A "dads' army" of former soldiers would run community service programmes for offenders under a radical cost-cutting privatisation plan that has shocked unions.

Napo, which represents probation staff, said it was alarmed to learn the plan had been discussed at a meeting between the prisons minister, Crispin Blunt, probation representatives and two officials from the National Offender Management Service this month.

A Ministry of Justice spokeswoman denied it was committed to the plan. "We have no plans to recruit ex-military personnel to supervise offenders on Community Payback work," she said.

Blunt, whose ministerial position has been undermined by a series of gaffes that led to accusations that he was "soft on criminals", is understood to be keen on the idea. Supervising an offender in the community costs the taxpayer £11 an hour, but MoJ officials believe that by bringing in private companies it could reduce this to nearer £6 an hour.

Under the plan, private companies bidding for contracts to run the unpaid work programmes would be asked to recruit former non-commissioned officers – servicemen who have worked their way up through the ranks – to help run them.

The use of former forces personnel would "toughen up" the image of community service and convince critics it is not a soft option compared to prison. Napo said ministers would find the proposal attractive because former officers who are already drawing armed forces pensions would be likely to work for less money than trained probation staff.

Any move to bring in private companies is bound to play badly with public-sector workers who fear for their jobs ahead of impending budget cuts. It would also mark a major overhaul in the running of community service programmes, which were established in 1976 as an alternative to custody.

"Community service has been successfully run by the Probation Service for the last 34 years," said Harry Fletcher, assistant general secretary of Napo. "There is a need for a review, but privatising to save costs, using a dads' army made up of former soldiers on minimum wages, is not the answer. It would be exploitative."

Three private companies have been approved by the Ministry of Justice to tender for contracts to run community service programmes.

In a separate move, Napo has been told up to 10 existing jails will be market tested for each of the next five years with a view to contracting them out to the private sector. Ministers believe the move would save £100m in the first year.