Council tax could go up to pay for staff pensions; Bad news for those retiring within a year.

Byline: Adrian Pearson Regional Affairs Correspondent

PENSION managers have promised to keep retirement plans for thousands of council staff safe from the financial turmoil.

The pledge came as council treasurers continue to watch the markets to see if they will have to increase their contribution to schemes which pay out more than pounds 100m a year.

If the financial markets do not substantially improve over the next 18 months, city leaders will have to look at diverting cash from frontline services or raising council tax to cover increased pension payments for thousands of retired or soon to retire staff.

Over the last couple of weeks, the UK's 200 biggest defined benefit company pensions, which includes final salary schemes, have seen the value of their assets dive by more than pounds 9bn as a result of the turbulence, which experts say will make for disturbing news to anyone planning to retire in the next 12 months.

In the North East councils are among the largest employers, with 127,000 hoping to secure a happy retirement after working for a council.

But because local government pension schemes are, by their management's own admission, "heavily subsidised" many councils will have to make up any shortfalls over the next few years as even the safest investments look likely to suffer.

The Tyne and Wear Pension Fund, for the five city region authorities, is one of the largest public sector pension funds in the country. If the financial markets do not improve over the next 12 to 18 months then when the councils gather to set their payments schedules in 2011 they will face the prospect of raiding reserves which should be used to invest in city services.

One finance chief told The Journal that councils will be watching the markets very closely to see the "longterm impact on the taxpayer".

Nick Evans, director of pensions investments at KPMG, said few pension funds would have invested with the troubled Lehman Brothers bank, but the wider impact left the North East very vulnerable.

He said: "By far the biggest impact of the Lehman Brothers administration on pension funds is the stock market response to the situation.

"The drop in market values during the last couple of days is having a major negative effect on the value of the pension funds that are behind the pensions to which the region's employers and many employees contribute and will reply upon in future years."

Liberal Democrat spokesman Ron Beadle said he was confident council officers could manage the situation, but warned: "The Government may soon find that it has to make extra funds available to meet its obligations and someone will have to pay out for that."

The Tyne and Wear Pension Fund has admitted it is not immune to the current global downturn, but has remained upbeat about its management strategy.

A spokeswoman said: "The Tyne and Wear Pension Fund has a well diversified structure with a number of managers investing in bonds, equities and property.

"This provides some protection against the situation in global equity markets."

A spokesman for the Department of Work and Pensions said: "We have put in place measures to ensure that people can have confidence in the pension system."

"The drop in market values is having a major negative effect on the value of pension funds