Local Government Pension Schemes (LGPS) in England and Wales saw a drop of 19 per cent (£24bn) in asset values during 2008/09, a fall equivalent to all the money collected by Local Authorities in Council Tax that year, according to data from the Department of Communities and Local Government (DCLG).

Between March 2008 and 2009, the market value of assets in English funds fell from £120bn to £97.3bn, and in Wales from £7.5bn to £6.1bn.

John Ball, head of defined benefit pensions at Watson Wyatt, said: "Private sector employers know only too well that volatility in the pension fund can eat into the revenues generated by their core business and local authorities are learning the same lesson. When councils up and down country are struggling to trim their budgets, the last thing councillors will want to hear is that their pension funds have lost a full year's worth of Council Tax. The good news is that it's not quite as bad as it looks. March was the worst time to take a snapshot of pension schemes' assets and strong stock market performance since then means some of the money lost will have been recovered."

The next actuarial valuation of LGPS in England and Wales will take place next year, and will look at the assets and liabilities of council pension funds at March 2010. This will determine the contribution rates that councils must pay from 2011 to meet the costs of new benefits, and to help pay off the deficit, which was last valued at £27bn in March 2007. However, there is concern that falling asset values have caused increases in liabilities.

Ball added: "There is a big hole in local government pension funds that will have to be filled sooner or later. The Government is worried that even a 20-year payback period could require Council Tax rises that the electorate will not stomach. It has therefore suggested kicking the problem into the long grass by letting councils target a funding level below 100 per cent. Since the pensions to be paid out would be the same, this just means asking future generations to pick up the tab. It's a different story in the private sector, where the Pensions Regulator has told employers that massaging down funding targets to mask the impact of market movements on funding levels is completely unacceptable."

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