Papers leaked to LGC show the commission is concerned about whether the savings councils make by letting staff go early on immediate pensions balance the costs.
The study, involving an in-depth look at a handful of funds, will cover the three categories of early retirement: ill health, redundancy and the efficient exercise of the council's functions. It will examine white-collar and manual staff.
The study begins in October and will report by autumn 1997. It coincides with new DoE regulations which consolidate councils' discretion to compensate staff who retire early by, for example, increasing their pension.
Actuaries are developing models for estimating the cost of individual early retirements, and district auditors will be given training in October 1997 on implementing local value-for-money reviews.
The commission will produce a guide on best practice and recommendations for action at local and national level.
The study will consider the feasibility of contracting out pension fund administration. In England and Wales in 1994- 95, the equivalent of 1,286 full-time staff administered more than 80 funds at a cost of almost £70 million.
Society of Chief Personnel Officers president Robert Cragg said early retirement schemes were not being misused, and that the commission should be asking questions about the pressures on staff which are pushing up the number of early retirements.
He said: 'Local authorities are having to manage a great deal of change, some imposed, like the local government review, and we have very few facilitators to make that happen. Private companies can do deals, pay someone off. What freedoms we have got we value.'
The Audit Commission study coincides with DoE and Local Government Management Board investigations into early retirement. 'It's absolutely totally ridiculous that there are three reviews being undertaken on this,' said Bob Medcraft, SOCPO pensions committee chair.