Uncertainty reigns as pension funds try to pick up the pieces

In October 2008, however, the worst happened. Now Yorkshire's public sector pension funds are trying to make good the damage wreaked by the financial crisis.

It is a demanding task. Analysts and investors have rarely been more uncertain about the future. That is why public sector pension funds are under pressure to justify how they spend their money, according to John O'Connell, policy analyst at the TaxPayers' Alliance.

"Council pension deficits are a huge ticking time-bomb. While investment portfolios will have taken a beating in the credit crunch, the real problem is that local authorities across Yorkshire are tied in to unsustainable final-salary schemes.

"Finance chiefs must now, more than ever, show some discipline; the outlook for the economy is sketchy at best and gaining a return on assets will be especially difficult this year. The worst thing councils could do is lose more good money in a desperate attempt to plug the black hole."

Fund managers have some reason for optimism. The FTSE 100 index has bounced back since their financial year-end in March – it rose 22 per cent over 2009, albeit from a desperately low starting point – and property prices have shown a modest recovery.

Public sector funds have several decades over which to manage their assets, but remain concerned. The most recent quarterly report from South Yorkshire Pensions Authority, which covers the period to September 30 last year, warns that investors may not be "out of the woods yet".

It continues: "Once the various Government stimuli wear off it is difficult to see what will prevent the recovery being other than anaemic."

The annual accounts from West Yorkshire Pension Fund, to be published shortly, said its average returns over the decade are positive and above average, but warned of a year ahead "buffeted by continuing financial uncertainty". The fund will "provide the required cool hand on the tiller," it adds.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said prospects for economic recovery were uncertain.

"If we are lucky we get a couple of years of low growth or, at worst, low growth and inflation."

Struggling local authority funds cannot carry out a "fundamental re-design" of their investment strategy annually because of their inflexibility, he added.

A full valuation of the assets and liabilities is due to take place in March but the results will not be known until months later. There is no suggestion the funds will collapse.

A spokesman for East Riding Pension Fund said the assets of all pension funds fell between 2008 and 2009 because of the slump in UK and global markets, which has since reversed. Employer contributions will not change until after the next valuation and any changes would take effect from April 2011.

West Yorkshire said its cash flow would be positive for the next 20 years and that it was six years into a 25-year plan to address the deficit.

John Hattersley, pension fund manager at South Yorkshire Pensions Authority, said: "Members of the authority are more than aware of the pressure the fund is facing and are already considering a way forward. They had a meeting with the fund actuary on Thursday to examine options.

"Stock market conditions remain uncertain but are considerably less fragile than a year ago."

A spokesman for North Yorkshire Pension Fund said it had missed its target for the 12 months to September, it had been among the best nationwide in the second half of that period and had continued improving. It said there was "no clear correlation between the short term performance of the fund" and council tax.

Blair adviser raises question for council taxpayers

Many council taxpayers will be concerned over local government pension funds risking their money on the stock market, said Tony Blair's former pensions adviser.

Ros Altmann said schemes were heavily reliant on waiting for returns from the stock market. "This approach has, unfortunately, left many pension schemes in trouble. The reason for their problems is partly that equity markets have not performed well over the past 10 years.

"But the other problem is that concentrating on the stock market and asset returns has meant pension schemes have failed to focus sufficiently on the liabilities they have to meet, which have been rising enormously."

She added: "Council taxpayers may be happy to take stock market risk, but many will be more uncomfortable with this approach and, after experience in the past couple of years, perhaps it is time to have a more open debate about these issues."