As many of you know, the Irish Government directed the National Pension Reserve Fund to invest in failing Irish banks earlier this year. Until recently, I looked on this directed investment as a profound governance failure—the original National Pension Reserve Fund Act made it clear that such investments were prohibited—but I’ve had a few conversations lately that have muted my position.
As it happens, new legislation was required to implement the direct investments policy. Indeed, the Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Act 2009 provide the Minister for Finance with the power to direct the NPRF Commission to invest in listed credit institutions. This suggests that the NPRF’s internal governance was, in fact, robust. Without the new law, the government would have been powerless to influence the fund. In other words, the governance structure was working well in that it forced the Irish government to go to some lengths to impose its will. Some might then call this a governance success.
Still, others might argue that changing the NPRF mandate was too easy for the government. In Canada the political requirements for changing the CPPIB mandate are much larger, even greater than for changing the Canadian constitution! So, some argue, the constraints placed on Irish politicians were too weak. Perhaps, like Canadian politicians, the Irish politicians should have been “tied to the mast” so as to prevent political temptation. Indeed, many of the governance and legislative requirements underpinning pension reserve funds remind me of the story of Odysseus and the sirens (Odysseus ordered his men to tie him to the mast so he could listen to the sirens without succumbing to their tempting song). For example, Canadian legislation ties politicians’ hands with respect to the CPPIB; there is almost no possibility of being tempted to use the money for other purposes. This is a necessary political condition for the CPPIB’s existence.
So the question then is whether Ireland should have had similar long-term constraints over policymakers. According to some of the people I have spoken with, it might not have mattered. Ireland was in severe fiscal distress. Iceland had just gone down and people were beginning to speculate that Ireland would follow suit. As such, Ireland tapped the NPRF out of desperation. In similar circumstances, I’m sure Odysseus’ men would have untied him from the mast as well (the alternative would have been to let him drown with the ship).
I have adopted what I think is a better way to think about the Irish case: the governance did what it was supposed to do, but extraordinary circumstances prevailed.
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