The National Pensions Reserve Fund will ease the pressure of Ireland's looming pensions timebomb.

Most European states, particularly Italy and Germany, are already suffering, with workers having to foot enormous pension liabilities for those who have retired.

Ireland's problems will come later, partly because the baby boom happened later here and partly because many of those who would be retiring over the next few years emigrated long ago. But the problem will emerge mid-century, although not to the extent currently being experienced elsewhere in the EU.

The fund was set up to ensure the State could pay public service and social welfare pensions in years to come. According to Department of Finance figures, the cost of both types of pension could rise from 4.7 per cent of GNP at the moment to 12.4 per cent of GNP by the middle of the century.

This is far-sighted but the operation of the fund and future contributions to it create wide-ranging questions, many of which could not yet be answered, the Minister for Finance admitted yesterday when he formally introduced the fund. The commissioners have only just taken over and have yet to decide on a conflicts of interest code, on an investment strategy or indeed on a benchmark. But there are a number of standards already set out in the legislation.

Under the very strict rules laid down, all governments up to 2025 will be obliged to invest 1 per cent of GNP in the fund every year, no matter what the economic circumstances.

This is a minimum and governments may put more money in, as Mr McCreevy has done.

If the economy once again runs deficits, which is likely over the course of this investment, then money will have to be borrowed to meet commitments to the fund. In such a case, the National Treasury Management Agency would borrow the money in the bond markets and manage it through the pension funds.

An observer said yesterday that future ministers could always say the pension fund had to be paid as a priority and point to current spending on hospitals, for example, as the reason for any future borrowing. But Mr McCreevy seemed to rule this out. "All governments know you cannot borrow for short-term expenditure reasons."

The fund will be managed by seven commissioners who are independent of the Government. They are appointed by Mr McCreevy and have terms ranging from three to five years.

Any further appointment will also be made by the Minister for Finance. All said yesterday that they were not members of any Irish political party.

The chairman will be paid £45,000 (#57,138) a year and the others £30,000. There is no performance element in the pay. As the Minister noted: "Whether the fund makes a great or a bad return, their remuneration will have nothing to do with it."

The commissioners will have discretionary authority to determine and implement an investment strategy. They are obliged to provide the maximum investment return subject to acceptable risk.

Deciding on this could take several months and it could be the end of the year before any money is invested. At the moment, the £5 billion is sitting in bank accounts. Accrued interest up to December 31st was £24 million.

The commissioners will be accountable to the Minister and to the Dail Committee of Public Accounts, where they will make a presentation at least once a year.

One possible problem is a conflict of interest. Some possibilities are obvious. Any decision to invest or not in Ireland could have an impact on the share price of Elan, whose chairman and chief executive, Mr Donal Geaney, is also chairman of the fund. There will also be intense competition among financial institutions worldwide for the business. The amount of money involved is considerable even at this stage and the projections over the next 25 years are massive. It would be surprising if Merrill Lynch and Commerz bank, whose chairman emeritus and chairman respectively are commissioners, among other institutions, did not attempt to win some of the business. All those involved point to the joint responsibility of all commissioners in these matters and say they will draw up a code for such an event in the near future.

The legislation also dictates that the fund cannot be used by future governments other than to provide for pensions. There is statutory prohibition on drawdown before 2025. After that date, any drawdown will be determined by ministerial rules subject to the number of people over 65 in the population.

As the Minister noted: "It will be very difficult for any future Minister for Finance to go to the Dail and say he wants to raid the people's pension fund."