A MULTI-BILLION pound pensions black hole is set to deprive cash-strapped councils of vital investment as tax funds are used to guarantee golden retirement packages.
Next year town hall leaders across the North East will be asked to hand over millions of pounds more in order to ensure thousands of workers can retire on a good pension.
Local government pension costs have increased across the region by more than £1bn to around £2.6bn after the value of council’s pension investments were wiped out by the recession.
The level of the debt means councillors can either hand over more cash which should have been spent on regeneration and social services to the retirement fund or prepare massive cuts in pensions.
But any reduction to the pension fund would be almost impossible to carry out due to legal constraints and huge opposition among thousands of council staff.
Instead treasury officers have told their council boss they are legally obliged to divert cash to fill the gap, meaning money collected in council tax will be taken to cover increased contributions.
In Northumberland alone the council is preparing to add £5m a year to its pensions contributions while at the same time preparing to make £30m worth of cuts a year, moves already predicted to damage front line services.
The council has been forced into the position after its pensions deficit went up from £255m to £407m in just one year.
And in Newcastle the problem is even worse, with the council’s cabinet preparing to find extra cash for a £513m deficit.
Peter Allen, the councillor responsible for overseeing Newcastle’s spending, said the region faced the "perfect storm" of competing pressures for cash while at the same time income from items such as rent collapses in the recession. He added: "The stock market could go up by the time we carry out next year’s re-evaluation of the pensions fund, but I would say the stock market is unlikely to have recovered sufficiently to prevent us increasing our contributions."
If the value of the pension funds investment does not increase substantially within months councils will have to look at much greater savings, possibly from jobs, to cover the costs.
Last night Andrew Tebbutt, Northumberland council’s executive member for resources, said all the region’s authorities face "major problems" and called on Government ministers to help tackle the issues.
He said: "The recession has already placed much more pressure on essential services and yet we have a Government saying it expects a lot of savings to be made without really acknowledging how much strain there is on our resources from issues such as pension cost.
"Ministers need to look very carefully at what they are asking of councils and how it is funded, because otherwise the difficult decisions we are about to make will get much harder."
The Tyne and Wear Pension Fund, which manages pensions for North East councils, has blamed the recession for the need to bail out the scheme.
A spokesman said: "The latest fund-wide actuarial valuation was undertaken as at March 31, 2007. Since that date, investment markets have fallen in value and this, alongside falls in interest rates, has increased the deficit in the fund.
"The next valuation will be carried out as at March 31, 2010. It is expected that contributions will rise for most employers in the fund. The strategy for the 2010 valuation will be formulated when the position as at March 31, 2010 is clear on areas such as the fund value, investment market conditions, inflation figures and on membership data. The Pensions Committee will be considering the strategy throughout 2010 in order to complete the valuation by the statutory deadline of March 31, 2011."