The National Pension Reserve Fund (NPRF) is now so closely aligned with the mounting bill for recapitalisation of the banks that the future of the fund as a mini-sovereign wealth fund must be open to question.
Super-charged with the payment of over €5bn from the sale of Telecom Eireann, the fund was set up in 2001 with the laudable intention of meeting perhaps about a quarter of the state's future pension liabilities from 2025.
For eight years the government paid in as much as €1.5bn annually, or the equivalent of 1% of gross national product, in quarterly instalments. Ireland's own little sovereign wealth fund used the cash to buy shares in so-called big cap companies listed on world stock markets, a bit in small listed companies and, as you would expect for a young pension fund, a smaller proportion in bonds. Smaller fractions again were invested in property and commodities
From the start it was not immune to fashions in investment styles, nor to pressure to boost returns. At the height of the stock market boom, it even flirted with the idea of investing in hedge funds. It bought shares by weightings of the FT world indices, and only indirectly held Irish shares if the Dublin-listed shares, as happened from time to time, were components of big stock market indices held by the NPRF.
Its appointed advisers – or, in the jargon of the fund, its mandates – were well paid. Mandates were awarded to investment managers such as Goldman Sachs, Putnam, Pioneer, AIG, Barclays and Bank of Ireland Asset Management.
The NPRF, once chaired by the late Donal Geaney, co-founder of Elan, weathered controversies along the way. It responded to criticisms about the use of taxpayers' money in unethical companies around the world. Once publishing annual reports only, it now issues quarterly bulletins about the performance of the fund. Arguably, the amount of information published remains inadequate for these times of public distrust of bankers, investments and failed regulators.
Like any pension fund, the NPRF has suffered with the collapse of asset prices. In recent times, the Sunday Tribune has regularly tracked the amounts of money taxpayers have paid in and the losses made. At one stage late last year, the fund's investments were worth €3bn less than the €18.5bn taxpayers had paid in since its inception.
As stock markets recovered slightly, the NPRF by the end of September was worth €20.9bn, in nominal terms a meagre 1.4% or €293m more than the amount paid in over the previous eight years. Taking account of inflation and the opportunity cost of the money injected, the real returns leave the fund deeply in the red.
The funds invested in the NPRF are effectively borrowed and the opportunity cost of the fund is effectively the 4.7% annual cost of servicing the national debt.
But the threat to the future of the fund comes from other directions. At the end of September the fund in truth was only worth €13.9bn. That was the value of the stock markets investments it directly controlled. The €7bn balance in the fund was the so-called "directed investments" – the money so far injected into the stock market banks, AIB and Bank of Ireland.
By any measure, the NPRF was already one of the smallest sovereign wealth funds in the world. Its future depends on the extra cost that will fall on taxpayers to bail out the banks.
Senior government sources early in the summer, citing the IMF report on Ireland, estimated that the banks would need an additional €6bn from the state on top of the €11bn that AIB, Bank of Ireland and Anglo have already swallowed. Not all of this would come from the pension fund.
At the time it was estimated that the €6bn could be roughly split: about €3bn in cash from the exchequer would go into Anglo Irish, Irish Nationwide and EBS, while the NPRF would fund the other €3bn for the stock market-listed AIB and Bank of Ireland.
Many observers believe the remit of the pension fund may need to be extended to invest in the non-stock market banks, such as Anglo, Irish Nationwide and EBS. Since early summer the potential cost of the second stage of recapitalising the banks appears to have dramatically increased.
Fitch Ratings in London believes that the incremental bill next year will range from €5bn to €10bn in the worst case. The Sunday Tribune last week reported that Anglo Irish had told the government that it alone will need €5.7bn in new capital.
Sebastian Orsi, banking analyst at Merrion Stockbrokers, estimates that although AIB will need an additional €4bn and Bank of Ireland €2.5bn, the greater part of their funds would be sourced from private investors and asset sales.
But even if the state has to call on a reasonably small amount from the NPRF, the amount of free or "discretionary" investments it can manage will be reduced significantly.
Activity at the NPRF's parent group, the National Treasury Management Agency (NTMA), may reflect a diminished status. NPRF director John Corrigan, who has been working closely with the newly-appointed head of the National Asset Management Agency (Nama), Brendan McDonagh, to help set up the new bad bank, has been promoted to run the NTMA.
Almost a decade ago, the fund wisely resisted calls from local investment managers and the bosses of stock market companies here to invest taxpayers' cash in an already over-invested Irish stock market. Ironically, before its tenth birthday, a big chunk of the fund is now reluctantly invested in Ireland.
NPRF's friends in high places
Over the years, it seemed that everybody had an opinion on the future of the fund. In January, before his appointment as the new governor of the Central Bank, Patrick Honohan joined the debate. On the Irisheconomy.ie website, the TCD economics professor wrote: "The beauty of the NPRF was that it succeeded in reducing government spending so that there would be something left for a rainy day. In my opinion, it is raining. At the same time, it should be borne in mind that the bank recap does not necessarily require injection of liquid assets. Placing a government bond in the bank's assets will generally do the trick." The NPRF appears to have fans in high places.