Ministers are hoping to tap into the £20 billion held in council pension funds – to pay for public building projects such as schools, roads and hospitals, the Sunday Herald has learned.

Finance Secretary John Swinney is examining how some of the funds, which invest on behalf of 400,000 people, could be put into projects in return for a steady rate of interest, in the same way most council and private pension funds already invest in UK Government bonds.

The idea is being considered as a way through the toughest financial times since devolution. Audit Scotland, the public spending watchdog, last month warned that the Scottish Government’s budget is expected to fall 7-13% in real terms by 2013-14, cutting up to £2.9bn from services. Chancellor Alistair Darling is expected to confirm the grim outlook in Wednesday’s Pre-Budget report to the House of Commons.

A senior Scottish Government source said the idea was in its “early days” but ministers had already decided it would not be used for the £2.5bn Forth Road Bridge and £814m Southern General Hospital in Glasgow, as they would be built using other funding.

Council sources are sceptical about how the Scottish Government can guarantee the repayment of money to the pension funds without the resources of a Treasury or Bank of England.

One senior source said the idea “smacked of Robert Maxwell”, the media tycoon who ransacked his workers’ pensions to prop up his business.

But another local government source said although the funds would never invest simply to help out the government, “if it made good investment sense I’m sure you would look at it”.

The Local Government Pension Scheme has around 225,000 active members, 85,000 deferred members and 130,000 pensions and dependants.

It is run by 11 sets of trustees, the largest of them in Strathclyde and Lothian. The sums held by the funds are huge, making them very attractive to a government short of cash.

Only four hold less than £500m, while the largest, Strathclyde, is worth £8bn. Collectively, the 11 units are estimated to be worth around £20bn, or more than half the Scottish Government budget.

A recent Audit Scotland study found that on average the funds invest 75% of their holdings in stocks and shares, 20% in lower yielding but safer Government bonds and 10% in property.

Council leaders are currently considering whether the 11 schemes should be merged. A confidential consultants’ report to the Convention of Scottish Local Authorities last month recommended creating a single investment body to save millions in administration costs and improve management.

The report also suggested there would be “an ever widening range of asset classes, investment vehicles and investment instruments” in future.

The Scottish Government has offered to pay for a £200,000 feasibility study. A source close to the Strathclyde Fund said: “It would be up to the trustees and their expert advisers to decide how to invest members’ money. That is not a decision that is or should be with Government ministers of any party.”

A spokesman for public service union Unison said: “It’s an idea we would need to look at. We are attracted to the idea of providing public services, provided it is not to the detriment of pensions.” Derek Brownlee, for the Tories, said it was an “interesting idea” but trustees would need to assess it on commercial terms. “They need to make damn sure they’re not taking a risk,” he added.

A Scottish Government spokesman said: “Ministers are always looking to develop innovative ways of leveraging in more value for the public purse.”