it would not be wise to speculate.
Paschal Donohoe (Dublin Central, Fine Gael)
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I understand. Mr. Corrigan made a point earlier in the discussion that our current yields are an improvement in many ways on the yield figures for the period when Ireland was rated as triple A.
Paschal Donohoe (Dublin Central, Fine Gael)
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The issue, then, is our relative performance in relation to Germany.
Mr. John Corrigan:
Quite. The spread is huge, historically. That spread will close as we normalise. As matters normalise in the eurozone, I think it is fair to say that German bond yields will probably rise. It is a question of to what extent we fall to meet them and they rise to meet us. That is what makes the market in speculation-----
Paschal Donohoe (Dublin Central, Fine Gael)
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In terms of the relative performance, is it correct that our notional bond yields with regard to the eight-year or ten-year debt are actually better than Spain's?
Paschal Donohoe (Dublin Central, Fine Gael)
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However, Ireland is in a programme and Spain is not. It is striking that as a programme country, we have a bond yield that is more attractive than that of a larger economy that is not in a programme.
Mr. John Corrigan:
Markets behave in a forward-looking manner. The price formation mechanism that results in our bond yields being where they are reflects the market's optimism that Ireland will emerge from the programme. This comes back to the earlier conversation with Deputy O'Donnell. Spain is only starting out on a journey that we started back in 2009. We all know the pain and grief we suffered and which we continue to endure. The market is looking at that and this is what accounts for the difference in the yields.
Paschal Donohoe (Dublin Central, Fine Gael)
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As part of that journey, what importance will the markets attach to the forthcoming budget?
Mr. John Corrigan:
As I said in my opening remarks, the status of Irish bond yields and our ability to access markets depend on a number of factors, some of which are within our control and others which are outside our control. One of the issues within our control is the delivery of a budget that is line ball with the troika requirements. The budget is important. The two milestones which we discuss with investors are the budget and the troika report on its recent visit.
The budget would be a factor that I would place in the category of being within our control.
12:10 pm
Paschal Donohoe (Dublin Central, Fine Gael)
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Chapter 2 of the Comptroller and Auditor General's report outlines the development of our national debt during the past four years. The graph provided - along with the rapid rise in the number who are unemployed - always strikes me as being the most disturbing illustration of the difficulties we are trying to manage at present. The graph in question shows that, as a result of the current crisis, our national debt nearly quadrupled in the period 2007 to 2011. Will Mr. Corrigan outline the amount of interest we are going to be obliged to pay next year and the following year in the context of servicing the national debt? How much, for example, will we be obliged to pay next year in order to service this debt?
Paschal Donohoe (Dublin Central, Fine Gael)
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Did Mr. Corrigan say €8 billion?
Mr. John Corrigan:
Yes. That includes provisions for certain sinking funds, which are circular in nature and which actually do not leave the system. Perhaps I might suggest that it would be more appropriate to compare the cash paid on servicing the debt this year and the amount that will be paid on servicing it next year. The figure for this year in that regard is €5.7 billion. Next year, the figure for cash paid is expected to be of the order of €7.25 billion.
Paschal Donohoe (Dublin Central, Fine Gael)
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That €7.25 billion is twice the amount of the adjustment the Government is seeking to make in the budget in the context of increasing taxes and reducing spending.
Paschal Donohoe (Dublin Central, Fine Gael)
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This really illustrates the challenge we face in the context of our debt levels. The amount we are going to spend next year on servicing our debt is twice that of the saving the Government proposes to make in the budget. Will Mr. Corrigan indicate how he perceives we might deal with this issue over time?
Paschal Donohoe (Dublin Central, Fine Gael)
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I will leave it at that. I thank Mr. Corrigan for answering all of my questions.
Derek Nolan (Galway West, Labour)
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In the context of what Deputy Donohoe just stated, the new bond yields are approximately 4.5%. Before we were locked out of the markets, we were taking out long-term bonds at higher rates. Are we trying to refinance those bonds?
Mr. John Corrigan:
No. The bonds we would have raised in the run up to the programme would be medium to long-term in nature. Refinancing refers to situations where bonds have been repaid and where one is obliged to seek new bonds in order to get the money to repay those bonds. The conversation has been around the interest on the bonds. Clearly, those bonds which we raised prior to the troika programme are included in the debt service figures I provided to Deputy Donohoe.
Derek Nolan (Galway West, Labour)
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Are we locked into interest rates on the bonds we issued just prior to entering the programme?
Derek Nolan (Galway West, Labour)
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So there is a fixed interest rate on them-----
Derek Nolan (Galway West, Labour)
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-----and this is higher than the rate to which we would be notionally entitled in the markets at present.
Derek Nolan (Galway West, Labour)
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Is there a strategy to begin to try to replace these bonds with others to which lower rates of interest attach? In other words, is it intended to repay and reissue?
Mr. John Corrigan:
In good times, that would be a normal debt management activity. The first challenge is to get the cash in through new bonds in order that we might have visibility over our funding in 2014. If bond yields were to remain low and if we were successful in securing that cash, as a debt management exercise one would, in good times, seek to retire those slightly higher interest bearing bonds with lower interest ones.
Derek Nolan (Galway West, Labour)
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So we are not there yet.
Gerald Nash (Louth, Labour)
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I wish to return to the point Deputy Donohoe made in respect of servicing the national debt. What percentage of taxation is used to service that debt? Is it correct that 20% of the overall tax take is being used in this regard?
Mr. John Corrigan:
This year, the figure - as a percentage of the tax take - will be 15.7%. We do not know what will be the tax take for next year but on the basis of an assumption that it will not change, it will probably be close to 19%. The projections are that it will stabilise at this level going forward.
Gerald Nash (Louth, Labour)
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Mr. Corrigan has left his crystal ball at home and so have I because that is the responsible thing to do in current circumstances. Is he of the view that we are on target to reach, by 2015, the national debt limit set by the EU ?
Gerald Nash (Louth, Labour)
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I wish to deal now with some issues relating to the State Claims Agency and the establishment of the legal costs unit. I have been arguing for some time that such an approach should be taken. Am I correct in stating that this unit will deal with third-party costs from the Mahon and Moriarty tribunals and, potentially, those from the Smithwick tribunal?
Gerald Nash (Louth, Labour)
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The legal costs unit has not yet been set up on a statutory basis. Is it the case that it is intended to establish it on such a basis?
Gerald Nash (Louth, Labour)
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There have been massive third-party legal costs relating to tribunal investigations into graft and corruption in public life. In that context, there has been a legitimate public outcry regarding the level of payments made to barristers who - in my opinion, this is a reflection on the tribunals - were carrying out their investigations at a very leisurely pace. They clocked up massive legal bills at the expense of the taxpayer in the process. I am glad we have reached the point where we recognise that this is a problem. The tribunal process has led to major concerns regarding the body politic and public life in this country and the huge costs awarded to barristers has increased public frustration. I welcome the fact that we are getting a handle on this matter.
The head of the new unit has not yet been appointed but I understand that the process in this regard is ongoing. Is that correct?
Gerald Nash (Louth, Labour)
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When will the unit be up and running and when will it have the resources required to allow it to address the issues to which I refer?
Gerald Nash (Louth, Labour)
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I presume that a team of forensic accountants and other professionals is going to be engaged to examine the bills of costs submitted by barristers engaged in tribunal work. Is that the case?
Mr. Ciarán Breen:
What we will be recruiting into the legal costs unit will be legal cost accountants who are skilled in terms of forensically dissecting the contents of bills of costs and engineering the kinds of reductions one would anticipate we should be obtaining in order to get those costs down to levels which will hopefully be significantly lower than those submitted.
Gerald Nash (Louth, Labour)
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Will Mr. Breen explain the difference between the system that is going to apply in the context of the legal costs unit and that which has obtained in recent years? When a bill of costs is submitted to the State Claims Agency at present, who is responsible for examining it?
What types of saving are being targeted? What will make it different? What is the great innovation with the unit and how will it save money for the taxpayer?
12:20 pm
Gerald Nash (Louth, Labour)
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Could Mr. Breen cover both, please?
Mr. Ciarán Breen:
I will give an example. Currently, for clinical and non-clinical claims we use a combination of our own in-house skills and legal cost accountants that we engage on an individual case basis. To give an idea of the kinds of savings we have had, last year we saved approximately €6.6 million through the negotiation of legal costs in both areas. In the first instance in tribunals of inquiry, applicants must have their costs awarded to them by the tribunal chairman. It is at that stage that they draw their bills of costs through their legal cost accountants and submit them to us. We do not have any idea at this stage, other than the figures that were mentioned in the Comptroller and Auditor General’s special report in 2009, of what the costs will ultimately be. I appreciate that was some time ago. At that time the Comptroller and Auditor General indicated that the costs for the Mahon tribunal would be €137 million or more and that those of the Moriarty tribunal could be up to €80 million. Our hope is that we will handle in-house high individual bills of cost. What is currently happening is that the smaller bills of costs that have arisen are being sent out to an independent legal cost accountant by the Departments that are dealing with both the Moriarty and Mahon tribunals, and this accountant is working with the Departments to get reductions in those bills.
Kieran O'Donnell (Limerick City, Fine Gael)
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I have one or two items to raise. When does Mr. Corrigan expect the final drawdown by this country will take place under the current IMF-EU programme in terms of funding? I say that in the context of our regaining our full economic sovereignty.
Mr. John Corrigan:
I ask the Chairman to bear with me a minute. It is anticipated that the last drawdown will be in the fourth quarter of 2013. The programme runs right up until then. In round terms the total available under the facilities is €67.5 billion and we have drawn down €55 billion of that to date. The bulk of the balance will be drawn down next year.
Kieran O'Donnell (Limerick City, Fine Gael)
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Roughly, what is the average rate at which we are drawing down the funding?
Kieran O'Donnell (Limerick City, Fine Gael)
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Does Mr. Corrigan anticipate that we will continue to draw down moneys from the fund right up to the end of 2013 and that we will be funding ourselves independently from the start of 2014?
Mr. John Corrigan:
The programme, as I have said previously, funds the State up to the end of 2013. We expect that we will be in a position to fund ourselves from 2014 onwards, but in order to do that, prudence and good management would require that the bulk if not all of the €10 billion bond issuance to which I referred earlier be done during the course of 2013. For prudential and management reasons, we are running two programmes in parallel.
Kieran O'Donnell (Limerick City, Fine Gael)
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In 2013?
Kieran O'Donnell (Limerick City, Fine Gael)
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What is the normal process after the programme when we regain our full economic sovereignty in terms of being able to fund ourselves? Would monthly bond auctions take place thereafter? Is that the normal way in which the National Treasury Management Agency does business?
Mr. John Corrigan:
That would be the ultimate reflection of the normalisation of the State’s capital market transactions. It is usually a combination of what I call syndicated transactions, which are large transactions that are usually used to launch a new bond issue, and bond auctions, through which subsequent issues are sold off. The Deputy is correct that the plan is to get back to monthly bond auctions.
Kieran O'Donnell (Limerick City, Fine Gael)
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Will that be from January 2014 or even from 2013?
Kieran O'Donnell (Limerick City, Fine Gael)
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We spoke about the promissory note and a bullet payment at the end. That would have major advantages for this country in terms of funding. One of the key elements from a budgetary position in terms of promissory notes is interest. I accept that budgetary matters are not part of Mr. Corrigan’s remit, but is it possible to construct a product, in refinancing the promissory notes, to the effect that we would have not only a capital repayment holiday but also an interest bullet that would enable the State not to have to record interest on the funding arrangement until the very end of repayments? If it is a 20-year or 30-year bond, then effectively the full amount would be repaid at the very end but the interest amount would not reach the accounts until the end as well.
Mr. John Corrigan:
I imagine the key requirement would be that the economic value of whatever instrument might replace the existing promissory notes would be equivalent in value to the promissory notes. It should be possible to slice and dice that from a cashflow point of view. I would make one qualification to that statement: the general Government balance, which is the measure of the budgetary deficit or surplus, operates on an accrual basis under EUROSTAT rules rather than the old cash-in, cash-out system, and there might be elements of the accrual that would box us in in terms of how we might slice and dice that in order to get the result we want.
Kieran O'Donnell (Limerick City, Fine Gael)
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With regard to the State's investment in Anglo Irish Bank via the promissory note, does that fall in any way under the remit of the National Treasury Management Agency, through the National Pensions Reserve Fund or anything else?
Kieran O'Donnell (Limerick City, Fine Gael)
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Was the NTMA involved in the construction of the promissory note from day one?
Kieran O'Donnell (Limerick City, Fine Gael)
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A delegation from the IBRC appeared before the Joint Committee on Finance, Public Expenditure and Reform recently. It appears the directors are now saying that what was regarded as the residual value of Anglo Irish Bank could have been higher. If that were the case, would it afford opportunities in terms of the way the promissory note is constructed vis-à-vis discounted cashflows to reduce the exposure in terms of the value of the promissory note to the State? Does Mr. Corrigan understand what I am asking?
Mr. John Corrigan:
I do indeed. As I said, I am not directly involved in the discussions on the promissory note, but I imagine that if it could be established with a high degree of certainty that the residual value was higher - the key being a reasonable degree of certainty - then that would be an ingredient to go into the mix as Deputy O’Donnell described it.
12:30 pm
Kieran O'Donnell (Limerick City, Fine Gael)
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And of benefit to the State.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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How many staff are there in the organisation?
Mr. John Corrigan:
There are 500 staff employed by the NTMA. Some 230 of them are employed by NAMA. In the non-NAMA side of the NTMA, there are 270 people. Some of the 270 are employed on shared services provided to NAMA, including HR and IT services and other related services. That is a broad-brush breakdown of the staff numbers.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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What percentage of those staff would be in receipt of salaries over €100,000? Would the salaries be much greater than that? Are the staff in receipt of bonuses or perks of any kind?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Just broadly in terms of the 500.
Mr. John Corrigan:
There are 118 people who earn up to €50,000, and some 230 people earn between €50,000 and €100,000. A total of 105 people earn between €100,000 and €150,000, and 32 people earn between €150,000 and €200,000. Four people earn between €200,000 and €250,000, six people earn between €250,000 and €300,000, four people earn between €300,000 and €400,000, and one person earns between €400,000 and €500,000.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Would any of those be on bonuses of any kind?
Mr. John Corrigan:
The pay structure of the NTMA provides for incentive payments or bonuses, as they were described by the Chairman. Most people would have built into their contracts some provision in this regard. It varies from person to person. However, in the current circumstances, for all practical purposes no incentive payments are being made.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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In 2011, would no bonuses have been paid whatsoever?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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It related to 2011 and amounted to €63,000.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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What is the scene like for this year? Do the bonuses relate to the higher end of the salary scale? Would each of the 500 staff employed have the opportunity, in some way, to gain a bonus in any one year? Is the bonus restricted to those on higher salaries?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Most people?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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How does it look for 2012?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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How does Mr. Corrigan think that those salaries in excess of €100,000 sit with public policy, on one side, and public perception, on the other, in terms of their scale and the fact that each is subject to a bonus? Five staff received a bonus. At what level were those staff?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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What is Mr. Corrigan's view on salaries?
Mr. John Corrigan:
My view on the salaries is that the salaries are the salaries. We have dramatically increased in numbers because of the additional responsibilities that have been given to us, mainly represented by the NAMA project. As I stated, NAMA has over 230 employees. We must recruit in the market and the salaries are what the salaries are. I can understand people's anger over salaries in the financial services sector but we must operate in that sector. Solving the perceived problems associated with high salaries is really a wider issue than the NTMA issue. When we recruit people, for example, we do not go after them with open chequebooks. We try to keep what we have to pay people to a minimum. A common sense requirement we have is that people must produce their P60s if a job offer is made to them so we will not be hoodwinked by people who are over egging what they claim to have earned. The salaries are what the salaries are. There is a job of work to be done, which is important from the State's point of view. There is a wider policy issue, which one may call an ethical issue if one wishes, with respect to salaries in the financial services sector, but that spreads much wider than the NTMA.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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We cannot go into it because it is policy but I must state the payment of that type of salary to people in the context of the public debate occurring on what is paid to those generally described as bankers is significant. The public and I wonder how it can be justified. In so far as policy is concerned, it is a matter for another committee, but I am expressing my point of view.
When the NTMA recruits staff, it obviously looks at what they were paid in the private sector in their previous employment. It considers their skills and compares them with the range of skills the agency requires. I fully appreciate the very positive work the agency does and that it can be difficult to recruit people with the necessary skills at a lower cost. However, the salary costs do not sit well in the public debate.
I want to link this subject to what Mr. Corrigan stated on the State Street issue. Mr. Corrigan used the words "collusion" and "fraud" and said people cannot be trusted. I do not wish to take him out of context but I believe these are the words he used. This territory is not dissimilar to the world of high finance. It has happened before and will certainly happen again.
However, in the context of what is being paid to people with a range of skill sets dealing with contracts like the one the National Treasury Management Agency, NTMA, had with State Street, I would have thought they would have been ahead of the curve with regard to how fraud and collusion can happen and would have built into the contract some oversight of the transactions to ensure what happened could have been caught much earlier or could have been prevented from happening although it is difficult to prevent collusion and fraud by the nature of the transaction itself. Notwithstanding this, however, I am surprised by the lack of control. While I heard Mr. Corrigan's explanation earlier, given the range of people his organisation employs one would have expected greater controls within that organisation that would have anticipated this or certainly would have had some sort of oversight and would have prevented this from happening or would have built such oversight into the contract, as I suggested earlier. I seek Mr. Corrigan's views in this regard.
12:40 pm
Mr. John Corrigan:
I have gone through what happened and when someone sets out to wilfully commit a fraudulent act of the nature that occurred here, it would have been very difficult to spot. As I stated, the fraud was not just perpetrated on the National Pensions Reserve Fund. It is not as though they picked us out because we were some sort of patsies. The fraud was perpetrated on a number of funds and we certainly are aware of two of the names involved. It certainly was masked from us. We examined the invoices and perhaps, with the benefit of hindsight, we should have done more. However, from an institution of the standing of State Street, one would have a high level of expectation that it would deal honestly with the matter and would have dealt with it in accordance with its contracts. When I say "collusion", for any fraud to take place, there clearly must be collusion and I have no doubt but there was collusion.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I understand the explanation from the other side of the argument. Collusion, fraud, theft or anything one wishes to describe, happens in business. It happens everywhere and whatever is the enterprise, it takes the appropriate steps at the various levels within the organisation to anticipate what might happen. Regardless of whether it is in a shop where someone has taken stuff off the shelves, where there is pilferage of one kind or another in a business or where someone simply is putting his or her hand into one's till, one will anticipate it and will try to do something about it. One puts in cameras, or has officers in place to deal with it. Given the substantial amount of money the NTMA handles and manages, as a non-qualified person looking in I simply would have expected, by way of either contract or oversight, to have seen something better from the organisation. It has been a learning curve for me that all of this could have happened, particularly when such vast sums of money are involved. Moreover, as others from outside Mr. Corrigan's organisation were involved, from a public accounts point of view, I expect greater oversight of all this for the future, because that is all we can do now. I encourage Mr. Corrigan to seek the full report and to make efforts with the Financial Services Authority, FSA, in respect of that investigation.
I will now turn to a paragraph from the earlier remarks of the Comptroller and Auditor General in which I was interested. When dealing with contributions to the pensions fund, he noted a total of €1 billion was repaid from the fund to the Exchequer. Is the Exchequer where the money came from in the first place?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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But did it rightly go back to the Exchequer? I refer to the €1 billion.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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From where did that €1 billion come in the first place?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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So it rightly went back to the Exchequer. That is where it should have gone.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Had he not directed that it go back to the Exchequer, where would it have gone?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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That was in 2011.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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This is a policy matter but in the context of the budget, instead of going back to that fund, it went back into the general expenditure of the Exchequer. Is that correct?
Shane Ross (Dublin South, Independent)
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I have been considering Mr. Corrigan's comments about salaries. Are NTMA employees the best paid people in the public service?
Shane Ross (Dublin South, Independent)
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These salaries would make some bankers blush. To put them in proportion, I presume Mr. Corrigan is the person in the €400,000 to €500,000 bracket.
Shane Ross (Dublin South, Independent)
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Yes, I know. Mr. Corrigan is the one person in that bracket. What is it, €480,000 or €490,000? Has it gone down?
Shane Ross (Dublin South, Independent)
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It has come down and is now €416,000.
Shane Ross (Dublin South, Independent)
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Okay.
Shane Ross (Dublin South, Independent)
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Mr. Corrigan is down to approximately €8,000 per week.
Shane Ross (Dublin South, Independent)
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When talking about the reason for such salaries, Mr. Corrigan kept saying the salaries are what they are. He stated the NTMA must recruit on the market. Was Mr. Corrigan recruited in the market?
Shane Ross (Dublin South, Independent)
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It went out to the market, did it?
Shane Ross (Dublin South, Independent)
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No, I meant for the top job.
Shane Ross (Dublin South, Independent)
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Therefore, Mr. Corrigan was not recruited in the market.
Shane Ross (Dublin South, Independent)
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Basically, what happened was that Mr. Corrigan was appointed.
Shane Ross (Dublin South, Independent)
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There was no open competition for Mr. Corrigan's job.
Shane Ross (Dublin South, Independent)
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For how many of the top people is there actually recruitment in the market?
Shane Ross (Dublin South, Independent)
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We have established Mr. Corrigan, who is the top guy, was not.
Shane Ross (Dublin South, Independent)
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They did not go out on the market and did not seek anyone else but chose Mr. Corrigan. While he may be very good at his job, they did not go to the market for it. Mr. Corrigan is accompanied by Ms Eileen Fitzpatrick, who was appointed last year to NewERA. Was she recruited in the market?
Shane Ross (Dublin South, Independent)
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Mr. Corrigan knows what is my question. Was she recruited in the market for the job as head of NewERA?
Shane Ross (Dublin South, Independent)
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Mr. Corrigan cannot come before the committee claiming these salaries are justified because the NTMA goes out into the market and must pay them because of the competition, when neither he himself nor Ms Eileen Fitzpatrick, who is sitting beside him, was recruited in the market. Is it not correct that insiders are being appointed to top jobs in there without recruiting in the market?
12:50 pm
Shane Ross (Dublin South, Independent)
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Mr. Corrigan might like to think it, but he has not gone out to find out whether it is right or wrong.
Shane Ross (Dublin South, Independent)
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That is why Mr. Corrigan has to pay them so much. How much is Ms Fitzpatrick paid?
Shane Ross (Dublin South, Independent)
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I am well aware of that, but I am asking the question.
Shane Ross (Dublin South, Independent)
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Mr. Corrigan is at liberty to say but he is not required to say.
Shane Ross (Dublin South, Independent)
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So the NTMA does not recruit everybody in the market. It appoints insiders who do not have to go to competition and it refuses to reveal how much they are paid.
Mr. John Corrigan:
I have given details in huge granularity when the Chairman asked me for the figures earlier. Under the Data Protection Act it is not appropriate to name the salaries of people other than those we are required to name who have been appointed to the position of chief executive. There are three people designated as chief executives: myself, Mr. Brendan McDonagh and Mr. Brian Murphy who heads up the National Development Finance Agency.
Shane Ross (Dublin South, Independent)
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Basically Mr. Corrigan will not tell us, so we are acting in the dark about what people are paid. We are a value-for-money committee. We obviously cannot make any judgments on individuals because we do not know what they are getting paid and Mr. Corrigan will not tell us. That is the reality. It seems pretty farcical to me.
What about pensions? How much is Michael Somers, Mr. Corrigan's predecessor, getting as a pension?
Mr. John Corrigan:
As regards Dr. Somers's pension, according to an interview he gave in the newspaper - again I want to be careful about the Data Protection Act, but I presume it is an accurate report - he said he was earning a pension of €265,000. He would have been required to take a cut in that under the public service pension reduction arrangements.
Shane Ross (Dublin South, Independent)
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Yes, but he is deputy chairman of AIB as well.
Shane Ross (Dublin South, Independent)
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Okay, well he gets €150,000 for that. When is Mr. Corrigan due to retire?
Shane Ross (Dublin South, Independent)
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What sort of pension will Mr. Corrigan get then?
Shane Ross (Dublin South, Independent)
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The salary has come down, has it not?
Shane Ross (Dublin South, Independent)
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Okay. What sort of a pension will Mr. Corrigan get? How much will it be?
Shane Ross (Dublin South, Independent)
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I am sure Mr. Corrigan has a rough idea.
Shane Ross (Dublin South, Independent)
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Yes, but would it be €100,000, €150,000 or €200,000?
Shane Ross (Dublin South, Independent)
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Does Mr. Corrigan contribute to the pension?
Shane Ross (Dublin South, Independent)
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So Mr. Corrigan does not pay any pension contributions.
Shane Ross (Dublin South, Independent)
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So Mr. Corrigan pays none, the employer pays none and he is getting a six figure pension. Can Mr. Corrigan indicate how much it will be? If it is related to salary, presumably there is a formula.
Shane Ross (Dublin South, Independent)
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Why will Mr. Corrigan not tell us? It is coming out of public funds. I think it is reasonable, Chairman, that we should know what pensions people get.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I do not think Mr. Corrigan is obliged to explain that level of detail.
Shane Ross (Dublin South, Independent)
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I do not want that sort of detail, but I wanted the formula.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I think he has been fair in explaining his salary and pension arrangements.
Shane Ross (Dublin South, Independent)
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We know it is six figures but I do not know whether it is €100,000 or up to Dr. Somers's figure of €265,000. I am trying to establish what sort of arrangements senior staff at the NTMA have for their pensions. I am not getting very far because, while I know it is related to salary, I do not know how closely it is related to salary or what the formula is.
Shane Ross (Dublin South, Independent)
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What are the rules?
Mr. John Corrigan:
According to the rules of the scheme, of the 500 employees, 55 people are on a final salary arrangement, which final salary scheme was closed a number of years ago. The rest of the staff are, by and large, on a career average pension scheme. In my case, it was a final salary scheme based on the salary that I was earning in my previous position.
Shane Ross (Dublin South, Independent)
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As regards what Mr. Corrigan calls six figure sums, and I am still not sure what they are, but assuming they are close enough to Dr. Somers's, how many people are getting that sort of pension from the NTMA? Mr. Corrigan gave us the figures on salaries but how many people are getting six figure pensions?
Shane Ross (Dublin South, Independent)
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Are due to get that sort of pension?
Shane Ross (Dublin South, Independent)
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Yes.
Shane Ross (Dublin South, Independent)
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They have similar arrangements to Mr. Corrigan.
Kieran O'Donnell (Limerick City, Fine Gael)
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Under the rules of the scheme, what percentage of final year salary would the people who qualify under the final scheme get, and what percentage for people on the average? Under the rules of the scheme, do they get two thirds?
Kieran O'Donnell (Limerick City, Fine Gael)
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So 50% of the final year salary is by way of pension for the final, and what is it on the average?
Kieran O'Donnell (Limerick City, Fine Gael)
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So, effectively, the people on final year salary get 50% of their final year salary as a pension. People who qualify under the average scheme get 50% of their average salary.
Kieran O'Donnell (Limerick City, Fine Gael)
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All right, so those are the rules of the scheme.
Shane Ross (Dublin South, Independent)
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Mr. Corrigan has given us a picture so we can assume that certain people apart from Dr. Somers are getting pensions of more than €200,000. It is pretty generous. I worry about the opaqueness with which Mr. Corrigan is confronting us. It is something we should dig deeper into. I do not understand why we cannot have more information. It would give us more confidence in the NTMA. The only people who are getting these sorts of salaries are the bankers. I worry that we cannot dig into this and find out, first of all, precisely what people are getting and, second, whether they are worthwhile, particularly as they are not recruited in the market.
What is the advantage to the NTMA of having NAMA as part of the family?
1:00 pm
Mr. John Corrigan:
That was the basis on which NAMA was set up. The thinking at the time, as I recall it, was that locating it within the wider NTMA facilitated the rapid establishment of NAMA from a standing start. The connections between NAMA and the NTMA are limited to several shared services. The arrangement that we provide staffing to NAMA is prescribed in the NAMA legislation. The other area in which we would work closely with NAMA would be to ensure that in the management of the NAMA balance sheet, the risks involved are integrated with other market-type risks which are being taken on in the NTMA. This ensures from the State’s point of view that there is a holistic view taken of counterparty risk, for example.
Shane Ross (Dublin South, Independent)
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Does the advisory committee of the NTMA meet very often?
Shane Ross (Dublin South, Independent)
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Does Mr. Corrigan meet the committee?
Shane Ross (Dublin South, Independent)
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On what does the committee advise Mr. Corrigan?
Shane Ross (Dublin South, Independent)
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Is there a remuneration committee in the agency?
Mr. John Corrigan:
There is a remuneration committee but the advisory committee itself has a statutory role in determining the pay of the agency’s chief executive officer. One of the provisions set down in the legislation is that the committee provides advice to the Minister for Finance on the salary of the agency’s chief executive officer.
Shane Ross (Dublin South, Independent)
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So this committee would have approved Mr. Corrigan’s salary and Dr. Michael Somers’s €1 million pay packet?
Mr. John Corrigan:
The committee did not approve it. The pay of the chief executive is approved by the Minister who takes advice from the advisory committee. In my case, when it was agreed I would not benefit pension wise from the higher salary as chief executive, the advisory committee would have advised the Minister on this.
Shane Ross (Dublin South, Independent)
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Is the advisory committee appointed by the Minister?
Shane Ross (Dublin South, Independent)
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Will Mr. Corrigan give me the names of the committee?
Mr. John Corrigan:
Mr. David Byrne, former Attorney General, is chairman. Other members are Mr. Brendan McDonagh, chairman of the Bank of N.T. Butterfield & Son Limited, Mr. Donald C. Roth, former vice president and treasurer of the World Bank, Ms Tytti Noras, Mr. John A. Moran, Secretary General of the Department of Finance, and Mr. Hugh Cooney, accountant. There is one vacancy on the committee.
Shane Ross (Dublin South, Independent)
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How much are they paid? Is it true the chairman is paid €50,000 a year for five meetings?
Mr. John Corrigan:
The chair is paid €50,000 and he took a reduction of 10% on that some time ago. The ordinary members receive €25,000 and they also agreed to take a reduction of 10% in line with the chairman. The Secretary General of the Department of Finance receives no fee in respect of his membership.
Kieran O'Donnell (Limerick City, Fine Gael)
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On reflection of the Chairman’s comments, it is now time for the NTMA to put in place a system, outside of the way in which it appoints transition agents, whereby the original contract notes from the agents that sold the shares on the bank’s behalf were attached to the NTMA’s summary sheet. It is incumbent on the agency to put its own proper verification systems in place, particularly when one considers €4.7 billion and €2.6 billion of taxpayers’ money fell down a black hole. Will it give a commitment to put such a system in place and ensure the agency is the final arbitrator in such matters?
Kieran O'Donnell (Limerick City, Fine Gael)
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I am not asking the NTMA to check every contract note but it should have a system in place whereby it can do a random check of them to provide some level of protection. One can never check something enough.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Deputy O’Donnell should note the Comptroller and Auditor General has set down several recommendations, of which Mr. Corrigan is aware.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I thank Mr. Corrigan and his officials for attending today’s meeting. Several questions were asked about salaries and pensions within the agency. If it is possible to give this information to the committee, I would be grateful. If a report emerges from the State Street Bank matter, I would be grateful if Mr. Corrigan could provide the committee with a copy or to at least keep us informed of progress in the matter.
Is it agreed that the committee notes the 2011 financial statements and accounts of the NTMA and the National Pensions Reserve Fund Commission, NPRFC, and disposes of the relevant chapters in the Comptroller and Auditor General’s report? Agreed. I thank the witnesses.