The National Treasury Management Agency (NTMA) has been tipped as a front runner to manage future public sector pension liabilities for the Exchequer.
Although no final decision is expected to be taken on the level of funding until next May, informed sources suggest that the NTMA will be given the authority to manage at least £200 million a year - and possibly far more - for the benefit of State pensioners.
Sources suggest that the Government is likely to go ahead with the plan, which would represent a major change in pension policy, given the problems of funding pensions for an ever-ageing public sector workforce.
If the NTMA is given the go-ahead to manage any funds, it is likely to provoke an angry response from the investment management industry.
Already, the Irish Association of Investment Managers has lobbied the Commission on Public Sector Pensions to award the contract to the private sector. But even members of the IAIM concede that the contract may be given to the NTMA.
Ms Ann FitzGerald, director general of the IAIM, said she is very surprised at the suggestion that the NTMA is the favourite.
"If the NTMA were to be given the contract it would not have the freedom to invest where is most profitable and may be constrained by Government policy," she said.
According to Ms FitzGerald, some semi-State pension funds are already constrained in where they can invest pensioners' money and as a result cannot give the best returns. "The precedent is already in place," she noted. In addition, in the US some public pensions have been forced to invest in uneconomic areas. "If you don't have the freedom to invest, you reduce returns."
She added that it is "most inappropriate" for the national debt management agency to move into a professional area of investment management in which it has no expertise. "It will also be in competition with the very people to whom it sells Government debt," she added.
At present the Government simply charges up its pension liabilities every year and pays them out of general Exchequer cash. However, as the volume of retired public servants grows, so does the pension bill.
Aside from growing numbers of pensioners, there will also be increasing demands for early retirement and to meet these requirements the Government needs some flexibility. Investing a significant sum every year which would produce a compound return is seen as one of the most effective way out of the dilemma for the Government. The move would also give a good deal of security to pensioners.
The Commission on Public Sector Pensions is looking at different options of funding the future liabilities. The present value of the State's unfunded liabilities is of the order of £19 billion. The shorter the time frame this is funded over, the more it will cost. It is understood that one option under consideration would be simply to fund the pension costs of new recruits. This would cost about £170 to £180 million a year.
However, to make a real impact it would probably be necessary to try and fund a larger part of the £19 billion in forward liabilities by, say 2015 or 2030. These options could cost from £300 million to almost £1 billion a year depending on the time frame. However, there are also complications with regard to double taxation and other technical issues. As a result, the Commission is not expecting to report until May 1998 when a formula may be proposed.
At that stage the Government could decide to simply award the contract to the NTMA or to hold a "beauty parade" between individual investment managers and the agency.
If the NTMA move gets the go-ahead it could throw a lifeline to the Government bond market which is looking at a shrinking market share post-monetary union. It could also provide a boost for the Irish stock exchange. However, some observers note that there may also be problems with the unions in terms of pay and taxation implications.
"It could not come into place until the negotiations begin for the next (national) agreement," one source noted.
The Committee will also be waiting for the report of the National Pension Initiative which is expected very shortly. That report has already been billed as the most radical pension reform in the history of the State.
