Wandsworth and Richmond upon Thames LBCs have agreed in principle to combine their pension funds as part of a broader staff merger.
The two authorities announced in January their plans to create a shared staffing structure, in a move predicted to save £1.6m per year.
However, if the pension funds were to remain separate, workers employed by the shared structure would be required to move to the Wandsworth fund, as they are not allowed to be in two funds if engaged in a single contract with a joint employer.
This would leave the Richmond fund with more pensioners receiving payments than current employees paying in. It would therefore need to invest primarily in assets providing a stable income, to pay pensions.
However, these assets, such as bonds or gilts, produce lower returns than growth assets such as equities, meaning that Richmond LBC may face increased employer contributions to keep the fund running, a Wandsworth pension committee report said.
Instead, committees of both authorities have agreed in principle to merge their pension plans into one £1.8bn fund, preventing the early maturation of the Richmond fund and a possible council tax increase to pay for it.
In the merged funds, the two authorities would remain responsible for their own past service deficits, but be jointly liable for the cost of the pensions accrued by employees of the shared service structure.
The merger will require a change in legislation, as London boroughs currently have to run their own funds. It would also require the creation of a joint pension fund committee involving both councils.
The authorities are seeking permission from the DCLG on the merger.