Large numbers of council staff have been made redundant and rules unique to local authorities limit the size of pensions.
There are currently 800,000 people employed in local authorities in England and Wales, 3 per cent fewer than a year ago. A further 5 or 6 per cent may be asked to go next year, according to the Association of Metropolitan Authorities.
Many who leave take early retirement on enhanced redundancy terms, but it has emerged that some councils have been paying these unlawfully.
In a test case two years ago involving North Tyneside council, it was decided that local authorities cannot provide better redundancy terms than those laid down in law. The council is now preparing legal action seeking repayments from former employees.
As many as 40 other councils may be in the same boat, possibly affecting several thousand former staff.
Westminster City council recently cut the pensions of 580 former staff, paid under a scheme that had been operating since 1981.
Following the North Tyneside judgment the council was legally advised that its payments were too generous.
Peter Vasquez retired in 1990, at the age of 62, as head of technical services in Westminster's finance department. The pension he retired on has now been cut by pounds 4,800 a year, 18 per cent of its value.
He is obviously very unhappy, but says others who lost less in cash terms are even worse off. 'It can be a sizeable chunk of a small pension. It has caused hardship to lots of them.'
In general terms, local authority staff (excluding teachers, who have a separate scheme) are entitled to a pension of half of their final annual salary if they have worked in local government for 40 years or more.
Councils may encourage early retirement by offering up to 10 years added service for staff over 50 who have been employed for five years or more, if their retirement is 'in the interests of efficiency'. If the payment is merely to promote voluntary redundancy, only six and two-thirds added years may be offered. Any redundancy payment made must be deducted from the compensation pension and lump sum that could be paid. Westminster had failed to do this.
Mr Vasquez says it is unfair that pensioners should pay for a mistake made by the council. The extra payment was the reason so many employees agreed to early retirement.
'This was a contract, this was our pension, for our lives,' he complained.
Westminster says it would like to continue paying the higher rate but is prevented by law. It has asked the Government to waive the rules but this has been refused.
It is possible that amended regulations will still allow this to be done, but most observers are pessimistic.
The Government recently moved to give councils more flexibility and resolve some of the difficulties caused by the North Tyneside judgment.
Draft new regulations propose to allow councils to make higher severance payments, up to a maximum of 66 weeks' pay, to staff with more than two years' service. Staff of any age would be eligible.
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