Public sector pensions could lead to 'calamity'

Public sector final salary pension schemes are "unaffordable and unfair" and could lead to "fiscal calamity" if they are not reformed, a report has warned.

The pension promises made to public sector workers are like a "Madoff-style pyramid, now collapsing under the weight of insufficient contributions, rising longevity and demographic change", the Centre for Policy Studies said.

The think tank warned that unless the schemes were reformed, the problems would get worse as the number of people employed by the state fell, and it called for the pensions to become self-sufficient so they were sustainable.

The group said the rapidly growing liabilities faced by the unfunded schemes were alarming, while the Treasury is also having to make up an annual shortfall between the amount received each year in pension contributions and the amount that has to be paid out to members who have retired.

The report, written by former investment banker Michael Johnson, said the simplest way to solve the problem would be to raise employees' contributions, while pensions being paid could also be cut, although it acknowledged that this would be "very challenging" politically.

Former minister Lord Hutton is reviewing public sector pension schemes on behalf of the government.