Moving all new public sector workers to less generous pension schemes would end up saving the Treasury more than £37 billion.

Policy Exchange, a conservative think tank, is urging the government to move teachers, nurses and doctors away from defined benefit (DB) schemes, which offer a guaranteed income for life. Instead they should be offered defined contribution (DC) schemes, where the value of their pension pot is determined by how much has been paid in and how well their investments perform — the type of scheme that is most common in the private sector.

Within 20 years, the move would be saving the Treasury more than £6 billion a year, Policy Exchange said. This would grow to a saving of nearly £20 billion a year in 30 years, based on 2025 prices, and more than £37 billion a year in 50 years. These calculations assume employer contributions of 10 per cent of a worker’s salary.

Official figures show that it will cost taxpayers £57 billion this year to fund the pensions of retired public sector workers. These schemes constitute a £1.4 trillion unfunded liability on the public sector balance sheet, according to the Office for Budget Responsibility (OBR).

DB schemes guarantee a fixed pension amount after retirement, based on average salary and years of service. Most private sector pensions are DC schemes, in which employees and employers contribute to an investment pot that will provide a retirement income.

The Conservative MP and former chancellor Jeremy Hunt has called for DB schemes to be closed for new public sector recruits from November. Richard Tice, the deputy leader of Reform UK, has also called for new public sector workers to be switched to DC schemes.

Policy Exchange proposes that all new public sector employees, except those in the armed forces, should be moved to DC schemes with standardised employer contributions of 10 per cent of salary and employee contributions of 5 per cent. This would also apply to workers rejoining the public sector. The minimum employer contributions under auto-enrolment is 3 per cent while workers pay in 5 per cent.

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The contributions would be invested and the performance of these investments would determine the member’s future pension. At the moment employee and employer contributions are paid to the Treasury, and this money is used to pay the guaranteed pensions of those who have already retired.

A change would mean that the government would have to continue to cover the pension payments of retired public sector workers, in the short term. Policy Exchange estimated that this would require an extra £1.1 billion in government spending on pensions in the first year, in 2025 prices. This would rise to a peak of £3.4 billion six years after the change, but the savings would outweigh the costs by year 14.

The modelling assumed that the size of the workforce was constant over the period, that average salaries increased 0.5 per cent each year, and that pensioners died at the average rate from the past four years.

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Baroness Noakes, a former president of the Institute of Chartered Accountants in England and Wales, is quoted in the Policy Exchange report: “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.

“At a time when the national debt represents 95 per cent of our GDP, annual debt interest payments are forecast to reach £114 billion, and pressures on the public purse are ever-increasing, we simply cannot afford to ignore the financial impact of the current public sector pension system.”