merrion street

Introduction

Good morning ladies and gentlemen. I am delighted to have been invited to speak at your conference today. I would like to thank Gerry and Irish Life for the invitation to address you all today.

I think you are all aware that we have been working closely with the management of Irish Life and permanent tsb a lot recently. The Government’s intention is however to allow Irish Life as a financially strong company, well rated by CRAs, continue to develop its business in the optimum manner, especially now having separated it from permanent tsb. In line with our approach to its shareholding across the financial sector, the Government allows it to operate fully as a commercial entity.

I have spent a lot of time recently outlining to a range of audiences Ireland’s progress in terms of restructuring and repairing the banking sector, restoring stability in our fiscal position as well as encouraging economic growth. You are, however, well familiar with those issues.

In my remarks today I thought it more useful to highlight some areas relevant to the pensions industry of more direct interest to you.

The Department’s role in Financial Services Development

Since the announcement of our revised strategy, I have made it clear that I see an enhanced role for the Department in identifying more strategically the pathways to recovery for the economy so as to see more sustainable economic growth and increases in the number of people employed in the state.

I am keen that this includes taking a greater role in, and developing more fully our relationship with, the financial services sector so as to work together to see what can be done to consolidate and grow the sector in a balanced way. In the coming months, we will be looking at the economy sector by sector to see how we can maximise the growth potential of those sectors.

My own view is that because of the financial skill sets which already exist in Ireland there is considerably greater potential for generating more good quality employment. We need to build on the businesses which exist here at the moment and we need to get more of these types of high quality jobs here.

At a recent IMF conference I attended we were discussing ways to deal with countries ham strung with the dual problems of low growth and high debt. Min Zhu, Deputy Managing Director, International Monetary Fund (IMF) during his presentation outlined an interesting way of demonstrating countries’ engagement with the global economy. He began with the usual map of the world, and then, based on measures such as openness to trade, openness for financial services, etc, countries grew or shrunk in size on screen. As countries sizes changed the success of countries like Luxembourg and Singapore in "punching above their natural weight" became very obvious.

While Ireland did quite well, it left me thinking about what we might do here in Ireland to increase our size in the next iteration of his presentation.

Cross Border Pension Funds

Sometimes, particularly because we have been so successful in the international financial services arena, we can forget that Ireland is a small country. The market for pensions within Ireland is limited by the size of our population. However, this should not mean that the size of our pensions industry should be mapped to the domestic population.

As many of you are probably aware the pension industry has a role to play in the Department of the Taoiseach’s Strategy for the International Financial Services Industry in Ireland 2011-2016. There is a dedicated Working Group for Pensions in the IFSC Clearing House Group. The IFSC strategy highlights cross border pensions as an area for potential growth.

Let’s scale that a little. In 2011, European pension funds had €4trn in assets, and this is expected to double over the next decade. Irish pension funds’ assets were estimated at €101bn for the same period. The potential here is obvious!

What must Ireland do to become a gateway country for Europe for pension funds? How can we build on the analogous success in the banking sector to become a more important global centre for R&D and innovation within the industry and for establishing ourselves as a hub for cross border servicing of pan European players?

I do not, however, want to down play the challenges – there are real differences between Member States in terms of structures and markets. In addition, cross border pension funds have capital and other regulatory implications.

As we think though about the future for this industry in an ever consolidating Euro zone, we should move to an analysis of the feasibility of moving the industry towards this pan European approach.

Opportunities for G

Pensions Fund Investment

Coming home to the domestic side of things, I believe there is a significant further potential for greater synergies between the insurance industry and pension funds and the Irish economy.

Consider this fact: 33% of domestic policyholder funds were invested by life companies in Irish assets at the end of 2010. The percentage of pension scheme assets invested in Irish assets is much lower.

I would like to encourage greater consideration of this issue. The benefits of further investment by pension funds in Ireland are fourfold as I see it:

(i)

(ii)

(iii)

(iv)

We have been working in particular on two aspects of this:-

(A) Investment required for new infrastructure projects

With our colleagues in the Department of Public Expenditure & Reform (DPER) and the NDFA, we have been engaged in a dialogue on how investment deals could be structured to facilitate the provision by pension funds of debt funding for new infrastructure projects.

During the IBRC US real estate transaction in 2011, I saw firsthand the key advantages in the US of having greater liquidity in the system from non-bank sources. Without such liquidity we would certainly not have pulled of the "largest single loan sale transaction in global real estate history". Europe has lagged considerably the availability of non bank funding.

It would seem to me that investment in long dated projects like PPPs – whereby the state pays for the provision of infrastructure assets by the private sector over a long term period- up to 25 years – should offer significant potential to match long-term pension assets and provide diversification for funds.

It seems to me that the discussion to date which has focussed a lot on releasing the pension levy to encourange investment by enhancing yields, misses the key point which must be analysed, namely the investment characteristics you require in terms of maturity, liquidity and credit quality. In solving for these we should get to a yield calculation which works for everyone.

(B) New funding products from NTMA

You are also probably aware that the NTMA has developed new funding products in order to diversify and increase its sources of funding, particularly from the domestic market.

We now have on offer an amortising Government bond that will facilitate the creation of long-term annuities. Unlike standard bonds where the annual interest payment is followed by the repayment of principal at maturity, the new amortising bonds will pay an equal amount each year over their lifetime, reflecting the preference of annuity providers for a steady stream of income.

These annuities, based on Irish Government bond yields, will be less expensive to purchase than annuities based on French and German government bond yields which have been the norm for pension annuities up to now.

You are probably aware that the NTMA has already issued €1 billion of amortising bonds in August at five maturities from 15 to 35 years and at an average yield of 5.91%. As one would expect demand was strongest at the longer-dated maturities.

It is the intention of the NTMA to continue to issue amortising bonds as demand arises to meet funding plans to comply with the Funding Standard by year end

Taxation issues

Coming now to some of the issues around taxation.

The business of selling pensions, in common with business generally, is facing challenging times. Clearly, the economic downturn has impacted on both the ability and confidence of individuals to invest in pension savings.

It is also fair to acknowledge that the restrictions on tax reliefs and other tax changes as well as concerns about future direction of changes in the fiscal environment has probably also had an impact on the public’s confidence in pension investment.

The State’s agreement with the EU/IMF included implicit commitments to deliver savings of over €900 million in the reliefs available to the broad pensions area in the period to 2014, including a move to standard rate tax relief on pension contributions over that time.

Budget and Finance Act 2011 introduced changes in reliefs in the pensions area aimed at yielding €300m in savings to the Exchequer. Also in 2011, a short-term levy was introduced on pension fund assets to pay for the Government’s Jobs Initiative which raised about €460m.

The pensions sector is making a sizeable contribution to the State’s efforts to turn our economy around. This contribution was acknowledged by the Minister for Finance in his 2012 Budget Speech in December last. In that speech, he stated that he did not propose to move to standard rate tax relief on pension contributions or to make changes to marginal rate relief at that time. He did indicate, however, that further changes to the tax incentive regime for pensions would be required and that the Department of Finance and the Revenue Commissioners would consult with stakeholders in that regard.

An informal but broad-ranging consultation process has been undertaken over recent months by my Department and the Revenue Commissioners with a wide spectrum of interests in the pensions sector. There are differing views on how the incentive regime should be changed. A recurring theme, however, is the desire for certainty in the future tax treatment of pension savings over the long term.

I understand that companies and organisations involved in the pensions sector have been involved in ongoing discussions over the past year with my Department and the Revenue Commissioners in this matter. I wish to use this occasion to thank you all for this engagement.

On behalf of the industry Gerry has certainly made us aware of made of the changes he would like to see made. My Department is committed to examining and discussing any proposals which the company and other industry players wish to put forward.

Conclusion

In conclusion, I would like to thank you once again for the opportunity to speak to you today.

I would like to re-emphasis the priority I am placing on engaging with the financial services sector on an ongoing basis as I believe there is great potential for growth and development. I see this engagement as very much a two way process. We now have our own particular focus with Neil Ryan, John Hogan and Aidan Carrigan focussing on what ways the broader international financial services sector can be developed. This is an all government effort working closely with the IDA and others.

We will never be as close to developments and trends as you are though. So please free to bring ideas to the Department’s attention where you believe they have merit.

We are making progress in dealing the many problems and challenges facing our country and the economy in general. The road is still a long one to travel together.

All of you have a role to play in helping us to address these challenges and I hope you will reflect on some of the issues I have touched on and revert to us with your ideas.