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DC plan would save £12bn on public DB

The Policy Exchange has proposed replacing gold-plated public sector pensions with a defined-contribution scheme.

In a report published last week, the thinktank which is associated with Tory leader David Cameron, criticises the current system as “thoroughly unsatisfactory”, benefiting just 20 per cent of workers at the taxpayers’ expense.

Policy Exchange estimates that the cost of its proposed defined-contribution scheme would be around £34bn, representing around 2.4 per cent of GDP.

Based on Government figures, the thinktank estimates that the current cost of servicing the debt of unfunded public sector pension schemes is £45.2bn a year.

It recommends a system where employers pay a cash amount annually, equivalent to the value of the benefits earned by staff in that year. These contributions would be used to buy index-linked gilts of sufficient value to pay for all pension promises made that year.

A public sector pension fund would be set up to receive contributions, buy gilts and pay pensions. This would have to be independently constituted if it is to survive political pressures, says the thinktank.

The report states: “With a funded model, pension promises will have to be paid for in cash in the year they are promised. This is the language that politicians and electorates understand and operate within. It is also the rule that applies in the private sector.

“We believe the approximate £35bn is already being spent. It is just being rolled straight into debt via the opaque accounting of the unfunded scheme.”

Cicero Consulting director and chief corporate counsel Iain Anderson says: “There is a strong chance that the Conservatives will take this thinking on board.”

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