The Policy Exchange has calculated that the total liability of unfunded public sector pension schemes could be £1.1 trillion.

Public Sector Pensions: The UK’s Second National Debt reveals that:

• Using the Government’s own calculations, the accumulated liability of unfunded public sector pensions schemes is estimated to be greater than the national debt. If proper financial methods are applied, the true figure is vast - £1.1 trillion, or equivalent to 78% of GDP
• The cost of servicing the debt each year to pay for these unfunded schemes in now £45.2 billion
Even on the Government’s own figures, in 2005-6, the interest paid on the unfunded liabilities
exceeded the interest paid on the National Debt for the first time.
• The Government has been using financially indefensible methods to work out its liabilities and how much workers need to contribute to the schemes.
• The Treasury has been subsidising pensions promises. The result is that someone who has been in the public sector for their whole career can now leave with a pension higher than the average they received when working. Neither the Treasury nor Parliament explicitly recognise they are paying this subsidy, which accounts in part for the rapid growth in liabilities. When added to the known subsidy, this means each of the five million employees in unfunded schemes receives a pension payment of £5,700 per year
• Younger workers and those on lower salaries are subsidising older workers and high fliers

Neil Record, author of the report, said: “The Government has allowed public sector pension liabilities to run out of control, with the Treasury spending contributions received for the next generation’s pensions to the pay the current generation of pensioners.

"The Government’s accounting for these pensions has been arbitrary and opaque, making it all but impossible to understand. Public sector workers deserve security in retirement. But the worry is that in denying the extraordinary generosity of the current schemes, the Government is creating an apartheid, when compared to those of the private sector. This could lead to high quality public pensions being completely abandoned - I want to avoid that.

"The Bank of England has already moved to make its schemes 100% funded. If the Government were to do the same, the changes would be costly – but the reality is this isn’t money that would otherwise have been saved, and we urgently need to bring transparency to the cost of these schemes.”

Liberal Democrat shadow work and pensions Secretary, Steve Webb, added: "We need an urgent independent review of public sector pensions. The system needs to be fair for both public sector workers and taxpayers, many of whom can't afford to save for their own retirement.

"The review must look at pay levels in the public and private sector, relative levels of job security, contribution rates and retirement ages. Top earners in the public sector can build huge pensions quickly and retire early and this must stop.

"The Government must be much more transparent about what is happening to public sector pensions and enter into an honest debate about what a fair and value-for-money system would look like."