Charity Begins At Home

The turmoil in government bond markets in recent times has highlighted the degree to which the international investment community is skeptical about investing in Ireland. Should we be surprised at this?

Put another way - would we invest in Ireland?

In the context of pension funds at least the answer appears to be no.

Major economies such as the US, UK, Canada and Australia have, on average, invested 25% of their pension funds in domestic equities. In Ireland the equivalent level of investment is 5%.

European countries have a high proportion of their pension funds invested in domestic bonds. In Ireland, the National Pension Reserve Fund has 0% invested in domestic government bonds – it is legally prohibited from having a greater stake of investment.

There are many good reasons why this should be so – risk diversification, the small scale of the Irish market etc.

For example the liabilities of Irish pension funds are calculated primarily by reference to German bond yields – therefore such funds must invest in German bonds rather than Irish bonds when matching liabilities. This contributes to the ever increasing yield gap between Irish and German Bonds.

Whilst the causes are explainable the fundamental point remains – the recovery of the Irish economy will ultimately be dependent on Investment in Ireland.

And for various reasons the legal and tax systems for pensions prevents this happening in Ireland to the same extent as it happens in other developed economies.

If an additional 5% of Irish pension funds could be encouraged to invest in domestic business it would represent a boost of €3.6bn in capital inflows.

Double that to 10% and you are looking at matching the famous deal Albert Reynolds did with Jacques Delors in 1993 to kick-start the Celtic Tiger.

It is said that charity begins at home. Is the same not true for investment?