Theresa Cummins looks at the downside of the Government’s pension levy.
The latest €7 billion recapitalisation plan of Irish banks proposed recently by the Government adds to the long list of measures designed to safeguard and protect our beleaguered financial institutions.
The stimulus plan, aimed at recapitalising Allied Irish Bank and Bank of Ireland, further endeavours the Government’s plan to increase confidence and stability in the banking sector in Ireland. Brian Lenihan, recently voted the second worst finance minister in Europe by the Financial Times, has stressed that the problem facing Irish banks is a liquidity issue, and not a solvency crisis.
“Everyone knows that we are facing a battle for financial stability,” Minister Lenihan said in defence of the plan, “This isn’t a question of bailing out the banks.” Instead the Government has highlighted that the recapitalisation scheme would improve the cash flow in the economy, by protecting and ensuring the longterm sustainability of the financial institutions in Ireland.
The National Reserve Pension Fund (NRPF), established to cater for public sector pensions, is now being considered a likely source of finance for the Government’s initiative to recapitalise Irish banks. The fund, which mainly invests in tobacco companies, has been targeted as a potential method of financing their €7 billion plan to recapitalise Allied Irish Bank and Bank of Ireland.
The value of the NRPF, which has experienced positive returns since the losses experienced after the dotcom collapse in 2002, has deteriorated substantially due to the global economic downturn. The Irish pensions fund decreased in value on average by almost six per cent in February, a dramatic increase in the loss of 1.9 per cent that was experienced in January.
A fund of €140 billion in 2025 will only provide for 25-30 per cent of the Irish public pension costs. With the aging population growing at a significant rate in Ireland, questions must be raised regarding the Government’s ability to financially provide for the elderly in the future.
“Questions must be raised regarding the Government’s ability to provide for the elderly in the future”
Currently there are four people in employment for every single retired person. This figure is expected to worsen by 2025, in which analysts are predicting a situation of three people working for each retired person. These distressing statistics only serve to highlight the vulnerability of the financial condition of the pension system in Ireland, and undoubtedly trigger questions regarding the practicality of using a source that is diminishing in value to fund our banking sector.
The Government has come under increased attack by the opposition after announcing plans to use €4 billion worth of savings in the National Reserve Pension Fund. Sinn Féin Finance spokesperson Arthur Morgan has expressed his disgust at the suggested strategy, declaring that the Government was effectively pumping money into these flagging institutions without experiencing sufficient return. Morgan emphasised that the plan gave the Minister for Finance “a carte blanche to raid the pension fund whenever and however he wants provided it is for his pals in the banking sector.”
Using the funds designed to protect one of the most vulnerable groups in our society to support banks which have been greedy and reckless with depositors’ money is at best questionable.
The Government’s raid on their rainy day fund, the value of which has already sharply declined, in an attempt to protect the financial institutions has worrying implications. The extent of bad debts among the Irish banks has yet to be revealed, and since a significant proportion of their loans are based on the now dwindling property market, the decision to use the National Reserve Pension Fund as a source of finance for these banks is risky and problematic.
The Government is playing a game of Russian roulette with tax payer’s money and if this stimulus plan turns out to be insufficient at recapitalising the banks, it will be ultimately be those who are already in a susceptible position who will suffer the consequences.