Local authorities pay into the scheme as teachers' employers, but their contributions have fallen far below the level the NAO says is now needed. The scheme, which is administered by the Teachers' Pensions Agency, suffered a shortfall of Pounds 1 billion in 1994-95 as the first-year cost of early retirements soared to Pounds 134 million.
This has worrying implications for local authorities, which may be asked to increase their contributions - currently 8.05 per cent of teachers' salaries.
The NAO's prediction that LEAs will have to pay more if the policy on early retirements remains unchanged follows an assessment by Sir John Bourn, the auditor general, who this week revealed that the average number of teachers taking early retirement every year has soared by 68 per cent from 11,624 to 17,187 in the past decade.
In 1994-95 16,683 teachers took early retirement, more than 6,000 on the grounds of ill health. The number in this second category might have been even higher had the pensions agency not changed the method of vetting applications in February. This led to a sharp jump in the rejection rate and drew protests from the teacher unions. David Whitbread, deputy secretary of the Association of County Councils, was dismayed by the possibility of an increase in employers' contributions. He said: "The teachers' pension fund is a notional fund. The Government simply collects all the contributions from local authorities and teachers and pays out funds while pretending it has saved up the money.
"In the past it operated on the basis that teachers and employers were being short-changed and their contributions were reduced to a more reasonable level in 1989.
"We would argue there are years of overpayment to be taken into account. Any suggestion of an increase in local authority contributions would be very worrying."
Barry Fawcett, assistant secretary of the National Union of Teachers, agreed that contributions had been unrealistically high in the past and added that the NAO's misgivings could not be properly evaluated until the latest review of the scheme's finances by the Government Actuary was completed.