The bulk of the £4.8 billion (€6 billion) expected to be raised by the Telecom flotation is to be used by the Government in a radical move to help fund the State's massive future pension bill.
The Telecom proceeds will be supplemented by an additional 1 per cent of Gross National Product, estimated at £520 million this year, which will be set aside annually to offset the so-called pensions timebomb.
The plan, announced yesterday by the Minister for Finance, Mr McCreevy, is motivated by an expected substantial increase in the ratio of pensioners to those at work. At present, there is one person aged 65 or over for every five persons of working age in the State. But demographic projections indicate that by the middle of the next century there will be just two people working for every person over 65.
"I have long been of the view that the State will have to start making adequate provision for pensions. Otherwise we will face the difficulties that other European countries are facing at this time," Mr McCreevy said.
The Government also plans to introduce legislation, which it hopes will be in place by the middle of next year, to underpin the funds and protect them from being plundered by future administrations.
The new pension fund, by far the largest in the State, is expected to top £4 billion by the time legislation setting it up is introduced.
The Government also plans to use part of the proceeds from the recent flotation, which should total some £4.8 billion when costs are deducted, to buy out the Exchequer's future pension liability in respect of pensioners and staff in Telecom Eireann and An Post.
The liability results from the period before some 30,000 civil servants were transferred from the old Department of Post and Telegraphs to An Post and Telecom Eireann in January 1984. Consultants are currently working on deciding the exact amount of that liability, but the Department of Finance expects it to be in the region of £1.1 billion to £1.4 billion.
Some of the Telecom monies will be used for investment on a once-off basis in priority improvements in infrastructure while the rest will go into the pension fund.
There will be two funds, one to deal with the public service pensions bill and the other to provide for State pensions. Although the amount of each fund has yet to be decided, the bulk of the funds will go to provide for the State pension bill, the larger of the two.
The Government has yet to decide who will manage the monies, which will make up the most significant pension fund in the State. Among the candidates for the job is the National Treasury Management Agency (NTMA) which has traditionally managed the national debt but recently won new powers to operate a fund management service as well.
Mr McCreevy said the legislative protection for the funds "will ensure that any future minister for finance who is strapped for cash will not be able at the stroke of a pen to dip into the funds or not provide the 1 per cent annually".
He also warned that while the current proposals were a start, they would not be enough and future governments might have to set more aside. It is predicted that the new plan will only suffice to meet one-third of the possible future pensions costs.
The move was welcomed by the Pensions Board, the Irish Association of Pension Funds and the Labour Party's finance spokesman, Mr Derek McDowell.