THE STATE could not entirely scrap the National Pension Reserve Fund even if it wanted to because of "contractual commitments'' attached to its €15.4bn of investments, the NTMA recently informed the government and the An Bord Snip committee.

In a letter sent by Brendan McDonagh, of the NTMA and Nama, the government were told the fund had made investments in property and private equity that could be hard to exit from at this time. The letter sent to the Bord Snip committee said "the fund could not be run down completely''.

McDonagh was responding to questions from the committee which asked about the likely consequences if the fund was discontinued. McDonagh said the primary impact of such a move would be that costs associated with an ageing population would not be prefunded.

He also told the Bord Snip authors that scrapping the fund would draw a very negative reaction from the three main credit rating agencies. Liquidation of the fund would leave the government coming under pressure to use the funds for day-to-day spending, thereby impeding the restructuring of the public finances, he said.

If the pension fund was dismantled and the funds released for another purpose it would mean that pensions would have to be funded via the pay-as-you-go system which McDonagh said was "clearly unsustainable".

According to its most recent report the National Pension Reserve Fund has €8bn in large cap equities and €3.6bn in "directed investments", which is a reference to the investments made in AIB and Bank of Ireland. The fund had just over €1bn invested in private equity and property vehicles.