Department for Work and Pensions considers privatisation as part of search for savings as budget shrinks by a third

The government is considering saving money by privatising the delivery of the state pension, according to Whitehall documents seen by the Guardian.

In an effort to make up billions more in austerity savings, the Department for Work and Pensions (DWP) has initiated a review of how it issues 4.5m pension statements each year and the administration of £100bn in public money to millions of pensioners in the UK and worldwide.

The review, entitled DWP Efficiency Review, runs to more than 80 pages and is marked "restricted". It also considers how to make cost savings in the way the department handles 750,000 phone calls and the distribution of £98bn in benefits and tax credits.Whitehall's biggest department is facing an "unprecedented reform challenge", says the document, which was distributed to senior civil servants in January.

By 2016, work and pensions secretary Iain Duncan Smith will have his operational budget slashed by 34% to £6.3bn from £9bn in 2009-10. Almost £2bn savings will need to be made in the next two financial years.

The document says ministers and civil servants need to "consider some more strategic shifts" such as looking at how the state pension and other benefits for over-65s are managed in order to meet demands by the chancellor, George Osborne, to cut their overheads. "This includes a review of the pension service's current delivery model and alternative delivery models," the document says.

It adds: "Opportunities to go further [with savings] are limited … [as] much of the 'low hanging fruit' has already gone. This is largely a result of the department pursuing all possible avenues for efficiencies. To deliver anything greater, the department needs to look more fundamentally at how it delivers its business, and consider some more strategic shifts."

Currently, the government runs 10 pension centres, including in Dundee, Newcastle, Swansea and Blackpool. The service employs 7,000 staff who help to administer £80bn in state pensions, £7.7bn in pension credits, £2.8bn in other pensioner benefits to people living in the UK and a further 1.2m to pensioners around the globe.

The review will examine if the "Tell us Once" bereavement service – which helps people report deaths and the termination of social security payments – could be run more efficiently if it was outsourced.

The chair of the Commons work and pensions committee, Labour's Dame Anne Begg, said she would not want to see the service tendered out to private companies and said 93% of pensioners were satisfied or very satisfied with the current model. "If you're saving money, it's coming from somewhere. And if you end up with a poorer service as a result then it's not good value for the taxpayer."

The pensions expert, Ros Altmann, said she was concerned by the idea that firms such as Capita, Serco or G4S could be brought in to administer £100bn in public money to millions of pensioners. "We're dealing with a vulnerable group and a massive number of people, so I would be seriously concerned about outsourcing a service like this, which is working well, with a view that it might make some short-term savings," Altmann said.

Altmann said an outside company could feasibly save money in two main ways – by reducing the pay and conditions of staff or by reducing the quality of the service. "In the long run, you could end up paying a lot more because either the service becomes a monopoly and the charges can go up or customer satisfaction and engagement goes wrong." She also had concerns about the bereavement service being run by a for-profit company. "To imagine that the private provider will be able to engage sensitively at low cost with people is rather difficult."

The right-leaning thinktank the Institute of Economic Affairs said it welcomed an overhaul in how the state pension was delivered and how it was funded.

"The government should look towards a radical shift in the provision of the state pension," an IEA spokeswoman said, adding that 15 years of huge increases in government provision for old age had "crowded out personal savings and incentivised early retirement".

"As life expectancy increases, the current system is unsustainable for both our children and grandchildren," she said.

The DWP said all government departments were undertaking efficiency reviews and there were currently no plans to outsource the pensions service.