A quarter of local authority pension funds in Britain have been impacted by the collapse of the Icelandic banking, the demise of Lehman Brothers and the part-nationalisation of some major UK banks, a new CoreData Research UK study has found.

Meanwhile 80% of trustees (representing more than ₤50 billion (AU$125 billion), think things will get worse before they get better but confident they can ride out the storm.

There are approximately 400 local authorities in the UK and 26.7% point to holding assets that fund less than 80% of their pension obligations, creating a potentially damaging debt cycle for many local authorities in the years to come.

A quarter of pension funds said they had a direct exposure to either the Icelandic banking system, Lehman Brothers or Bradford and Bingly in the UK when each of the crises surrounding them became apparent.

Having said that around a quarter of funds point to be being fully funded, however these may be funds that have reduced their levels of defined benefit focus over the past decade.

In terms of asset allocation around four in 10 local authority pension funds are in the process of making adjustments to their portfolio construction, 2 in 10 are considering making adjustments and the remainder is not making and re-adjustments.

Six out of 10 funds state that their asset consultants have done no worse or better than others at this time of high volatility that has seen the UK bourse drop by half since its peak in July 2007.

The CoreData study was conducted in October and found three leading reasons behind why trustees believe the markets are in such a pickle:

1. Excessive use of complex and opaque derivative-based products.
2. Excessive levels of debt at banks and other institutions.
3. Lack of oversight by the regulators and politicians.