As BT tells its staff to take a cut, how safe is pension?

Up to 80,000 BT employees face the loss of part of their pension in a move that may be widely followed, says Sam Brodbeck

Thousands of pensioners face the prospect of sharply reduced retirement incomes as major British companies attempt to alter the terms of ruinously expensive pension pledges. Telecoms giant BT has written to current and former workers informing them it is going to court to determine whether it can reduce the annual increases applying to pensions paid to its employees.

BT is far from the only business seeking to argue that previous promises made to staff are today unaffordable, and that they should be allowed to “water down” some of the benefits.

On Wednesday, data showed that as many as three million workers with “final salary” type pensions had a 50:50 chance of losing a fifth of their promised income – because companies could not afford to pay. The figures, from the Pensions and Lifetime Savings Association, are the latest in a series of reports highlighting a crisis in company pensions.

In the case of BT, the proposed move would mean many of the 80,000 current and former staff needing to find other sources of income to bridge the gap.

Figures produced by Prudential, the insurer, for Telegraph Money, suggest the average pensioner could lose well over £100,000 over a typical 25-year retirement under the sort of changes BT has outlined.

By law “final salary” or “defined benefit” pensions – which until the late Nineties were commonplace – must be increased annually to protect incomes from falling behind the cost of living. At the moment, the BT savers affected (members of the pension fund’s “C” plan) have their retirement income increased by the retail prices index (RPI). Where they can, the companies that pay into these types of pension funds have switched to using an alternative inflation measure, the consumer prices index (CPI).

In almost all years CPI is lower than RPI, often by around one percentage point, meaning pensioners in schemes using this index see their pensions rise more slowly. The move can save the “sponsoring” companies – in this case BT – a great deal of money.

The BT scheme’s other sections, “A” and “B”, are mainly for staff who joined the company before it was privatised in the Eighties. They have already been switched to CPI.

Although the scheme closed to new entrants in 2001, more than 300,000 existing members continue to build up their entitlements.

In the letter sent to members, and seen by Telegraph Money, BT revealed it had applied to take the matter to court to “seek a decision as to whether it would be possible to change from RPI to another index”.

It admits that the court’s decision “may affect the future increases applied to pensions in payment”, but nowhere does it explicitly warn that pensions are likely to be cut as a result.

“The way they have gone about this stinks,” said Charlotte Annandale, 60, who worked at BT for 20 years before retiring early to look after her mother, who suffered from dementia.

“We’ve been told we can write to the lawyers, but I doubt that will get us anywhere.

“I’ve spoken to a lot of fellow BT scheme members about this change and very few people understand what it means for their pension. I’m definitely going to be affected by this – and it will only get worse as the years go by.”

A spokesman for BT said the average pension in the scheme was worth £400,000. That equates to a pension paying roughly £20,000 a year.

Prudential modelled two scenarios: one assuming a pension starting at £20,000 and rising by RPI, and the