The Irish Republic has been swept up in the usual flurry of claims and counterclaims, promises and threats preceding the general election on May 17. Among the issues ensnared in the party politics is the ambitious plan to pre-fund the country's state pension liabilities.

The plan, which is largely the brainchild of Charlie McCreevy, the Fianna Fail finance minister, was first discussed in the late-1990s. The aim was to create a reserve fund that would take advantage of the country's benign demographic profile and the robust state of its public finances.

Built up over 25 years - without any pay-outs - the fund is projected to cover a third of the country's pensions liabilities by 2026. By then, Ireland would begin to suffer the problem of a greying population that is already being felt in Europe's larger economies.

The Irish government, led by Fianna Fail's Bertie Ahern, has legislated to put 1 per cent of gross national product - currently about E1bn (£620m) - into the fund each year.

There is currently one Irish person aged 65 or over for every five people of working age. By 2050 half will be of pensionable age. Official figures suggest the state's pension contribution will have risen from 1.7 per cent of GNP to almost 7 per cent in that period.

The fund has been lauded by international credit rating agencies and the Organisation for Economic Co-operation and Development, which said last year that it "makes clear to the public the need to make provision for future liabilities".

But the Irish Labour party, which polls suggest is the most likely coalition partner for Fianna Fail, has said it would slash the statutory contribution to the fund from 1 per cent of GNP to 0.25 per cent if it were in government.

"We are not raiding the pension fund. We are reducing the payments into it for a period to allow us to do things that will increase Ireland's productive capacity," says Derek McDowell, Labour's finance spokesman.

But Dermot Ahern, Fianna Fail social welfare minister, has accused Labour of "spending today's money without any reference to tomorrow".

He says Europe is looking to Ireland's example.

"Every European country has visited Ireland to see what we're doing with our reserve fund - Italy, particularly, and Germany - because they haven't done what we're now trying to do when they had the money. It's not just good accountancy, it's good economics."

However, the fund's optimistic projections for Ireland's population and economy were made back in 2000.

Since then the country's fiscal position has tightened considerably. Mr McCreevy's budget of last December forecast that the general government balance was expected to slip into deficit in 2003.

Labour argues that this generation of workers is being asked to pay twice over - not just for the current pensioners through the pay-as-you-go system, but through public expenditure sacrificed as a result of the contribution made to the reserve fund.

But changing the scheme would require new legislation. And the mandates to manage the fund have already been awarded.

Michael Somers, a member of the seven-member commission entrusted to make the strategic asset allocation and choose the fund managers, believes Labour is on to a vote loser.

"We have been amazed just how much people have got to like the idea of having this fund to safeguard their pension."

He points out that Fine Gael, the main opposition party, is arguing that the top-up should be bigger.

The scheme has attracted a lot of fund manager interest. In all, there were 580 expressions of interest for what in the industry is seen as a "trophy" mandate. The list was whittled down to 178, of which 51 institutions were interviewed. The fund will be split 80:20 in favour of equities to fixed-interest instruments such as bonds.

"The view is that over a 25-year period, unless the whole world is going to be turned upside down, equities must outperform bonds. Yes, in any short period of course you can get the reverse. If we had been in last year it would not have been a great idea, but luckily we weren't," says Mr Somers.

The National Treasury Management Agency, which he heads, will do the day-to-day performance monitoring of the fund.

Half of the equity investment will be by passive managers. These include Barclays Global Investors and State Street. Goldman Sachs' Tampa fund management unit won one of the largest mandates - a US active equity value mandate.

Under European Union procurement rules, the tender had to be open to international companies. But two Irish institutions - Bank of Ireland Asset Management and Irish Life's fixed income team - managed to get a slice of the action.

The agency is a little coy about the progress made on building up the portfolio. But it is understood that Morgan Stanley, as the so-called transition manager, has already acquired the securities, selected by the fund managers.

"The idea of having a transition manager is it avoids the fund managers bumping into each other in the market place. It also avoids any ambiguity as to when the funds performance clock starts to run," says Mr Somers.

"Managers tend to look for a honeymoon period, while they assemble their portfolio. There's no honeymoon period. You get the stock on a Monday and wham bam your performance is measured on the following Monday."

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