The Irish Association of Pension Funds (IAPF) has warned that the quality of returns on the new State pension fund will depend on the calibre of the people appointed as its commissioners.

The Minister for Finance, Mr McCreevy, will announce the names of the commissioners within weeks. The legislation establishing the fund requires the appointees to have acquired "substantial expertise and experience at a senior level".

A new report from the IAPF says it is vital the Minister appoints the right people with the necessary experience who will be willing to take risks and will be free from political influence. Consultant Mr Shane Whelan, author of the report, suggests the Minister should go further and emulate the Canadian model by asking for nominations from relevant groups such as the Association of Investment Managers, the trade unions, IBEC, the Society of Actuaries, the Law Society, the civil service, the Pensions Board and the Institute for Directors. This would ensure the appointments are made at arm's length, he said.

The commissioners will have to decide on the investment strategy for the new fund. But according to the IAPF, there is a history of similar funds in other countries completely underperforming.

According to Mr Whelan, most have provided returns which are on average dismal and at times disastrous. In many instances, the returns have been lower than the interest rates on local individual deposits and in some cases the investment involved has been halved.

Already £4.8 billion (€6 billion) has been set aside to kickstart the project and, according to Mr Whelan, the fund could amount to 40-50 per cent of national output by 2025 and could still be growing. As a result, there is huge interest from fund managers from here and abroad who want look after some of it. By 2025 just 1 per cent of the fund could amount to some £250 million in today's terms. As a result, the decision of the commissioners in choosing fund managers and their targets is potentially significant. The National Treasury Management Agency (NTMA) will be responsible for day-to-day administration of the fund but will not set the targets.

The main objective, according to Mr Whelan, is to ensure the money lodged in the fund is not available to governments for politically motivated investments.

The temptation for the commissioners, at least in the early years, will be to opt only for the very safest investments. This could well mean lower returns but the possible backlash if taxpayers' money is lost could be foremost in their minds.

According to Mr Whelan, it is important to invest in areas which are not heavily represented in Ireland as the fund will also be reliant on profits and wages in Ireland. As a result it should be light in areas such as food processing in favour of investment in areas such as oil exploration and refining.

Interestingly, the report also advocates some exposure to currency markets, an area generally ignored by pension funds because of volatility.

The fund should also invest in Government bonds which provide a relatively risk-free investment, albeit at lower returns than equities. It is, however, prohibited from investing in Irish Government bonds, perhaps because of the conflict this could cause the NTMA as administrators of the fund and issuers of Irish bonds.