CITY of York Council's pension fund is £77 million in the red.

Director of resources Simon Wiles said the deficit has been caused not only by depressed stock markets but also past decisions by both the authority and the Government, resulting in underpayment into the pension fund.

He said that when the poll tax was introduced and tax collection rates were low, councils were allowed to take a "contributions holiday" to help improve cash flow, causing a loss of investment.

The removal of tax relief on dividend payments had cost the pensions industry billions, and the past practice of allowing early and generous retirement benefits had not been funded properly.

He said that the deficit was the council's share of the shortfall in the North Yorkshire Pension Fund, which in 2001 stood £186 million. He said all the county's constituent members, which include all the district councils as well as the county council, were in deficit.

York's contribution rates were likely to have to rise dramatically next year, having a severe impact on the budget and council tax rate unless a solution could be found.

Mr Wiles said one way of tackling the problems would be to pay a lump sum into the pension fund to cut the deficit, using the council's cash balances of £40 million. This would reduce the contributions rate the authority would have to pay in coming years.

Another option was to do nothing now, but in the knowledge that this would mean sharply increased contribution rates in the short-term, to be funded by either higher council tax or budget savings.

A third option would be to hike its contributions now, but this would cause substantial budget cuts or tax increases.

Mr Wiles said that a detailed report, exploring and costing all possible options, should be drawn up for councillors to decide the best way forward.

Updated: 10:47 Monday, September 08, 2003