Talks between ESB management and unions over the firm's €510 million pension deficit and a related pay claim were described as "grave" last night with various "painful decisions" to be taken shortly.

An update to staff reads: "We are endeavouring to tackle what we recognise as an enormous problem, the solution to which will be difficult and painful for all the parties involved."

The ESB group of unions has an 18.5 per cent pay claim on the table, plus a demand for a 20 per cent stake in the firm. But management has warned unions that pay increases could significantly worsen the pension deficit.

An actuarial valuation of the superannuation fund was reviewed by the union's own experts, Farrell Grant Sparks and Buck Consultants, and the staff memo says this "confirmed the gravity of the situation".

Sources last night said various creative solutions were being looked at to resolve the impasse, but the memo paints a bleak picture. "Difficult discussions continue on this matter - particularly given the difficulties emerging from the enormity of the pension fund deficit."

Mr Paddy Reilly, head of the group of unions at ESB, last night said: "There will be pain in this for all concerned. But while the situation is grave, we believe we can overcome this."

The firm warned in its recent results presentation that while the actuarial valuation put the pension deficit at €510 million, an FRS17 estimate put it at over €900 million. FRS17 is a rule obliging firms to account for pension liabilities on an ongoing basis.

ESB chairman Mr Tadhg O'Donoghue recently described the union's pay claim as "off the radar" and he warned that an 18.5 per cent rise could be disastrous for the company because of the extra pressure it would put on the pension fund.