Transparency and Accountability: The Case for Ireland

Transparency and Transparency and Accountability: The Case for Accountability: The Case for

IrelandIreland

3rd PUBLIC PENSION FUND MANAGEMENT CONFERENCE

Anne Maher September 20-22, 2004Chief Executive Washington DCThe Pensions BoardIreland

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AGENDA

Background to Irish Fund

Progress of Irish Fund

Transparency and Accountability

Importance

Key Components

Transparency and Accountability in Irish Fund

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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

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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

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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

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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.”

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Investment Strategy

Eurozone Equities

Non-Eurozone Equities

Eurozone Bonds

20%40%

40%

50% hedged

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IRISH FUND

Commission decided on heavy equity investmentstrategy 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.

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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.

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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

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Asset Allocation

End 2002 End 2003 End June 2004 Benchmark

Cash*

Bonds

Equities

26.1%

17.3%

56.6%

14.5%14.0%

71.5%

20.0%

80.0%

*Includes other net current assets

13.0%12.8%

74.2%

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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

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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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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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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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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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The National Pensions Reserve Fund Act, 2000provides 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

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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

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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

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Chairperson of Commission to appear beforeCommittee 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

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CEO of Fund Manager to appear before Committee ofPublic 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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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

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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

Documents

Transparency and Accountability: The Case for Ireland