Pensions timebomb fears for council workers

The coalition Government's austerity measures will cut the number of people paying into the schemes – meaning councils and taxpayers will have to fork out more to support them, experts have warned.

Yorkshire's local government pension schemes, which are mainly for council workers but also include police authority and court staff, saw more than 2.7bn wiped off the value of their assets in the financial crisis but recouped much of this as the stock market bounced back this year. Now they could face new pressures as the number of people paying into the scheme is cut.

The head of pensions research at Hargreaves Lansdown, Tom McPhail, said local government pension funds would be hit by a fall in the number of people employed by the state, even though Britain could see a private sector recovery at the same time. He said: "The rate of job cutting over the next year is likely, when taken in isolation, to slow down the growth in funding and assets."

The fund manager at South Yorkshire Pensions Authority, John Hattersley, said it would be hit by members being made redundant or taking early retirement.

He added: "There should be an immediate strain on the fund because we will be paying out lump sum payments. In the long term there is a potential mismatch because we are paying pensions early and not getting contributions."

The four public sector schemes in this region, which have more than 450,000 members, are already fighting to plug massive black holes triggered by disappointing returns on investments and Britain's ageing population.

The future of pension funds nationwide also faces long-term uncertainty after an official report by Lord Hutton, the former Labour Cabinet Minister, called for final salary schemes to be scrapped while fund managers are waiting for details on which regions will feel the most pain from Chancellor George Osborne's feared 330,000 public sector job cuts.

Last night unions vowed to fight the Government if it tried to downgrade workers' retirement benefits.

The regional officer for the Unite union, Tony Randerson, based in Hull, said: "It is no good pointing the finger at the poor devils who receive the pension, because it is not the workers' fault. These are monies owed to them that they have worked their lives for. One has to ask if pension funds are being managed correctly."

The former pensions adviser to Tony Blair, Ros Altmann, now director-general of Saga, said paying for the deficits could lead to rises in council tax, income tax or pension contributions. Britain's wait-and-hope approach to long-term pension provision amounted to "pray as you go", she added.

Both South Yorkshire and West Yorkshire Pension Fund narrowly missed their benchmark targets for the year to March 2010 but saw the value of their assets rise quickly in that time.

East Riding Pension Fund hit its target but its actuary warned of an "upward pressure on the level of employer contributions" when the results of its three-year valuation are known.

North Yorkshire Pension Fund enjoyed a strong period in the 12 months to March but admitted that investment returns over three years had been "disappointing".

Fund treasurer John Moore said only a small proportion of members were likely to lose their jobs, adding: "We have some issues with solvency but we are addressing them."

All the funds insist their pensions are affordable, in a healthy long-term position and that measurements of their deficits are just snapshots of a moment in time.

A spokesman for the Local Government Association said the shrinking of the public sector would be cheaper in the long-term although the cost of redundancies would be "expensive" this financial year. He said council payments into future pension schemes would not have increase the impact on frontline services.