BT dealt a blow to more than 300,000 members of its defined benefit pension scheme today after the telecoms giant announced major reforms to the way it calculates yearly rises in payments.
BT said annual inflationary increases in pension payouts would instead rise in line with the Consumer Prices Index (CPI) measure of inflation rather than the Retail Prices Index (RPI), following the Government's decision in the Budget to switch to CPI for a raft of public service pensions and benefits.
The change will shave a mammoth £2.9 billion off BT's gaping pension funding deficit, cutting its shortfall to £5.2 billion.
But it will mean potentially lower inflationary pension increases for members of its defined benefit and final salary schemes, as the CPI measure is generally lower than RPI.
From next April, this will hit 175,000 BT pensioners who have schemes dating back before 1986 and 91,000 of those with deferred pensions, as the rise is based on September's inflation figures when CPI was far lower than RPI.
CPI stood at 3.1% in September, while RPI reached 4.6%.
It will not impact the level of pension being built up by the 53,000 members still contributing to the scheme, although they will see annual rises increase in line with CPI rather than RPI once they retire.
The Government announced in June that it would use CPI to calculate increases in public service pensions and benefits - as well as the State pension, although that will not take effect until 2012.
The news has caused concern for public sector workers and State pensioners, while many companies in the private sector are also expected to follow suit by changing to CPI.
BT said the Government's move would see it switch automatically to CPI, as many of its rules reflect those of public sector schemes.
But it is seeking legal advice on whether it will need to make the change for the 12,000 pensioners currently drawing payments who joined the scheme after 1986.
It wrote to scheme members today outlining the impact of the changes.
BT closed its defined benefit scheme to new accruals in 2001, although it still has 331,000 members.
While bad news for BT pensioners, it was taken well by investors - shares rose 2% as BT confirmed the decision would wipe billions off its pension liability.
It will continue to pay £525 million a year into the pension as agreed in an earlier recovery plan, but said today's announcement could reduce the number of years to make up the shortfall.
The move will further alleviate some of BT's pension woes following the ruling late last month that the Government must guarantee the bulk of BT's pension liabilities in the event of BT going bust - even for employees who joined the company after its privatisation in 1984.
BT shares have been weighed down in recent years as the pension funding issues have hung over it, but the stock has leapt 10% in the past month alone thanks to the pension announcements.