A negative Retail Price Index (RPI) will hit pensioners hard, effectively wiping an average £900 off a £12,800 per annum pension between 2008 and 2010, warns Hewitt Associates.

The global human resources consulting and outsourcing company said data from the Office of National Statistics, which shows an RPI for September 2009 of -1.4 per cent per annum, is cause for concern as this figure will be used by the majority of UK pension schemes for the calculation of their next pension increase early next year. Hewitt said with a reduction in benefits not a viable option, UK schemes are likely to maintain payments at their current levels.

However, the statistics also show that pensioners have faced 'real' inflation over the past two years of 5.4 per cent per annum, with council tax and other costs taken into account. On these figures, a typical single pension currently drawing a pension of £12,800 per annum will have seen a rise in costs over the last two years of £1,420, with income rising only by £525.

"Around half of the UK's single pensioners are living on less than £12,800 a year," explained Lynda Whitney, pension consultant at Hewitt Associates. "For those that rely on their private pension as a key contributor to their income, no pension increase will be a huge blow. While maintaining levels of private pension as RPI decreases sounds beneficial, the average pensioner's outgoings, for example council tax, face a higher rate of inflation than many of the items allowed for in the RPI. This means the actual inflation faced by them has been 2.2 per cent per annum, in the last year and 8.7 per cent per annum in the year before that."

Hewitt acknowledged that, although trustees and company sponsors are the ones who determine the increase in benefits, in many cases they are powerless to help as they are held back by deficits. Hewitt Associates' Pension Risk Tracker showed that at 16 October 2009, FTSE 100 company pension schemes were almost £78bn in deficit. This has increased by a huge £48bn since 1 January 2009.

"While pensioners are facing a hole in their finances, companies are also struggling to manage their liabilities and are desperately seeking means of plugging the gap. For the majority of sponsors, increasing benefits to take account of 'real' pensioner inflation is simply not an option."

"This situation once again casts the spotlight on the retirement problem in the UK. There is a difficult trade-off between paying more into your pension, working longer or living on less."

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