Councillors find themselves in the pension trap

Public sector finance: enhanced payments are leading to trouble with the ombudsman. Paul Gosling reports

Westminster's beleaguered councillors could face further applications for surcharges because they approved enhanced redundancy payments, to encourage staff to take early retirement, which may have been unlawful. Similar action may be taken against councillors in about 10 other authorities that have also apparently exceeded their powers. Former senior councillors in Westminster are already locked in dispute with their district auditor, who is attempting to surcharge them over unconnected allegations of gerrymandering.

The latest problem arises as a result of a finding of maladministration against Westminster by the pensions ombudsman, Julian Farrand, whose decisions have legal force. Mr Farrand concluded that Westminster had an obligation to comply with undertakings it had given to former staff, promising enhanced pension payments as part of redundancy packages.

Westminster had begun to pay the enhanced pensions, but ceased doing so when the Audit Commission advised it that it was acting in excess of its powers. Having ended the payments it finds that this, too, is apparently in breach of the law.

There are 580 former Westminster employees who found themselves with smaller pensions than they had been promised, and at least one of these complained to the ombudsman. Some pensions had been cut by 18 per cent of their value, worth as much as pounds 4,800 a year for a former senior manager. Under a redundancy settlement scheme that operated from 1981, the council had paid out additional lump sums without deducting them from compensation pensions, as it ought to have done.

The Audit Commission's advice to local authorities has been that they have no powers to award enhanced settlements or improved pensions beyond those specified in legislation. Councils that exceeded these levels were told to cease payments above those stipulated in law immediately. This was regarded as unfair by pensioners, who claimed that in many cases they had only taken early retirement because of the generous redundancy terms promised.

Westminster City Council has applied to the High Court to overturn the ombudsman's decision. The hearing is expected to take place early next year. The pensions ombudsman, Westminster and the Department of the Environment will not discuss the matter until after the case is heard. The Audit Commission, too, is adopting a wait-and-see approach.

The London borough of Redbridge is another authority where councillors could face surcharging. An investigation is under way, conducted by Redbridge's district auditor, Coopers & Lybrand, into an apparent pounds 500,000 overpayment of pensions.

Problems over severance payments initially came to light at North Tyneside council, where the authority had exceeded its legal powers. This was resolved by the Department of the Environment introducing retrospective legislation to approve some of the action taken by North Tyneside, and to provide dispensation for other action taken.

It has emerged that some other authorities' redundancy arrangements were not covered by these steps, and the DoE has given no indication that it is willing to introduce further legislation or dispensation to rescue Westminster, Redbridge and the other authorities now trapped.

The confusion over the powers and duties of authorities to make enhanced redundancy provisions has existed for several years, and illustrates two problems that should be of as much concern to central government as to councils themselves.

In many areas legislation affecting local authorities is unclear, making councillors vulnerable to surcharges even in instances where they would consider they have done no wrong. In turn, the risk of surcharge, especially when considered together with the reduced role and influence of councillors, is making it harder to find people willing to become councillors.