The true cost of pensions for all current public sector workers has been estimated at £1.2 trillion — equivalent to 85 per cent of Britain’s GDP and worth £20,000 for every man, woman and child in Britain.

According to the British-North American Committee , made up of academics and business leaders who publish a paper today, the Treasury is greatly understating the cost of providing gold-plated retirement schemes for public sector workers such as nurses, teachers, the police and Armed Forces.

The committee calculates that public sector pension costs, as a percentage of economic output, are three times higher than in Canada or the US.

Neil Record, a former Bank of England economist and pensions expert who helped to draft the report , warned that generations of future taxpayers would have to foot the bill. “Neither politicians, the Treasury, nor employees know what public pensions cost — or are worth — each year [or] what the total future taxpayers’ pension liability is,” he said.

He urged the Government to be more open about its calculations. “We are hiding behind actuarial assumptions that are designed to push costs out into the future. What we need here is more transparency,” Mr Record said.

Vince Cable, the Liberal Democrat Treasury spokesman, said yesterday that public sector pensions were “in danger of running out of control”. He said that changing the system was “the big test of political courage”, adding: “The system has to be reformed and there are various options, including shifting to an average salary basis and raising employee contributions, which must be pursued.”

He added: “Behind the fat-cat culture in the public sector is a wish to enjoy the rewards available in the private sector without the risks. But the truth is that many of those senior civil servants, parliamentarians, local government bosses and others who feel underpaid on their generous packages would sink without trace if they had to manage a business through the recession.”

About 6.4 million British workers, or about 25 per cent of the workforce, are members of public sector pension schemes. The five biggest schemes cover the NHS, teachers, Civil Service, police and the Armed Forces, with a further scheme for local government workers.

Unlike in the private sector, most public sector pension schemes offer a pension based on an employee’s salary at retirement. The five biggest schemes, though, are unfunded — meaning that there is no separately managed pot of cash used to build up sufficient capital to pay pensions when workers retire. The value of their liabilities is calculated using discounted government bonds, or gilt yields, indexed to inflation.

The Government set the rate at 3.5 per cent in 2001, when interest rates where higher and better returns were assured. Interest rates have since fallen to 0.5 per cent, sending the returns from investing in government bonds plummeting.

The committee was formed in 1969 and consists of business leaders and academics in Britain, Canada and the United States. Its findings were endorsed by other pensions experts. John Ralfe, an independent pensions consultant, said: “The Treasury remains in painful denial — either it does not understand the economics of public sector pensions, or it does understand but chooses to ignore the implications.”

The Treasury admits to an estimated public sector pensions liability of £886 billion but has defended its calculations. Sources close to the Treasury, which declined to comment, have previously said: “Public services pensions are affordable, both now and in the future.”

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