The Jefferson Smurfit Group has been lobbying the Minister for Finance to ensure that the new State pension fund invests heavily in Irish shares, The Irish Times has learned.

The move, which would prop up the share price of Smurfit and all other Irish quoted companies, is necessary - according to Smurfit sources - to avoid the new fund having a detrimental impact on the Irish stock exchange. It would do this by exacerbating the existing trend of Irish institutions selling off Irish stocks in favour of those in the euro zone.

However, such a directive would be impossible for the Minister for Finance, Mr McCreevy, to implement under legislation steered through the Oireachtas by his own Department. The new pension fund is required to select investments, subject to acceptable risk, which will generate maximum returns.

The only constraint on the pensions' fund is that it can make no investment in Irish Government securities. This provision was introduced by Mr McCreevy to ensure that future governments would not be able to fill the fund with Irish bonds if the need arose to borrow heavily again.

The Minister was also determined to ensure that the fund would be wholly free from political interference.

Smurfit, one of the State's biggest public companies, has seen its share price collapse to a 10-year low, and in that period has gone from being Ireland's largest company to tenth place on the stock market.

The group has written to Mr McCreevy asking that the new pension fund invest an "appropriate" amount (around 15 per cent) in Irish shares.

The company points out that since the advent of the euro, Irish institutions have been selling off large volumes of Irish shares to spread their risk more widely across the euro zone. This has hit the share price of many Irish companies.

According to Smurfit, the amount that the new £6 billion (€7.62 billion) pension fund invests in Irish companies is likely to be followed by other fund managers and could exacerbate the situation further.

In 1995 Irish institutional investors held about 60 per cent of Smurfit's shares. That fell to 26 per cent at the end of 2000 and this decline is likely to continue, according to market sources. The proportion of shares in all Irish companies held by Irish institutions have declined from around 35 per cent in January 1999 to around 20 per cent now, according to Smurfit research. But the key benchmark index, the Morgan Stanley Capital International index, has a weighting of around 0.5 per cent for Ireland. Most sources expect that to be the target allocation for Irish equities for the new State pension fund.

Irish companies are worried domestic fund managers will continue to sell their holdings of Irish shares. The seven commissioners of the new pension fund are likely to be appointed by Mr McCreevy in two-three weeks.

The board will set the investments target of the fund. The brief is to generate the optimum level of return of both capital and income, taking an acceptable level of risk.

After the broad benchmark has been decided, the investment management will then be divided between various fund managers and stock brokers, all of whom will be competing aggressively for the business.