A Progressive Role for Public Pension Funds?

Perhaps the single best decision made by Charlie McCreevy as Minister for Finance was the establishment in 2001 of the National Pension Reserve Fund (NPRF). In addition to proceeds from privatizing Eircom, 1% of GNP was to be channeled annually into an investment fund dedicated to financing public service pensions from 2025 onwards.

Not only was the NPRF a sensible exercise in counter-cyclical fiscal policy, – in marked contrast to the habitual “If I have it, I spend it.” approach – it was a hefty down-payment on the otherwise unfunded public service pension liability.

Unfortunately, the best laid economic plans didn’t survive contact with Ireland’s world-beating banking crisis, the final bill for which will likely come in between a third and half of current national income.

As well as sending the budget deficit to close to a third of GDP in 2009, the banking crisis also soaked up three quarters of the National Pension Reserve Fund, some  15bn. Partly, this was the result of then government policy, and partly the behest of the troika, who made funding conditional on prior use of the pension fund.

It is still questionable as to whether the remaining  5bn – now a drop in the ocean compared to future public service pension commitments – will retain its original purpose, given pressing fiscal constraints.

While the NPRF’s over-riding objective was, correctly, to secure the best financial return for the state, thus minimizing the unfunded pension liability, there was at the margin a certain degree of openness to adherence to principles of ethical investing. In more recent years, the mandate of the NPRF was also amended to allow investment in infrastructure projects, a development which was since overtaken by events.

While the NPRF could be considered to have dipped its toes in ‘progressive investing’, this was nothing compared to the trail-blazing efforts of Norway’s Government Pension Fund, established to manage proceeds from the exploitation of its oil resources.

Not only is Norway’s the largest pension fund in the world, expected to be valued at a trillion dollars by the end of the decade, it has since 2004 been governed by an ethical investing council

The Fund is prohibited from investing in companies whose business may be supportive of human rights violations, including several Israeli firms involved in the construction of settlements on Palestinian lands. It does not invest in tobacco companies, or in businesses like Boeing linked to the production of nuclear weapons.

The California Public Employees’ Retirement System, or CalPERS as it is commonly known, is the second largest such fund after Norway’s. Unlike its Norwegian counterpart, contributions come from its 1.6m employees and retirees, rather than from oil revenues.

CalPERS provides a template for what is achievable through ‘progressive investing’, while achieving solid returns for those who depend on it. In addition to ethical investing, CalPERS has for years been to the forefront of shareholder activism in the US. It has recently taken action on excessive CEO pay and signaled its intention to vote against Wal-Mart directors over a massive Mexican bribery scandal.

Late last year, CalPERS earmarked $800m for investment in US infrastructure. Their stated aim was to not only maximize returns, but to do so while creating jobs, and ‘supporting essential community services that are crucial to continued economic development’.

Irish public finances may now be at their lowest ebb in the wake of the banking crisis, but as we plan and build for the future, and prepare to meet the still significant public service pension liability, there is much that can be learned from the ‘progressive investing’ models of Norway and California.

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