The government is planning to relax company pension rules by limiting inflation links for deferred pensions.

Changes will affect those workers who leave an employer but defer taking the pension until they retire. It will mean the cap on the annual growth of the pension pot will be cut from five per cent to 2.5 per cent.

The change has been welcomed by the pensions industry, saying it will reduce costs for firms running pension schemes, but has been criticised by the unions.

TUC general secretary Brendan Barber said: “We are very disappointed at the proposal that the cap on the revaluation of deferred pensions.

“This is particularly important for those with broken careers, typically women and carers.

“If we were to return to higher rates of inflation in the future this could quickly eat away at benefits built up early in a working life – something that seems to go against the government’s message that we should all start saving as early as possible.”

He added: “Someone somewhere has made a pretty cynical calculation that widespread ignorance of how pensions work will protect the government against what should be an angry backlash.”

However, minister for pensions reform Mike O’Brien said the changes would strike the balance between encouraging employer provision of pensions and protecting members’ benefits.

“These measures will reduce costs and will make it easier for schemes’ rules to take advantage of specific relaxations to legislation,” he said.

The National Association of Pension Funds (NAPF) has called the proposed changes as a “sensible middle course” to encourage employers to provide pensions and members’ rights.

“These proposals will help sustain the future of defined benefit pensions, which provide valuable income to millions of working people in retirement,” said NAPF chief executive Joanne Segars.