FT: Ireland to propose creation of sovereign wealth fund

[ClubMan]

Ireland to propose creation of sovereign wealth fund​

Government forecasts surplus will reach €10bn this year and more than €16bn in 2024
Ireland plans to set up a sovereign wealth fund next year, modelled on successful ventures in other countries, to channel its bumper budget surpluses into tackling long-term cost pressures such as pensions and infrastructure spending.

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(Hopefully people can read it or get the gist as it's not paywalled for me at the time of writing).

 

[Horatio]

I think this is a perfectly sound idea. In fact we're very late to this practice with small aspirations. There is already a wealth fund but it is capped at EUR8BN & currently is funded to EUR6BN.

Singapore have been doing this for over 40 years through their Government Investment Corporation (USD360BN) & Temasek holdings (USD400BN+). GIC's stated aim "securing Singapore’s financial future". Makes perfect sense.
Also their Central Provident Fund (government administered contributory pension) is personally allocated, so I get back what I put in plus interest & investment returns depending on how I choose to allocate it. A brilliant model IMO.

Our European neighbors have also been practicing this for quite some time.

1	Singapore[1][2][3][4] [5]	GIC / TH / CPF / Monetary Authority Singapore	1,950​	Non-commodity
2	China[6][7][8][9]	SAFE / CADF / CIC / NSSF	1,744​	Non-commodity
3	France[10][11]	Bpifrance/Caisse des dépôts et consignations	1,670​	Non-commodity
4	Norway[12]	GPF	1,388​	Oil & Gas
5	United Arab Emirates	ADIA / EIA /MIC /Dubai Inc. /Sharjah Assets Management / Ras Al Khaimah Investment Authority / Ajman Holding / Fujairah Holding	1,363​	Oil & Gas
6	Saudi Arabia[13][14]	PIF	1,000​	Oil & Gas
7	South Korea[15][16]	NPS / KIC	880​	Non-commodity
8	Kuwait[17]	KIA, GIC, Wafra	712​	Oil & Gas
9	Hong Kong[18][19]	Exchange Fund / HKMA investment portfolio	500​	Non-commodity
10	Qatar	QIA	445​	Oil & Gas

List of countries by sovereign wealth funds - Wikipedia

en.wikipedia.org

 

[Horatio]

Summary & Key message from the scoping paper published yesterday 10April2023:

There are known risks to the public finances
˃ The Department estimates that windfall corporation tax receipts will be in the region of €12 billion
this year. When these windfall receipts are stripped out, the forecast headline budgetary surplus
is turned on its head, with an underlying budgetary deficit somewhere in the region €1¾ billion.

˃ Pressures on the public finances are building. Perhaps the best understood pipeline-cost relates
to an ageing population. Increased longevity means higher healthcare, pension, and long-term
care spending; the bill will have to be met by a relatively smaller working age cohort in the years
ahead.

˃ To put this into perspective, age-related spending will be around €7-8 billion higher by the end of
this decade than it was at the start of the decade – this is simply the ‘stand-still’ cost. These costs
are set to increase exponentially thereafter. Less-well understood future costs include those
relating to the ‘twin transitions’ (climate and digital).
Long-term funds have been established to help with future risks

˃ The National Pensions Reserve Fund was established in 2001 as a long-term savings vehicle to
meet part of the cost of population ageing. This Fund was partially liquidated during the joint
banking / sovereign debt crisis of 2008-2012, with the residual amount re-purposed as the Irish
Strategic Investment Fund in 2014.

˃ There are numerous examples of advanced countries establishing sovereign wealth funds in order
to build up fiscal buffers and to (part) pre-fund future liabilities. This document highlights the
approach of Norway, Australia and Japan in building up their fiscal reserves.

˃ In 2019, the Government established the National Reserve Fund; the objective was to provide
sufficient funds to mobilise counter-cyclical fiscal support in the event of a severe economic
downturn.

˃ Recognising the role of ‘windfall’ corporation tax receipts, the Government has subsequently
transferred €6 billion to this Fund.
A longer-term fund could be established to help meet future costs

˃ Large headline budgetary surpluses are currently projected, though much of this stems from what
are likely to be ‘windfall’ corporation tax receipts.

˃ While acknowledging the benefits of paying down public debt, which is relatively high by
international standards, this document assesses the pros and cons of establishing some form of
public sector longer-term saving vehicle in Ireland. The fund would be capitalised by windfall taxes
and some fraction of any future budgetary surplus. This could be drawn-down over time as agerelated
and other structural expenditure pressures build in the future.

˃ Simulations suggest that drawdowns from such a fund would not cover the entirety of the
projected increase in age-related costs under any of the illustrative options presented here,
indicating that it is a complement to, and not a substitute for, other necessary reforms, including
increases in rates of PRSI.

Full document: https://www.gov.ie/pdf/?file=https:...fc8-1411-4a64-9425-b3a42e1b6423.pdf#page=null

 

[Right Winger]

Most important message: do it quickly before the shinners get in and squander it all on payback to their supporters.

 

[Horatio]

I hadn't considered that but of course you're right there is alway the possibility that sucessive Governments build & grow a wealth fund in good faith are displaced & incoming Government just goes on a spending spree. Aaargh!

 

[joe sod]

I agree with setting this fund up but I believe its investment strategy should be outside of political influence. For example don't want the green party or others hijacking the fund for their own special interests like giant solar farms or bus connects etc and still classifying that as the country wealth fund.
The wealth fund should be managed as a broad spectrum global fund and outside of political influences thereby protecting it from fad investments and allowing it it to grow like a Vanguard global etf without political or societal biases

 

[Horatio]

I agree with setting this fund up but I believe its investment strategy should be outside of political influence. For example don't want the green party or others hijacking the fund for their own special interests like giant solar farms or bus connects etc and still classifying that as the country wealth fund.
The wealth fund should be managed as a broad spectrum global fund and outside of political influences thereby protecting it from fad investments and allowing it it to grow like a Vanguard global etf without political or societal biases

Yes, exactly so.

An interesting point I noted is that it is being labeled a savings fund / vehicle rather than an investment fund / vehicle. Not clear if this is intentional labelling with an explicitly different conceptual strategy by the authors. I may be over thinking this but surely it is an investment vehicle?

 

[joe sod]

In fairness to Michael mcgrath he gave a very good explanation why this should be used for a wealth fund and not thrown at the housing or health crises as alot of the media commentators have been asking.

He said that the construction sector doesn't have the capacity to absorb this money and it would be wasted away in higher prices rather than more building.
He also said that interest rates on our national debt currently cost 4 billion euros a year and this is bound to rise with interest rates ,therefore he wants to retire debt as it expires rather than rolling it over. That would be a first for an Irish government actually paying off debt.

However the biggest factor is the pension crises coming down the road very soon

 

[PMU]

I agree with setting this fund up but I believe its investment strategy should be outside of political influence. For example don't want the green party or others hijacking the fund for their own special interests like giant solar farms or bus connects etc and still classifying that as the country wealth fund.
The wealth fund should be managed as a broad spectrum global fund and outside of political influences thereby protecting it from fad investments and allowing it it to grow like a Vanguard global etf without political or societal biases

You have highlighted genuine risks, but it’s not going to happen. For example, the National Pensions Reserve Fund had both a Discretionary Portfolio and a Directed Portfolio. The Discretionary Portfolio was controlled by the NTMA and the Directed by the Minister for Finance. The Directed portfolio was used in the financial crisis to support public policy objectives (e.g. buy the shares of Irish banks). I don’t think you can get out of this, and have to recognize that there are times of crisis where a Government needs to direct state assets for public policy objectives.

But not all governments are 'well-behaved'. Obviously the risk is that a venal government would direct ‘investment’ into vanity projects and favoured areas, and not into disfavoured areas, regardless of potential investment returns. For example, we have seen recently the Dáil Committee for Social Protection recommend that the new auto-enrolment pension fund (i.e. taxpayers long-tern savings) should not be invested in either the fossil fuels or arms industries, but should invest in Irish renewable energy developments. Weapons and fossil fuel companies to be sidestepped for investments to fund Irish pensions | Independent.ie . Another real risk , which has not as far as I can see been seriously addressed, is that a government could direct a sovereign wealth fund be used to purchase controlling interests in Irish companies on the stock market, i.e. and thereby achieve an effective ‘nationalization’ of Irish industry.

 

[joe sod]

For example, we have seen recently the Dáil Committee for Social Protection recommend that the new auto-enrolment pension fund (i.e. taxpayers long-tern savings) should not be invested in either the fossil fuels or arms industries

That's exactly what I'm talking about, where the funds are invested should be outside political control and based solely on stable returns for the future with investments similar to what a global equity fund or vanguard etf would invest. If you exclude fossil fuels we'll then you are giving up investments that go up in inflationary environments like now and exposing the fund to all the falling investments like bonds and tech during rising inflation. Ethics could compromise the government's ability to pay pensions in the future