Merton Council’s spiralling pension deficit nearly doubled to £242m in the last financial year as the overall value of the authority plummeted by more than £500m.

According to a draft statement of the council’s accounts, its pension liability soared by £123m while the decision to transfer housing stock at nil value to Merton Priory Homes has stripped the council’s asset base by more than £400m.

The pension fund has been hit by the flagging economy with significant reduction to bond yields sparking fears of substantial service cuts or increased council tax should the authority struggle to pay its pensions.

Matthew Elliott, chief executive of the TaxPayers’ Alliance, said: “This massive pension deficit is a worrying sword hanging over the heads of Merton taxpayers.

“The simple fact is the Local Government Pension Scheme is utterly unaffordable and it must be reformed.

“We have now reached the unfair situation where most taxpayers pay more into public sector pensions than they can afford to save up for their own retirement.

“This deficit is a huge IOU, which will take decades to pay off unless action is taken immediately.”

Merton Council’s director of corporate services said the valuation of the pension deficit was expected to improve as the economy strengthened and claimed it had no immediate impact on the authority’s financial health.

But the council’s new cabinet member for finance, Councillor Mark Allison, said: “This situation could be devastating and it looks as though we’ve inherited big problems, but we will get through this.”

The deficit needed to be addressed but of more concern, he said, was Merton Council’s next annual settlement from central Government, anticipated to be slashed by up to £20m – 25 per cent of the current level.