3rd PUBLIC PENSION FUND
MANAGEMENT CONFERENCE
Transparency and
Accountability: The Case for
Ireland
Anne Maher
Chief Executive
The Pensions Board
Ireland
September 20-22, 2004
Washington DC
AGENDA
Background to Irish Fund
Progress of Irish Fund
Transparency and Accountability
Importance
Key Components
Transparency and Accountability in Irish
Fund
2
BACKGROUND TO IRISH FUND
Fund Establishment
Fund recommended by Reports of:
Commission on Public Service Pensions
National Pensions Policy Initiative
Department of Finance Budget Strategy for Ageing Group
July 1999: Minister for Finance announced Government
decision
December 1999: Temporary Holding Fund for
Superannuation Liabilities Act, 1999 set up
February 2000: National Pensions Reserve Fund Act, 2000
passed into law
April 2000: Establishment Day and National Pensions
Reserve Fund Commission appointed
3
BACKGROUND TO IRISH FUND
National Pensions Reserve Fund Act, 2000
Fund to be controlled, managed and invested by
National Pensions Reserve Fund Commission
Independent of Government
Fund to receive annual Exchequer contribution of
1% GNP
Commission mandate: to generate commercial
return
National Treasury Management Agency (NTMA) to
be Manager for 10 years
Payments from Fund to Exchequer from
2025
4
PROGRESS OF IRISH FUND
Started with clear objective and agreed Mission
Statement
Decision on investment strategy and portfolio
construction
Appointment of service providers
Competition
Selection process
Decision on market entry strategy
Market entry and subsequent performance
5
PROGRESS OF IRISH FUND
Mission Statement
“To meet as much as possible, within prudent risk
parameters to be agreed by the Commission, of the
cost to the Exchequer of social welfare and public
service pensions to be paid from the year 2025 until
the year 2055 as provided for in the National Pensions
Reserve Fund Act, 2000.”
6
PROGRESS OF IRISH FUND
Investment Strategy
20%
40%
Eurozone Equities
Non-Eurozone Equities
50% hedged
Eurozone Bonds
40%
7
IRISH FUND
Commission decided on heavy equity investment
strategy for four reasons
Very long-term view given Fund’s drawdown profile
The Fund’s strong cash flow
The nature of the pensions to be partly prefunded
An assumed average equity risk premium of 3% p.a.
8
PROGRESS OF IRISH FUND
Competition for Service Providers
Restricted Procedure under Public Services
Directive 92/50/EEC
Phase I: Notice published in the Official Journal of the
EU inviting service providers to submit request to
participate in tendering process
Phase II: Limited number of applicants invited to reply
to request proposal (‘RFP’) within 40 days; site visits
by Agency; presentations (‘beauty parade’) by further
short list.
Award Criteria: The most economically
advantageous tender.
9
PROGRESS OF IRISH FUND
Market Entry Strategy
Average-in (spread market risk over time)
or
Fully invest (increased risk – Fund retains
upside)
or
A hybrid insurance (options based) approach
Commission decision = average-in
10
PROGRESS OF IRISH FUND
Asset Allocation
26.1%
14.5%
13.0%
14.0%
12.8%
20.0%
17.3%
Cash*
56.6%
71.5%
74.2%
80.0%
Bonds
Equities
End 2002
End 2003
End June 2004
Benchmark
*Includes other net current assets
11
PROGRESS OF IRISH FUND
Fund’s Appetite for Alternative Assets
Commission recently decided to allocate 10% of Fund
in 5 new asset classes
Small cap equities – 2%
Corporate bonds – 2%
Property – 4%
PPPs - €200m. initially
Private Equity – not determined
Why?
Potential for improved risk adjusted returns
Fund has no medium term liquidity needs
Can live with J curve effect
To be decided - Hedge/Absolute Return Funds/
Emerging Market Equities
12
PROGRESS OF IRISH FUND
Tactical Asset Allocation (TAA)
Fund has made TAA decisions
Market entry – averaging-in: effectively TAA
Currently underweight bonds
12.8% compared with 20% benchmark
Fund’s strong cashflow would facilitate TAA
But does TAA skill exist so as to add meaningful
value?
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PROGRESS OF IRISH FUND
Overall Performance Summary
2003
2002
Since
Inception
(cumulative)
Since
Inception
(annualised)
Irish Fund
12.8%
-16.1%
-2.2%
-0.8%
Benchmark
16.6%
-21.6%
-11.8%
-4.5%
Relative
Return
-3.8%
5.5%
9.6%
3.7%
2004 Fund Performance
1 January to 30 June 2004
4.5%
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TRANSPARENCY & ACCOUNTABILITY
Importance
Greatly increased focus arising from corporate and
accounting scandals, for example Enron
New legislation and regulation affecting accounting and
corporate disclosure and governance, for example,
Sarbanes-Oxley Act 2002 in US and Higgs and Smith
reports together with new accountancy regulation in UK
OECD guidelines for Pension Fund Governance, EU
Pensions Directive, national pensions regulators and
supervisors all have disclosure and accountability
requirements for private pension funds
General climate change also affects public funds
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TRANSPARENCY & ACCOUNTABILITY
IMPORTANCE
Accountability is essential part of good governance
Public awareness and understanding is best
discipline
Some evidence that good mechanisms to
understand and communicate with plan
stakeholders is a driver of organisational
performance
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TRANSPARENCY & ACCOUNTABILITY
KEY COMPONENTS
Focus of liability on a governing body or person
accountable to someone
Good governance of governing body/person
Effective accounts and audit requirements
Effective custody requirements
Public transparency and reporting to all
stakeholders
Independent oversight
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TRANSPARENCY & ACCOUNTABILITY IN
IRISH FUND
Responsible party
Commission consisting of Chairperson and 6
Commissioners
Commission is body corporate who can sue and be
sued
Eligibility requirements
Disclosure of interest requirements
Commission control, manage and invest Fund
Commission accountable to Parliament
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TRANSPARENCY & ACCOUNTABILITY IN
IRISH FUND
The National Pensions Reserve Fund Act, 2000
provides for:
Preparation of accounts and audit by the Comptroller & Auditor
General (senior auditor in State) of the accounts
The publication by the Commission of an annual report of its
activities and of the audited accounts of the Fund
The chairperson of the Commission to appear before and give
evidence to the Committee of Public Accounts on the policies
of the Commission in relation to the Fund
The Chief Executive Officer of the Fund Manager to give
evidence to the Committee of Public Accounts on the regularity
and propriety of all transactions on the Fund and on the
economy and efficiency of the Commission and the Manager in
regard to the expenses of operation of the Fund
19
TRANSPARENCY & ACCOUNTABILITY IN
IRISH FUND
Accounts and Audit
Must keep all proper and usual accounts of moneys and
other assets
Must include separate account of administration fees and
expenses incurred by Commission
Audited Accounts of NTMA (the Fund Manger) must note
record of expenses incurred by NTMA as Fund Manager
Accounts signed by CEO of Fund Manger and a
Commissioner must be formally adopted by the
Commission and submitted to the Comptroller & Auditor
General for audit not later than 4 months from end of
financial year
Copy of audited account must go to Minister and
be laid before each House of Parliament
20
TRANSPARENCY & ACCOUNTABILITY IN
IRISH FUND
Report and Information to Minister
Not later than 6 months after end of financial year
Commission must make report to Minister of its activities for
the year
This report must be laid before each House of Parliament
Each report must include:
Information on investment strategy
Report on investment return
Valuation of net assets and detailed list of assets
Information about investment management and custodianship
Information on fees, commission and other expenses incurred
by Commission and Fund Manager
Report shall also include any other information the
Minister may direct
21
TRANSPARENCY & ACCOUNTABILITY IN
IRISH FUND
Chairperson of Commission to appear before
Committee of Public Accounts (PAC)
PAC is parliamentary committee responsible for
examining and reporting on departmental expenditure
PAC holds public hearings and conducts tough
examinations
Chairperson of Commission must appear before and
give evidence to PAC at such times as PAC reasonably
request
Evidence given relates to policies of Commission,
subject to confidentiality of commercially sensitive
information
22
TRANSPARENCY & ACCOUNTABILITY IN
IRISH FUND
CEO of Fund Manager to appear before Committee of
Public Accounts (PAC)
CEO must give evidence to PAC on
Regularity and propriety of transactions recorded in any
record subject to audit
Economy and efficiency of Commission and Fund Manager
Systems, procedures and practices employed by
Commission to evaluate its effectiveness
Any matter affecting the Commission referred to in any
report of Comptroller & Auditor General
CEO must not question or express opinions on policy of
Commission
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TRANSPARENCY & ACCOUNTABILITY IN
IRISH FUND
Other Requirements for Accountability
Minister may appoint person to examine any aspect of
Fund and Commission – Fund Manager must assist this
and give access to all records
Independent valuations of assets
Independent assessment of investment performance
Public Procurement procedures must be used for
appointment of all service providers including EU
Procedures under Public Services Directive 92/50/EEC
Appointment of custodians
Commitment to open and transparent reporting subject
to preserving confidentiality on commercially
sensitive information
24
TRANSPARENCY & ACCOUNTABILITY IN
IRISH FUND
Other ways of accounting to public
Fund Manager website www.ntma.ie
Press briefings
Conference presentations
New Additions
National Pensions Reserve Fund Review (between
year end and publication of statutory Annual
Report)
Quarterly performance statements
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CONCLUSION
Transparency and Accountability
Are part of good governance
Are strong features of funds which work well
Growing in importance globally
No one ideal model as it must be country specific
based on:
Capacity to regulate
Standards of accounting
Trust law
General governance quality
Must be there in legislation and in practice
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CONCLUSION
In the case of Ireland
We have good legislative requirements
We need to work harder at making them be
‘seen’ to work in practice
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