Brian Cowen (Laois-Offaly, Fianna Fail)

I welcome this motion, as it gives me an opportunity to reaffirm the Government's continuing support for the purpose for which the National Pensions Reserve Fund was established and to set out, without ambiguity, the Government's commitment to the future of the fund.

Population ageing, and the profound issues it gives rise to, is emerging in the developed world as one of the major public policy concerns of this century. Due to the twin effects of a lower birth rate and population ageing, the percentage of the population in the labour force is set to fall in developed economies with serious implications for the financial sustainability of pensions, health and long-term care systems. We, in Ireland, also face these issues although our population, which is younger than the European average, gives us some time to prepare for them. I note some comment in recent years that, due to increased immigration, the issues we face may have eased although such an analysis ignores that immigrants to the country now will be retiring at the same time and with the same pension entitlements as our own baby boom generation of the 1970s and 1980s.

Any complacency anybody might have harboured in this regard should have been rudely blown away by the projections contained in the national pensions review recently published by the pensions board. The board projects that annual social welfare pension costs will rise from their current level of 3% of GNP to 10.1% of GNP by mid-century with public service pension costs projected to climb from 1.3% of GNP to 3.7% over the same period. Even when the Pensions Board adjusts its projections and uses a higher immigration rate, the mid-century costs of social welfare pensions fall by only 1% to 9.1% of GNP. In other words, immigration in no way eliminates the effects of population ageing.

I recognise that projections are only as strong on the assumptions on which they are based and cannot accurately predict the future. Nobody knows for certain whether the public pension's bill in mid-century will be 12%, 14% or 16% of GNP. However, we it will be a great deal higher than it is now and that the only question is the severity of the issue. Sensible governments make prudent provision for the future based on the most likely scenario, which is exactly what the Government has done with the establishment of the National Pensions Reserve Fund.

Before coming to the fund itself, I would like to dwell briefly on the key role of the social welfare pension in our pension system. The national pensions review, to which I have already referred, has made a large number of recommendations regarding how our pension system might be improved. Many of these recommendations are concerned with occupational and private pensions and are beyond the scope of this debate. However, in its overview it makes a point crucial to any consideration of our pension system, which is that Ireland already has a good level of pensions provision and a sound pension base.

The social welfare pension is the bedrock of our pension system. For those with little or no supplementary provision, it provides the only source of regular income in their retirement. For those in a position to make their own supplementary pension arrangements, it provides a basic level of income on which they can build. It also means that not all of their retirement income is dependent on the performance of their pension investments, which is an increasingly important consideration as private and occupational pensions are increasingly provided on a defined contribution basis.

The Government is acutely conscious of the key role of the social welfare pension in ensuring that people can maintain an acceptable standard of living in their retirement and as a foundation on which occupational and private pensions can be built. Since coming into office, the Government has made significant improvements in the real level of benefits and is committed to increasing pensions to €200 per week by 2007. However, there is little point in increasing pension levels if such increases are not sustainable in the long term. Securing the State pension system in an environment where the burden on the taxpayer is rising dramatically is one of the central challenges we face as a society and the Government established the National Pensions Reserve Fund in order to meet that challenge.

The Government established the National Pensions Reserve Fund in 2001 to meet in part the increased costs of social welfare and public service pensions from 2025 onwards. The fund is essentially a demographic equalisation mechanism, involving the statutory investment by the Government of 1% of GNP annually — a sum equivalent to over €1.4 billion this year. The fund entails setting aside some of the revenues generated now while the bulk of our population is in the labour force and contributing to economic growth, investing in those funds and drawing them down in the future when growth rates are likely to be slower and the age dependency burden very much increased.

Establishment of the fund before the fiscal issues caused by population ageing begin to bite means that relatively modest contributions can have a significant effect. It is projected that the fund will be equivalent to €140 billion, 40% of GNP, in 2025 — the first year of drawdown.

The national pensions review projects, using conservative return assumptions, that payments from the fund could reduce the impact of pension payments on the Exchequer by 3.5% of GNP annually by mid-century, which is a quarter of the total cost. The fund smooths the Exchequer costs arising from Ireland's pension commitments over a lengthy period, thus contributing to the long-term sustainability of the pensions system. To the extent that the fund defrays future pension costs, the need for less palatable and indeed less equitable means of addressing the issue, such as reducing the real value of pensions, significantly increasing taxation or increasing the retirement age, can be allayed.

The establishment of the National Pensions Reserve Fund has placed Ireland at the forefront of countries preparing for the issues caused by population ageing, and France and New Zealand have since established very similar funds. It is a testament to the vision of my predecessor,Charlie McCreevy, that specific and innovative aspects of the National Pensions Reserve Fund Act 2000 have now come to be seen as international best practice in this area. In this regard, I refer particularly to the fact that the fund is managed by an expert commission, which is independent of Government in the exercise of its functions. Indeed, the commission is in a very similar position to the trustees of private pension funds, and it controls and manages the fund with discretionary authority to determine and implement its investment strategy. This has given the commission the freedom to develop, outside of the political process, a long-term investment strategy primarily based on a diversified portfolio of real assets, including quoted and private equity, property and commodities, outside of the political process. Indeed, a long-term State fund with no need for liquidity or to match liabilities on a yearly basis has some clear advantages in seeking to maximise long-term investment returns. The commission is to be congratulated on recognising those opportunities and on taking steps to profit from them.

The legislation also requires that the fund's investment strategy must be on commercial lines, subject to prudent risk management. This means that the commission cannot make investments for any purposes other than maximising the fund's contribution to Ireland's future pension costs. This represents a very clear-sighted approach and one which will bear rich dividends through a focused and disciplined investment strategy. From time to time, there are calls for the fund to be used for specific purposes, particularly in our infrastructural programme. Any decision in this regard is one for the commission, and the commission has stated that it is keen to make such investments, subject to its receiving a commercial rate of return. While I am on this subject, I also note that lack of capital is not an issue with Ireland's PPP programme, and the success or otherwise of the programme is not in any way dependent on investment by the fund.

A third noteworthy feature of the National Pensions Reserve Fund Act is the mandatory nature of the 1% of GNP contribution. The Government made the contribution mandatory because we recognised that if we left discretion in the level of the minimum contribution, future Administrations could come under pressure not to make the contribution when faced with other competing, more short-term priorities. It was this Government's opinion then, and it remains our opinion now, that any short-term difficulties that the payment may cause the Exchequer are more than offset by the long-term gain. We see the 1% of GNP contribution as a prudent and sustainable annual commitment. Indeed, it is worth noting that, in aggregate, the Government has not engaged in borrowing to make contributions to the National Pensions Reserve Fund since it began setting aside money for pensions prefunding after the Eircom flotation in 1999. In the seven years of contributions, the Government has run budget surpluses in five of those years, and the total budget surplus over the period is just under €4 billion. Moreover, payments into the fund do not count as Government expenditure for the purposes of calculating the general Government balance under the Maastricht rules.

It is no secret that the fund was established in very difficult market circumstances, with the bursting of the stock market bubble of the late 1990s and the subsequent bear market of 2000 to 2002. However, the commission coped with these circumstances extremely well through a phased market entry strategy which enabled it to invest at attractive valuations and to profit as the market recovery took hold from early 2003. In 2005, the fund earned a return of 19.6%, or €2.4 billion. In the first quarter of this year, it has earned a further 5.4% or €830 million, bringing its total value to €16.6 billion. Overall, since its inception to the end of March this year, the fund has earned €4.1 billion in excess of contributions from the Exchequer equivalent to a compound annual return of 6.2%. Compared with an alternative use of paying down the national debt, the State is better off by €2.1 billion from the establishment of the fund.

In its annual review in 2005, the commission pointed out that equity markets were volatile and returns of last year's magnitude should not be regarded as the norm. However, as a long-term investor, it is prepared to accept this volatility. It goes on to state that the biggest risk it could run would be to take an overly cautious investment approach and thus reduce the fund's potential contribution to Ireland's increasing pension costs. I believe that is a crucial point. I am aware, and I accept, that the appropriate investment strategy for a long-term fund with no drawdowns for 20 years can lead to short-term volatility. There were those who did not accept this point when the fund experienced negative returns in 2002 and criticised both the Government for establishing the fund and the commission for its investment strategy. I would hope that such critics would take a more long-term and rational perspective in future.

The commission has also been innovative and to the forefront of best practice in other areas. Last week, it joined a group of the world's largest institutional investment funds in signing the principles for responsible investment at their launch at the New York Stock Exchange by the UN Secretary General, Kofi Annan. The principles are based on the premise that environmental, social and governance factors can materially affect investment performance, but that large institutional investors have lacked a framework for the systematic integration of those environmental, social and governance issues into investment decision-making and ownership practices. The commission has said the launch of these principles is the beginning of a process which will see the fund taking account of environmental, social and governance factors in its investment strategies and becoming a more engaged shareholder in the companies in which it invests. As Minister for Finance, I fully endorse the principles and believe they represent a significant step towards bringing consideration of those issues into the investment mainstream. Their application should lead not only to better long-term financial returns but to a closer alignment between the objectives of institutional investors and those of society at large.

On Senator Ross's point about investment returns, I can only say that we did not set up the pensions reserve fund as some sort of investment competition to measure investment returns. Realistically, one must look at the performance over the medium to long term. It will always be possible to find some three-month period when some other fund performed better. I am happy that we will be able to look back, when the pensions crunch inevitably comes, and be satisfied that the modest contributions we are currently making to the pensions reserve fund will have been well worthwhile.

Senator Terry asked why we have not sought to invest to assist the Irish economy. The recent ESRI reports, and others, show that we have sufficient funds for investment, and capital investment particularly. We have to avoid issues that arose in the past, when we saw value-for-money issues come into play over the rising costs, particularly in the construction industry, where we saw what happened with inflation. We can spend more money, but we may not get the outputs that we need. With Transport 21 and the investment strategy we are proposing there, some economists would claim — Members can seek them out for different opinions — that we are trying to do too much too fast. Try to tell that to someone stuck in traffic gridlock. John Kenneth Galbraith unfortunately departed this world last week, but I read an acerbic comment he made once about economic forecasting. He said that the reason we had economic forecasting was to make astrology look good. Although that might have been an over-emphasis on his part, his stature allows us at least to repeat the comment, if not to stack it up.

Finally, the independence of the fund must be respected. We do not want to politicise the fund; we want to ensure that it has a commercial mandate. The development we saw in the New York Stock Exchange last week helps to assuage some adverse comment that I know has been raised in the finance committee, when people from the fund were before it, including the chairman and the chief executive.

It would be remiss of me not to pay tribute to the fund's first chairman, Mr. Donal Geaney, who unfortunately passed away last October. Working with his fellow commissioners and the NTMA, Donal did a superb job in developing what was effectively a €6.5 billion cash holding on its establishment five years ago and what has become the diversified internationally regarded fund we have today. I know from the commission and the NTMA how Donal continued to give of his time to the fund even as he fought his last illness. I know that also from personal knowledge. We are fortunate that people such as Donal are willing to give of their talents to the public service.

The establishment of the National Pensions Reserve Fund will not, on its own, solve the pensions issue or all of the problems posed by population ageing, as Senator Quinn pointed out. However, it considerably assists in putting our public pension system on a sustainable basis. It is a real and lasting achievement by this generation and represents an equitable sharing of the burden of future pension provision and the fruits of our current economic prosperity.

In that sense, it is an extraordinary responsible initiative and, politically, it demonstrates considerable foresight and maturity in our society and politics such that we were able to bring forward this proposal, enact it, and see it professionally managed to the extent that we have seen thus far, despite the volatility in the various markets. It was an important strategic decision, as Senator Hanafin said, and one that, if it is to have a strategic impact, must be allowed to continue with the integrity of the framework to protect and enhance it.