Monthly Archives: July 2012

NAMA makes measly €12m pre-tax profit in 2011

phew… 12m eh. As close to zero given the size of the company as makes no difference…

NAMA Wine Lake


[The annual report is now available here]

NAMA is publishing its 2011 Annual Report today. The profit and loss account and balance sheet shouldn’t be much changed from the unaudited 2011 accounts published at the start of May 2012.

But they are.

The impairment provision for 2011 has increased by a staggering €467m from €800m to €1,267m. NAMA has decided that it can book a “tax credit” of €235m, something not apparently contemplated when the unaudited accounts were published, and NAMA seems to have “found” profit elsewhere of €185m. We wait for the publication of the report to look for further clues.

Overall NAMA is declaring an audited profit before the tax credit of €12m, and after tax of €247m. That compares with €200m in the unaudited accounts for both headings. Given that it is the State that is on the hook for the tax credit, you might…

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Recent parliamentary questions show Department of Finance is going to the dogs

NAMA Wine Lake

One of the key means by which the government of the day in Ireland is held to account, is provided by the parliamentary questioning (PQ) system where any deputy in the Dail can submit in writing any question of any minister, and they’re generally supposed to get a response in three working days. It’s a powerful tool in this democracy, but as was evidenced in this Government’s Programme for Government (extract above), it is a tool that could benefit from additional support.

Not all questions will get answers of course. Sometimes the information sought isn’t recorded any place, on occasions the information is too voluminous to collate and sometimes the information is commercially confidential. This blogpost will examine three finance parliamentary questions from the past week, to show that the Department of Finance is both stupid and mischievous.


What the Fianna Fail finance spokesperson Michael McGrath is after is…

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The crises in Irish pension provision

This is an extended version of an opinion piece published in the irish examiner. In 1908 David Lloyd George, the then chancellor of the exchequer in the United Kingdom of Great Britain and Ireland steered through, against some considerable opposition, a revolution in social welfare. The idea was simple and yet radical : that people in their old age, unable to work, should have a modest stipend and not be a burden on their families. Ireland of course benefited from this also, and over 170,000 pensioners obtained some pension, the 1908 act providing for means testing.

Since then pension provision has evolved massively. But in Ireland we face now not one but three interlinked pension problems. Pensions are in principle a fairly simple thing: you put aside a sum of money on which you can draw for future needs. The problem arises in that it is inherently an act of forecasting. Consider the elements involved. You need to first forecast how long after retirement you are likely to live. Then you need to forecast how much income you will need for each of these years. Then you need to forecast how much time there is until you retire, and by how much you expect each sum of money you put away to grow over that period. Each of these forecasts must be more or less on the button if the final equation is to be correct. (for more on the underlying equations see here ) Not surprisingly therefore pension planning is complex. Most people underprovide for their pension which means that a significant burden then lies on the state. The pensions board provides a pensions calculator which I suggest would horrify most when they plug in their details. The reality is that we are underfunded in al pension areas. Irish people are not very financially literate and we pay very high fees for pension fund management, much of which is based on asset levels not on actual performance. The pension issue in Ireland is complicated by the fact that we have a mixture of pay as you go pensions and traditional pension savings as noted above. And even within that there are shades. One split is on defined benefit (where at retirement you get a set % of your final or average lifetime salary) and the pension fund is supposed to have enough in the savings pot to meet this, while the other is defined contribution (where the pension is in effect determined by how much if any is in the savings pot). And then we have pay as you go pensions, in the public sphere, where pension payments are in effect paid out of current tax revenue. All these are in crisis.

In the realm of public sector pensions there was a report in 2008 by the comptroller and auditor general that looked at the future liability of the state for public sector pensions. This found that there was a “contingent liability” of some €100b. While that is a shocking amount of money, it must be placed in context. It does not mean that the state owes 100b. It does mean that, based on a certain set of forecasts (how many pensioners will live for how long and at what rate their pension needs will grow) that a sum of 100b would be needed if one wanted to at that time invest at a particular rate of return to obtain an income stream that would meet this. Its also important to note that this is a sum that would be required to meet the pension liabilities over 50 years. At present public sector pensions are paid for in the main out of current tax revenue. There was a national pension reserve fund, which was an excellent idea of Charlie McCreevy to set aside a fund that over time would build up and generate income to pay public sector pension liabilities. This fund alas has been poured into the bottomless pit of the Irish banks. When next we hear criticism of public sector pensions from the private sector it might be useful to note that the cure for the overhang was dissipated in private interests.

How to deal with the existing public sector pension bill is a problem, but at least the government have taken steps (reduced entitlements, longer waiting times to benefits, increased contributions) for new entrants. That is not enough for the critics of public sector pension provision however, who (quite rightly) draw attention to the overhand, and then complain about the existing pension provisions without suggesting realitic reforms. Absent simply writing down existing legal provisions (a dangerous route) there is little that can be done in the shortterm to reduce the bill. In any case, reducing the existing pension bill will do nothing to increase the pension pots of anyone who has suffered losses.

we also have, as I have noted before, the issue of the unfunded liability of the noncontributory pensions. Public sector pension costs are circa €4b per annum. Non contributory pensions (old age mainly) are c €1b, and the state also subvents (tops up) the social insurance fund (which is the fund into which PRSI etc is paid and out of which contributory pensions etc are paid) by nearly €2b. Thus it would be fair to say that applying the same logic to these as to the public sector pension issue we face a state overhang of between €25 and €75b. However, we hear very little of this. The perception is that we are a very young population – this is true but the % of the population over 65 here is 18% compared to a OECD average of 23%. Yet we spend only 3.6% GDP on pension provision compared to over 7% on average. We face a massive change in the next 30 years in our population pyramidand we need to begin to save for this. (here is a link to an OECD population pyramid , in Excel format). State old age pensions have remained untouched over the crisis – the ghost of Ernest Blythe hangs long over the state.

In the private sector we have seen the massive destruction of wealth and pension funds have not been spared. Up to 80% of defined benefit schemes are estimated to be in deficit. We have seen the closing to new entrants of defined benefit schemes, and where such schemes do exist we have seen cases such as Waterford crystal where the fund was not able to provide its warranted requirements. A further complication here is that the government has refused to implement EU requirements for a pension protection fund (which would of course involve a levy). The UK government also refused and was forced to implement same only after a long legal battle. Thus in addition to the public sector pension overhang the government face a large bill, possibly running into the hudreds of billions should, as expected, the European court rule that it was in breach of its requirement to have put a pension protection fund in place. The last thing the Irish state needs now is additional financial strain but it is highly likely that that will be forthcoming.

For those that choose defined contribution funds there has been a horrific loss of value over the last number of years. That said, the indications are that Irish households are holding increased financial assets, and the declines in pension fund reserves are not nearly as large as the declines in domestic financial asset values. Irish household wealth has fallen but stripping out the house value falls this is not significant. That is important as it suggests, along with other trends in savings that whether by a sense of fear or a sense of requirement Irish people can increase savings levels. If the government can, through imaginative means increase savings they will have done a good days work.

Thoughts on public sector sickpay

So the labour court has agreed that the government can adjust and cut the sick leave allowances of 300,000 public servants. The old “allowance” was 7 uncertified sick days per a mum and this will now be reduced to the same per 24 months. Also the time on full pay will be cut from 6 to 3 months and same for half pay.
We’re told that the total sick pay bill comes to €500m (out of €14,000m) and that thus this will save €250m. The reforms are welcome but will they in fact save that? It seems to me several issues need to be noted. First, of the total the vast majority was for certified sick days only some €60m being for uncertified sick days. So we might save 30m here IF and only IF people were malingering and taking sikies to which they were not entitled.
Second, when people go from full to 1/2 pay (as they will do now more swiftly) they will in many cases get some social welfare. So while the sick pay element of aome €440m will fall the social welfare bill will rise by an unspecified amount. Some data on that would be nice.
Third, much gloating and pointing has been evident from the usual suspects on this issue. The typical cry is “lookit – all them lazy gits in the public sector on the sick”. One wonders what the comparative figures are for comparable private sector posts? Perhaps 3.5% of the overall budget is not unusual? Or Maybe it is. Comparable data again would be nice.
Fourth we need to compare like with like. A breakdown of this pay bill by sector would help. Defense and policing are inherently physical jobs where the chance of serious injury (and thus sick pay) is significant. Health sector frontline workers face similar issues with the added exposure to all sort of sicknesses. Again, a higher level of sickness than the workforce at large is inevitable.
The changes are welcome but let’s not get carried away either with the levels of sick pay or the savings. Not that that will stop those for whom the public sector represents a bottomless pit of sloth…

The Tin Ear of Dr Sinn

One of the great masterpieces of world literature is Gunther Grass’ The Tin Drum, cataloging how Germany fell into the abyss of madness. The eponymous drum is pounded upon by Oskar, who survives the horrors of war and gains fame only eventually to be consigned to a secure institution. Its as much a discussion of the perils of taking oneself too seriously as it is on the perils of taking others so. Modern Germans labour, unfairly it may be, under the yoke of the dreadful history of their great grandparents. And yet, outside Germany we are often more reluctant than perhaps is helpful to accept that that is part of their (and our) shared history and that the context therefore is unavoidable. We are all too much at times like the Noel Coward song…Here in Ireland we are all too aware of the context of the past, and while at times it can be a massive evasion “blame the brits” sort of awareness, it at least exists. Its not therefore too much to suggest that others might want to cultivate this awareness in their speech.

Dr Hans Werner Sinn has waged an increasingly lonely campaign to convince anyone, everyone, that Germany stands in massive danger, that German capital is being starved and German money sucked to the periphery through the Target 2 interbank settlement system. Despite devastating critiques of this view by amongst others Karl Whelan Dr Sinn holds fast to the notion that it’s a massive danger. It’s not, unless and until the euro zone breaks up and even then it’s much more an accounting exercise than a real issue. As head of the ifo , the major german economic think tank, Sinn is a major player in the German economic and political sphere. Topflight german magazine Der Speigel has a fantastic takedown of Dr Sinn, which portrays him as an intellectual bully, a man possessed of absolute certainty (in a world where most economists have at least rid themselves of that) and obsessed with publicity and the media, a man whose views have remained slow to evolve.

Yet, he remains a most influential man. And bearing his media savvy and his acknowledged influence in that regard one of his statements quoted in Der Speigel makes one wonder. He has long regarded the bailouts of the periphery as dangerous. He now states “Our children will be forced to go to southern Europe and get our money back” . This is to my mind and ear inflammatory stuff, by a man who knows or perhaps now we see does not but should know his history and his geopolitics. At best its crass bluster, at worst can be read as a oblique reminder of the invasion and occupation of Greece and  Italy in WW2. One hopes that this time the children of Germany will be armed with lawyers writs and bond calculators.  It is similar to the head of the ESRI musing on the usefulness of ANFO in bond negotiations when in the financial district of London (riffing on the IRA Bishopsgate and Canary Wharf bombings) . The euro crisis has done enough harm to intra-euro national solidarity. People of influence should know enough to not fuel this any further. Its a pity that the certainties of Dr Sinn do not extend to a knowledge of the past context and present realities.

Take part in an experiment, help a student, maybe win €100

If you have a free morning on Wednesday 11 July and want to help a masters student and perhaps win €100 into the bargain, then come along to the Maxwell Theatre 10-13h.
The experiment consists of a number of rounds of trading shares with periodic news updates coming during the trading. The objective is to look at some issues in gender, confidence and trading and will form part of the masters dissertation of a MSc Finance student, Kiril. The Maxwell is in the Hamilton building in TCD