A court ruling has dealt a bitter blow to gold-plated pension schemes, wiping out as much as 20% of pension income for millions of people.
Trustees of a group of pension schemes, including BT Group PLC (LSE:BT.A) and Marks and Spencer Group PLC, lost a High Court case on September 1 over a change in inflation calculations that will worsen their retirement prospects.
Downing Street's move to stop tracking the retail price index (RPI) and instead increase salary-linked pensions based on a less generous measure of inflation is at the centre of the legal challenge.
Experts termed it another "unnecessary blow" to pensioners facing rocketing prices.
In the UK, around 10.5mln people have private sector pensions, which are often linked to RPI.
The UK Statistics Authority has said the RPI is "flawed" and should be replaced from 2030 by CPIH, a variation of Consumer Prices Index that includes homeowner costs.
As the CPIH measure is generally one percentage point lower, those with RPI-linked pensions may now lose out on tens of thousands of pounds during retirement.
As a result of this ruling, around £100bn of pension fund money is at risk of being lost to the Treasury because it is invested in government bonds that are linked to RPI.
BT, M&S and Ford Motor Company (NYSE:F) pension scheme trustees launched a judicial review, arguing that the change was unlawful, but did not say if they would appeal.
The schemes represent nearly 450,000 members and £83bn of assets.
A spokesperson for the pension schemes said, "This decision will leave millions of pensioners in defined benefit schemes with RPI-linked benefits poorer through no fault of their own and facing substantial decreases in their year-on-year income. Women will be particularly impacted since they live longer and retire earlier."
According to the Office for National Statistics, RPI inflation currently stands at 12.3% and CPIH at 8.8%.
As a result of the ruling, pension expert Jos Vermeulen, of fund shop Insight Investment, said the gap highlights the magnitude of the loss pensioners will endure.
There was "significant concerns" about the move, he said, adding, "It was of no surprise that three UK defined benefit pension funds felt they had no choice but to challenge the government’s decision."
In some cases, retirees may be worse off by as much as 20%, and the average pensioner may lose between 10% and 15%.
The High Court estimated that the switch in inflation measures would reduce pensioners' lifetime incomes by between 4-9%, with women suffering greater reductions.
There had been discussion about moving the switch forward to 2025, but former Chancellor Rishi Sunak agreed that no changes will be made until 2030.