Policy Exchange has recommended that all new public sector workers, excluding the armed forces, should be moved to new funded defined contribution (DC) pension schemes.

Under the proposals, the current defined benefit (DB) public sector pension schemes would be closed to new entrants, with existing members remaining in the schemes and building up contributions and entitlement.

In a paper on public sector pension reform, the think tank modelled the cost of transferring public sector employees to DC schemes with standardised employer contributions of 10 per cent and employee contributions of 5 per cent.

Its modelling found that, following an initial period of ‘modest’ annual short-term costs, peaking at £3.4bn six years after adoption, there would be ‘significant’ annual savings.

Estimated annual savings would rise to £6.1bn 20 years after adoption, £19.4bn 30 years after adoption, and £37.4bn 50 years after adoption, according to the analysis.

Policy Exchange highlighted that public sector pensions constitute a £1.4trn unfunded liability, equivalent to 45 per cent of GDP.

Typically, public sector schemes are DB pension schemes and are more generous than pension schemes in the private sector.

In most public sector schemes, contributions are not invested and are returned to the Treasury instead, with the pensions of current retirees paid for out of current spending, creating “massive” spending liabilities for future taxpayers.

The think tank therefore recommended that all new public sector workers, excluding the armed forces, should be moved to DC schemes with employer contributions of 10 per cent and employee contributions of 5 per cent.

It argued that such a scheme would still compare favourably with the majority of private sector schemes and ensure public sector workers continued to receive a ‘good’ income in retirement.

Commenting in the foreword, House of Lords member and former Institute of Chartered Accountants in England and Wales president, Baroness Sheila Noakes, said: “It cannot be fair that taxpayers should be asked to pay for public sector pensions on terms that are increasingly not available outside the public sector.

“The approach set out in Policy Exchange’s paper strikes an appropriate balance between fairness and affordability, protecting the accrued rights of current members and ensuring new public sector employees receive a pension that compares favourably with private sector comparators – and that would ensure an adequate income in retirement.

“The scale of the liabilities involved means that public sector pension reform cannot be avoided by any government serious about long-term fiscal responsibility.

“As Policy Exchange rightly observes, gripping this nettle would send a powerful signal to the bond markets that the government was serious about getting on top of future public sector spending.

“Political determination would be needed to deliver reforms of this scale, but the reality is that an honest conversation about the sustainability, fairness and future of our current public sector pension system is long overdue.”

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