The Government's decision to cut VAT and then raise it again could add around £3bn to defined benefit pension liabilities, Watson Wyatt warns.
The consultancy believes DB pensioners in both the private and the public sector will gain but this will be at the expense of their former employers.
Watson Wyatt explained pension costs would rise because returning the standard rate of VAT to 17.5pc in 2010 would lead to higher inflation and therefore higher pension payments for retirees in subsequent years.
Watson Wyatt head of defined benefit consulting John Ball says: "Tinkering with VAT affects inflation and inflation affects how much money pension schemes have to pay out.
"The knock-on effect is bad news for companies with defined benefit pension schemes but good news for people who have retired with defined benefit pensions. The gains to individuals will be relatively small but the costs add up for schemes with thousands of pensioners. In the case of public sector pensions, it will be the taxpayer who foots the bill."
Each year, DB schemes increase payments to pensioners based on the rate of RPI (retail prices index) inflation in the previous September.
Many pension schemes give increases of inflation capped at 5pc for all benefits - though the statutory requirements are different according to when the benefits were accrued.
Pensions are not reduced when inflation turns negative, so falling prices increase pensions in real terms.Professional Pensions
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