The controversial universal credit programme is likely to be scrapped by a future Labour government, the shadow chancellor, John McDonnell, told a fringe meeting at the party’s annual conference in Liverpool.

He said that a party review of the flagship government programme was expected to find that the system “not only needs reform but needs replacing”.

At present, Labour’s policy is to “pause and fix” universal credit, a system that merges six existing benefits into a single payment. McDonnell’s words appear to signify a big shift in policy.

McDonnell told a lunchtime meeting that the review was being led by the shadow work and pensions secretary, Margaret Greenwood, but current indications were that the system should be scrapped.

“Margaret is doing the review, which will obviously come forward with conclusions about UC itself. But all the messages we are getting at the moment is that this is a system which just does not work and therefore not only needs reform but needs replacing,” he said.

The rollout of universal credit has been heavily criticised by the National Audit Office (NAO), which has warned that people are being plunged into debt, rent arrears and reliance on food banks due to delays in payments.

At the fringe meeting, which was organised by the civil servants’ union PCS, the union’s general secretary, Mark Serwotka, praised McDonnell and Labour’s leader, Jeremy Corbyn, for getting rid of the policies of Gordon Brown and Tony Blair, which, he claimed, demonised benefit claimants. “Never again should a Labour government choose to continue the Tory narrative of the deserving and the undeserving poor,” he said.

Serwotka also criticised TV reality programmes for further demonising claimants. “[The shows] Benefits Street, and Can’t Pay? We’ll Take It Away – people being literally entertained by this,” he said.

In a speech to Labour’s annual conference on Monday, Greenwood set out proposals to ban punitive sanctions for people who turn up late to benefits appointments, in addition to plans to end the benefits freeze by raising rates in line with inflation.

She told delegates that Labour was “ambitious for our country and for all of our people – that is why today I am promising a complete change of direction”.

She added: “We will end the hostile environment that the Tories have created, by completely overhauling our social security system. We will rebuild it and restore dignity at its heart.”

Esther McVey, the work and pensions secretary, was recently criticised by the government’s spending watchdog, the NAO, for misrepresenting a critical report on the rollout of universal credit.