This Policy Exchange research note models the cost of transferring new public sector employees on to funded, defined-contribution pension schemes with a standardised employer contribution of 10%. This modelling finds that, after an initial period of modest short-term costs, there are significant annual savings associated with this reform. Estimated annual savings rise to £6.1 billion 20 years after adoption, £19.4 billion 30 years after adoption, and £37.4 billion 50 years after adoption (all figures are in 2025 prices).

• Public sector pensions constitute a £1.4 trillion unfunded liability – equal to 45% of GDP and almost half the size of the official national debt.
• These are typically defined benefit schemes, unlike the defined-contribution schemes that predominate in the private sector. Public sector pension schemes are also considerably more generous than those in the private sector, with employer contributions often in the range of 25-30% of salary, compared to an average private sector employer contribution of 6%.
• In addition, in most public sector pension schemes, the pension contributions of existing public sector workers are not invested, rather they are returned to the Treasury while the pensions of current retirees are paid for out of current spending. The creates massive spending liabilities for future taxpayers – currently valued at £1.4 billion.
• This paper recommends that all new public sector employees – with the exception of the armed forces – should be moved to new defined-contribution funded pension scheme, with a standardised employer contribution of 10% and an employee contribution of 5%.
• Such a scheme would still compare favourably with the majority of private sector schemes and would ensure public sector employees continued to receive a good income in retirement, with the total proportion of salary being invested into an employee’s pension being above the 12% recommended by Pensions UK.

The launch of this report was covered by:

• The Times
• Daily Mail
• City A.M. (1)
• City A.M. (2)
• The Express
• The Critic
• POLITICO’s London Playbook
• PensionsAge
• Professional Pensions