National Pensions Reserve Fund

The National Pensions Reserve Fund (the Fund) is controlled by the National Pensions Reserve Fund Commission and performs its functions through the NTMA, which is the Manager of the Fund. The Chief Executive of the NTMA is an ex officio member of the Commission. The Commission publishes a separate detailed annual report and accounts.

Legislative and Operating Framework

The NPRF’s legislative and operating framework has changed significantly since the Fund was established in 2001 with a statutory objective to meet as much as possible of the costs of social welfare and public service pensions from 2025 onwards. Under this objective, the Commission is required to invest the assets of the Fund so as to secure the optimal total financial return, with regard to its purpose and an acceptable risk level. This investment strategy has been implemented through a globally diversified portfolio including quoted equities, bonds, property, private equity, commodities and absolute return funds.

In 2009 and 2010 €10.7 billion of the Fund’s assets was invested in Allied Irish Banks (AIB) and Bank of Ireland at the direction of the Government. A further €10 billion investment was made in 2011 as part of the EU/IMF programme. The remainder of the Fund has continued to be managed by the Commission in line with its original statutory objective.

In September 2011 the Government announced its intention under the Strategic Investment Fund initiative to channel resources from the Fund, following appropriate changes to its governing legislation, towards productive investment in the Irish economy.

This was followed in June 2013 with the announcement of legislative proposals to establish the Ireland Strategic Investment Fund (ISIF) to fully absorb the Fund and have a statutory mandate to invest on a commercial basis in a manner designed to support economic activity and employment in Ireland. This legislation was published in May 2014. The establishment of the ISIF will involve the dissolution of the Commission and the creation of a new NTMA Board and Investment Committee to oversee and manage it. The ISIF will also hold the Fund’s directed investments in AIB and Bank of Ireland.

Capital Preservation Strategy

In light of the proposed changes to the Fund’s investment mandate, in 2011 the Commission acknowledged the need to ensure that resources were available when appropriate commercial investment opportunities in Ireland were developed or sourced. At the same time, it was necessary to maintain the Fund’s capacity to participate in gains if equity markets performed well, in accordance with the investment strategy developed to implement its current statutory mandate.

In June 2011 the Commission adopted a ‘Capital Preservation Strategy’ in order to achieve what the Commission considered an appropriate balance between these objectives. The impact of the strategy has been to reduce the Fund’s downside equity exposure, via the purchase of options and a reduced exposure to equities, and its implementation has been adjusted over time to reflect market pricing and the expected timeframe for mandate change.

The disposal of the Fund’s private equity and property portfolios has also been accelerated to improve liquidity, including the sale of approximately €800 million of global private equity interests in December 2013 following a competitive sale process.

Performance and Portfolio Update

The Fund reports on three levels to include (i) the Discretionary Portfolio (the investment of which is the Commission’s responsibility), (ii) the Directed Portfolio (public policy investments made at the direction of the Minister for Finance), and (iii) the Total Fund. At end-2013 the Fund’s total value stood at €19.9 billion. The Discretionary Portfolio was valued at €6.8 billion and the Directed Portfolio was valued at €13.1 billion.

Discretionary Portfolio
The Discretionary Portfolio earned a return of 6.4 per cent in 2013. The value of the Fund increased by €742 million during the year, including €340 million of dividend income transferred from the Directed Portfolio.

The implementation of the Capital Preservation Strategy since June 2011 has rendered the Fund’s long-term benchmark, which did not incorporate a capital preservation element, no longer suitable as a measure of relative performance.

In that context the Fund’s secondary benchmark – the average cost of five-year Irish government debt – provides a more suitable measure and the Fund outperformed this benchmark by 3.8 per cent in 2013. From June 2011 to end-December 2013 the Fund’s performance was 6.7 per cent per annum. The average yield on five-year Irish government debt over the same period was 4.8 per cent.

Figures may not total due to rounding.
Source: NTMA

Directed Portfolio
Since 2009 a total of €20.7 billion of the Fund’s assets have been invested in AIB and Bank of Ireland at the direction of the Minister for Finance for public policy reasons. At end-2013 the Fund’s shareholding in AIB and Bank of Ireland was 99.8 per cent and 14.1 per cent respectively. The Fund’s Directed Portfolio had a year-end valuation of €13.1 billion (up €4.5 billion from €8.6 billion at end-2012). At end-2013 the Directed Portfolio comprised both ordinary and preference shares in AIB, valued at €10.0 billion, and ordinary shares in Bank of Ireland, valued at €1.1 billion. It also included cash proceeds of €1.9 billion from the sale and redemption of the Fund’s holding of Bank of Ireland preference shares in December 2013.

As the Fund’s preference share investment in AIB is unlisted and its ordinary share holding leaves a free float of only 0.2 per cent, the Commission, as it has in previous years, engaged an external corporate finance firm to provide an independent fair market valuation as of 31 December 2013 for the purposes of valuing these investments in line with generally accepted accounting principles. Following this exercise the AIB ordinary shares have been valued at 1.25 cents per share and the AIB preference shares have been valued at 100 per cent of cost.

The Fund’s ordinary share holding in Bank of Ireland was valued at its market price of 25.2 cents per share at 31 December 2013.

The Directed Portfolio’s return in 2013 was 57.6 per cent. In addition to the change in values of the holdings in AIB and Bank of Ireland, this return also includes the proceeds from the Bank of Ireland preference share redemption and sale.

Figures may not total due to rounding.
Source: NTMA

The valuation of €11.2 billion combined with cash of €4.2 billion received since inception (some of which has been remitted under Ministerial Direction to the Exchequer or transferred to the Fund’s Discretionary Portfolio), amounts to a total value of €15.4 billion at end-2013 (-26 per cent on the original investment of €20.7 billion).

It should be noted that the figures set out above reflect the NPRF’s investments in AIB and Bank of Ireland only and do not represent the totality of the State’s financial position in Irish banks.

Total Fund
The Total Fund, comprising both the Directed and Discretionary Portfolios, recorded a return of 35.4 per cent in 2013.

Investment in Ireland

Pending the statutory establishment of the ISIF, the Commission decided that up to 20 per cent of the Fund may be allocated to investments in Ireland, allowing it to avail of attractive investment opportunities while ensuring that concentration risk resulting from an increased level of investment in Ireland was within acceptable limits.

As at 31 December 2013 the total amount committed to investments that would come under the Strategic Investment Fund initiative was €1,252 million.

This includes:

• €375 million to three long-term funds that will provide €850 million of equity, credit and restructuring / recovery investment for Irish small and medium-sized businesses (SMEs) and mid-sized corporates;
• A $50 million contribution to the €100 million China Ireland Technology Fund to invest in fast-growing Irish technology companies with a substantial presence or strategic interest in China, and in Chinese fast-growing technology companies with a substantial presence or strategic interest in establishing a presence in Ireland;
• A two-year bridging facility of €250 million on commercial terms with Irish Water to fund the initiation of the metering programme and Irish Water’s start-up costs; and
• A provision of stand-by credit facilities to enable the N11/N7 roads PPP project to proceed with European Investment Bank financing.

In allocating funds to investment in Ireland, part of the Fund’s objective is to act as a catalyst for third party capital investing in Ireland, thereby increasing the amount of investment that can be achieved from the limited resources of the Fund. The total project size was 2.1 times the Fund’s commitment as at 31 December 2013.

*In the case of both China Ireland Technology Fund and Silicon Valley Bank, the NPRF committed €36m (total €72m) to global funds as part of the wider third party relationships. These commitments are not included in the total project size in Ireland figures.
Figures may not total due to rounding.
Source: NTMA