The Government is set to use £750 million of the expected £1 billion it will raise by floating Telecom Eireann to pay off pension liabilities for staff in the semi-state. It means that the Exchequer will end up with at most £200 million following the flotation, after £40 million is paid in fees to advisers.

Telecom was vested in 1984 when it was spun off from the old Post & Telegraphs. The Exchequer has a liability for the years which employees worked in the company prior to this. It is understood that this amounts to £750 million. Although no final decision has been taken, the Government is said to be strongly considering using the monies from the flotation to discharge all its liabilities to former and current Telecom employees.

The Telecom pension fund, which is said itself to have no liabilities, would be given the money by the Government to administer through its fund. The Exchequer put about £250 million into the Telecom pension fund over the past couple of years to meet its ongoing commitments, relating to the period prior to 1984. The flotation is expected to take place next June or September. It is still unclear exactly how much of the company will be offered for sale, but £1 billion is understood to be the target amount to raise. It emerged earlier this week that floating the company will cost £40 million. The bulk of this comprises fees and commission which Merrill Lynch and AIB will get.

This means that only around £200 will go straight into boosting the Exchequer's coffers.

Pensions and the funding became a central issue earlier this year in the discussions for employees to gain a 14.9 per cent shareholding in Telecom. Five per cent was ceded in return for changes in work practices. Employees were to buy the remaining 9.9 per cent. The employees have agreed to contribute 5.3 per cent of their salaries each year to help fund their pensions. In return, Telecom contributed £100 million towards the £190 million the employees were to pay for the 9.9 per cent stake.

Although the Government will end up considerably less in terms of hard cash, it does mean that it will have discharged its liabilities to the pension fund once and for all, effectively paying down an element of the national debt.

The government is set to gain more cash from the KPN/Telia deal, which enable the Dutch-Swedish telecoms consortium to buy into Telecom. It paid £183 million for a 20 per cent stake, and has an option on a further 15 per cent for £200 million.

It is expected that the consortium will exercise this option next year. A complex mechanism which was part of the deal, means that the Government will in excess of the £200 million because the growth in Telecom's value since the buy-in will also be factored in.