Millions of workers and pensioners face much lower rises in their future pensions after BT followed the Government's recent change to raise public-sector pensions by the lowest cost-of-living measure.
BT has reached a deal with its pension scheme trustee to base future increases for 266,000 former workers on the consumer prices index rather than the retail prices index.
The deal will dramatically cut the company's pensions black hole and, according to City analysts, could cut its liabilities by as much as £3 billion.
Other major companies are almost certain to follow BT's lead.
The Communication Workers Union reacted furiously to the news. Andy Kerr, deputy general-secretary, said: "BT might have got a boost in its share price but the result will be a lifelong cut in benefits for our retired members. This is an attack on the rights of responsible and hard-working BT staff. CPI linking will mean smaller pension increases for many hard-pressed pensioners and will lead to the pension falling below the real cost of living."
CPI is traditionally some 0.9% lower than RPI because it does not include mortgage and other housing costs. The Government argues that it is a better measure of inflation. Pension minister Steve Webb said: "The CPI provides a more appropriate reflection of pension recipients' inflation experience."
Accountancy firm KPMG has predicted as much as 80% of all private sector pension schemes could switch to using CPI cutting their combined deficits by £45 billion. Two years ago BT's pension deficit stood at £9 billion but has shrunk as investment performance has improved. Today's decision will bring the deficit to about £4.6 billion.
It will also mean that BT's recent agreement with the Pension Regulator to eradicate the deficit by making annual payments of just over £500 million over the next 17 years could take much less time to achieve.
Trade unionist Kerr said: "CWU agreed in 2008 to change benefit structures in order to keep the scheme sustainable — now our members are being hit again. We fear that workers in other ex-public sector companies will also see their pensions reduced."
BT's deal was welcomed in the City where its shares rose 4.3p to 162p. BoA Merrill Lynch raised its price target for the shares from 170p to 195p and analysts said that the deal with the trustee was worth as much as 27p a share.
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JPMorgan Cazenove said: "Today's news confirms our long-held but contentious view that BT's pension scheme is a much-reduced issue facing the group. We continue to see scope for reduced pension contributions in the foreseeable future."
