Pensioners have lost out on around £80 billion because the rate of inflation was underestimated for the past 12 years, experts have warned.
Millions of pensioners missed out on hundreds of pounds a year because their retirement benefits had not increased to reflect the full rise in inflation.
The Bank of England admitted in its monthly inflation report, published this week, that the Consumer Price Index, to which many pensions are pegged, was 0.3 points a year higher than figures had previously stated between 1997 and 2009.
It meant that prices ended that period almost 4 per cent higher than recorded in the official figures released by the Office of National Statistics.
Experts said this meant that pensioners on the average pension of £16,500 would have seen their payments cut about £650 a year.
Many final salary pension schemes link pension payments to inflation. If the rate rises so does the annual payout to pensioners.
But the Department for Work and Pensions dismissed suggestions that benefit rates to pensions would be changed. It said this would be done only “if the official inflation figures were recalculated and republished”.
The CPI error came from a misreporting of clothing and shoe prices which were affected by heavy sales discounting.
The ONS “picked up seasonal falls in prices during the winter and summer sales, but did not fully capture the recovery in prices after sales had finished”, the Bank said.
The ONS changed the way it recorded the prices of clothes and shoes in January last year. But according to the report, the miscalculation was “likely to have a larger impact on the retail price index inflation than on CPI inflation”.
John Broome Saunders, from BDO Investment Management, estimated the cost to pensioners could be as high as £80bn.
“Had the inflation calculation been done correctly, many final salary scheme members would now find themselves entitled to a pension around 4 per cent higher than their actual entitlement,” he said.
“And this doesn't just affect pensioners – deferred scheme members have also been denied a similar level of increase."
Mike Smedley, a pensions partner at KPMG, the global accounting firm, said: "While these sound like small amounts, they add up over the life of a pensioner.
“This just highlights that the small-print lottery of company pension scheme rules will have an even greater impact than we previously thought."
Richard McIndoe, head of pensions at Strathclyde Pension Fund, one of the largest pension funds in the country, described the disclosures as “messy” and “unfortunate".
“Pensioners will feel aggrieved when they see this, and they think they should have received four per cent more,” he said.
A DWP spokeswoman denied that the changes to the calculation affected benefit rates or pensions.
“Inflation figures are determined by the ONS who regularly do work to improve their methods of calculation,” she said.
“Any changes in methodology do not mean that previous inflation rates were incorrect."
An ONS spokesman said the inflation measurement “improvements” were part of a programme to ensure figures were kept up-to-date.
“(The) ONS agrees with the Bank of England that the improved collection practices for clothing better reflects current consumer behaviour and have improved the measurement of clothing prices,” he said.
“Implementation of such improvements do not, of course, mean that there were measurement errors in the past.”
He declined to comment further. The BoE said responsibility for inflation calculations remained with the ONS.