Labour has been accused of a ‘cop-out’ and ‘lacking fiscal discipline’ by raiding a £150billion surplus in the Local Government Pension Scheme (LGPS) to fund teachers’ pay rises.

The unprecedented move – sanctioned by Education Secretary Lucy Powell – also raises the prospect of swoops on council workers’ pension plans to balance the books in next month’s Budget, experts said.

It comes after Powell did a U-turn and agreed to fully fund a 3.5 per cent pay increase for teachers to head off the threat of strikes, costing an extra £500million.

The cash will come from the LGPS, where employer contributions to the pension pots of its non-teaching members, such as caretakers, dinner ladies and receptionists, will be cut by an average of 4.9 per cent.

School support staff pensions, which are based on their salary, will not be affected. But the unions who represent them are furious the windfall is not being used to give their members similar pay rises.

The news has reignited the row over who owns the LGPS surplus.

The £550billion fund is awash with cash after employers paid more into the scheme than is now needed to cover pension promises made to its 6.9million members.

Richard Tice, deputy leader of Reform UK, wants to use some of the excess cash to cut council taxes that also help fund the LGPS.

He said: ‘The surplus belongs to the taxpayer, not the members. The LGPS employer contributions in many areas are too high. However, using it to fund pay rises in other parts of the public sector which have unfunded defined benefit pensions is a cop-out and lacks fiscal discipline.’

Employers pay about 16.5 percent of a worker’s salary into the LGPS, which is then invested in the stock market and other assets, unlike teachers’ pension schemes.

LGPS members contribute at least 5.5 per cent of their pay and receive a pension based on their salary and length of service, typically £5,000 a year. 

Steve Simkins, partner at pensions consultancy Isio, said the teachers’ pay deal was ‘a surprise’ which could lead to ‘difficult decisions being avoided’ for the Government.

He added: ‘There is a risk that this is a lazy use of surplus, if it has allowed a higher pay rise than was needed.’

Chancellor John Healey is under pressure to find new pots of money to fund spending on defence, social care and housebuilding while meeting fiscal rules designed to keep a lid on sky-high Government borrowing costs. 

Tapping the LGPS surplus could avoid the worst of what most economists see as inevitable tax rises in his Budget on October 28 without breaking those rules.

Professor John Clancy, of Birmingham City University, reckons cutting LGPS employer contributions could net the Treasury ‘at least £10billion a year’ – enough to restore Healey’s financial buffer against future shocks.

The Government was contacted for comment.