Is your council tax set to soar?

Burgeoning pension fund deficits could trigger a sharp hike in council tax bills, a tax organisation has warned.

Councils across the UK have a combined pension deficit of more than £54 billion in 2010/11, according to new research from The TaxPayers' Alliance (TPA).

Put another way, the UK's 101 local authority pension funds have total liabilities calculated at £186.6 billion and total assets worth £132.4 billion.

This difference represents a huge 'black hole' at the heart of the Local Government Pension Scheme (LGPS).

• '£800bn pensions bombshell by 2050'

Your share could be £1,125
To put this £54 billion shortfall into context, it averages out at £1,125 for each of the UK's 48 million adults. Ultimately, taxpayers will be held liable for this deficit, so we could be facing some steep increases in our council tax bills, plus other local taxes such as parking charges and fines.

In previous research, TPA estimated that a fifth (20%) of all council tax is spent on funding employer contributions to the LGPS. In other words, if your council tax bill this year is £1,500, then around £300 of this goes towards topping up your local council's sickly pension scheme.

As a result, TPA argues that the LGPS is "much more generous than most private-sector pensions and is in urgent need of reform."

The only good news is that this huge deficit fell from £91 billion in 2009/10 to £54 billion in 2010/11, largely thanks to a sharp recovery in share prices. Then again, this is still £3 billion more than the £51 billion shortfall recorded in 2008/09, so things have got worse instead of better since the recession.

• '£800bn pensions bombshell by 2050'

10 councils with big 'black holes'
According to TPA figures, these 10 councils had the largest pension deficits in 2010/11.

As you can see, Birmingham has the biggest pension shortfall, weighing in at a hefty £1.34 billion, or £1,292 for each of its 1,037,000 citizens. Durham has the second-highest black hole, at £728 million (£1,424 per head). In third place is Hampshire, with a deficit of £718 million, which comes to £554 per head.

Another problem is that some pension funds are much better funded than others. The average funding level for all LGPS plans is 70% of their liabilities.

However, of the top 20 councils, three have assets worth less than three-fifths (60%) of their liabilities. These are Brent (London), with a funding level of 42%, Rhondda Cynon Taff in Wales at 53% and Welsh capital Cardiff, with a 58% funding level.

In total, TPA identified 26 councils with funding levels below this critical 60% level. Brent was the worst by far, but other councils with pension-funding problems include Merthyr Tydfil, South Wales (50%), Craven, North Yorkshire (52%), Worthing, West Sussex (52%) and Havering, London (55%).

The biggest bills per head
TPA also identified those councils with the highest pension shortfalls per head of population. These are the 'top 10' in this category.

Merthyr Tydfil has a shocking pension problem, with a deficit amounting to £2,268 per head, which is more than double the £1,125 average I calculated above. Brent is just behind on £2,267 per head and Rhondda, Cynon, Taff takes third place with a deficit per person of £2,063.

While London and Wales dominate the list above, the situation looks bleak across the country.

This is a problem for every household paying council tax throughout the UK. Indeed, every one of the 434 councils in this survey - from Aberdeen City to York - has a pension deficit, although it's a tiny £3 per head at the Greater London Authority and in Chichester, West Sussex.

Pension promises we can't keep?
Frankly, I find this survey to be deeply disturbing. Clearly, councils with huge pension black holes will have to fill them somehow - and this burden will fall on ordinary taxpayers. However, with Brits struggling to pay their own household bills and pension contributions, it's a bit much to ask them to fork out an average £1,225 extra per person towards sorting out council pensions, too.

Hence, Matthew Sinclair, director of the TaxPayers' Alliance, is calling on the government to reform pensions urgently.

"The deficit in the Local Government Pension Scheme remains a ticking time-bomb that's being left for future generations of taxpayers to deal with," said Sinclair. "With an ageing population and a crisis in the public finances, generous final-salary schemes like the LGPS are inflexible and too expensive, and need urgent reform.

"Councils should not take false comfort in the improvement in the stock market. Their pension liabilities continue to far outweigh their assets and the situation remains worse than two years ago."

In summary, unless councils take action to increase employee pension contributions, freeze current entitlements, reduce future payouts and increase their retirement age to 65, then taxpayers could be clobbered with yet more rounds of steep rises in council tax.

This will not be a welcome move, especially as many councils have already ignored the call by Secretary of State for Communities and Local Government, Eric Pickles, to freeze council tax in 2012/13.

Want to know how big your share of this problem is? Then find your local council in the full report from The TaxPayers' Alliance.