Finance Minister Jerome Kennedy says the province will need to cover the public pension shortfall if markets do not rally enough in the coming years. (CBC)

The global financial crisis has hammered the Newfoundland and Labrador government's pension plans, almost eradicating the gains the province invested from the Atlantic Accord.

Finance Minister Jerome Kennedy told CBC News the fund — used to pay the pensions of civil servants, teachers, judges and even retired politicians — has lost $1.6 billion in value over the last year.

Year-over-year, the fund lost 24 per cent of its value, plunging from $6.7 billion in December 2007 to $5.1 billion in December 2008.

"There can be no denying the seriousness of that hit," Kennedy said in an interview.

"[The] $1.6 billion, that either has to grow, growth that has to be obtained in the fund over the next number of years, or we have to come up with it as a government."

Newfoundland and Labrador's pension funds, which also include funds to cover the retirements of teachers and others, have always been short of cash.

In 2006, Premier Danny Williams used a $2-billion advance from a revised Atlantic Accord, which recognizes Newfoundland and Labrador and Nova Scotia as the principal beneficiaries of their offshore petroleum resources, to cover unfunded pension liability.

The current shortfall does not mean that retired civil servants will lose income. The pensions are fully guaranteed and the government is legally required to pay them, no matter what happens with the pension funds.

The shortfall, though, poses a serious problem for Kennedy, who is scheduled on Friday to start a series of pre-budget hearings across the province, to gather opinions on what priorities should be presented in the spring budget.

With the price of oil at less than a third of the value of last summer's peaks, the government is already trying to assess how to predict its revenues for the 2009-10 year.

Oil royalties and ancillary revenues, including offshore-related business taxes, have become a key source of income for the government in recent years. Three fields off Newfoundland's east coast are currently in production.

In December, Kennedy said that oil prices were so high earlier in the fiscal year that the government expects to finish it in March with a $1.27-billion surplus.

However, Kennedy warned that the province could be faced with a significant deficit if oil prices did not improve.