UK - Pensionable pay for public sector workers should be capped at £75,000 a year, the Pensions Policy Institute (PPI) has argued in its latest paper.

Research conducted by the PPI also shows that the value of pensions paid out to civil servants has fallen by almost a quarter since reforms by the former Labour and current coalition government got underway.

Introducing a cap on pensionable pay would be in line with proposals made by the Conservative party prior to May's election.

Other reform suggestions include a shift to a hybrid system or funded defined contribution systems with 5% paid by employees and a further 10% paid by employers.

Yet another suggestion includes shifting defined benefit schemes from a final salary to a career average system, as well as adjustments to the accrual rate.

Nicki Cleal, director at the PPI, said: "Introducing a career average scheme offering similar levels of benefits to the one introduced to new entrants to the civil service, but with higher levels of member contributions, would reduce the adequacy of public sector pensions for some workers, but could also reduce the costs to the government of providing the public sector pensions from 1.2% of GDP today to 0.9% of GDP by 2050."

However, Cleal did warn that a shift toward a funded system would substantially increase costs for the government in the short term, explaining that the UK would have to continue to pay current pensioners while investing in the additional costs of the new funded schemes.

Proposals for a notional defined contribution scheme, mirroring those that exist in Sweden and with total contributions of 15%, were not recommended by the PPI. The organisation warned that such an arrangement would be unlikely to provide an adequate pension provision.

Cleal added: "Under this option, government spending on public sector pensions is projected to fall from 1.2% of GDP today to 0.7% of GDP by 2050. However, beyond 2050, some of these savings would be offset by increased government expenditure on the state second pension."

While changes made by successive governments have seen the cost of providing public sector pensions fall, they have also eroded the value, with the average pension of a worker now worth 18% of final salary, compared with 24% prior to initial reforms conducted by the Labour government.

If the current pension system were left unreformed, the cost of civil service pensions for the government would fall to 1% of GDP by 2050, down by 0.2 percentage points over the current cost.

However, former Work and Pensions secretary Lord Hutton, who earlier this year unveiled the preliminary results of his review of the public sector retirement system, is expected to publish his findings next year.

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