Pressure on councils could be stepped up with the publication of data comparing each authority's performance. This would effectively repeat the Audit Commission performance indicator on early retirement.
The proposals are among 36 in a report on ill-health retirement published by Treasury chief secretary Andrew Smith. The report says public sector ill-health retirement costs the taxpayer£1bn a year.
Mr Smith argued that although such retirements have almost halved since the record level of 40,000 in the 1990s, rates are still above those in the private sector.
Employers' Organisation executive director Charles Nolda said the variations show the problem is 'at its roots a management issue, the solution to which is cultural rather than medical'.
He said regulations around the Local Government Pension Scheme have been tightened in recent years, but welcomed the Treasury's recommendations on the importance of redeploying people unable to carry on at their post. Many of the recommendations on assessing capability and alternative employment options have already been incorporated into the local government scheme, Mr Nolda said.
Local government minister Beverley Hughes said the Audit Commission accepted progress had been made, but the DETR would be drawing up an action plan covering the Treasury's recommendations.