In the life of a central banker, having to write an explanatory letter to the chancellor – as Mervyn King did this week – is about as tough as it gets, the equivalent of a naughty schoolboy having to explain why his homework is late.

But it is also a reminder that inflation is far from a slain beast. The consumer price index now stands at 3.1 per cent. And the more comprehensive measure – the retail price index – which also includes housing costs such as mortgage interest and council tax, stands at 4.8 per cent.

For savers and investors it is the RPI that matters, as this is more representative of living costs and it is this measure that drives so many inflation-linked financial products, from annuities and National Savings to index-linked gilts.

With RPI at its highest level since 1991, the impact of rising inflation cannot be underestimated. Even with modest inflation of 2 per cent annually, over 20 years, the purchasing power of a level pension is reduced in real terms by around a third.

Clearly, therefore, it makes sense to seek some protection from inflation. But with so many people wanting it – particularly the pension funds controlling hundreds of billions of pounds of assets – it is an expensive perk.

A 60-year-old man with a £100,000 pension pot can buy a level annuity giving him an annual income of £6,400 for the rest of his life. If he opts for an annuity which will rise in line with RPI, this falls to less than £4,000 a year.

This all only serves to emphasise how expensive pensions are becoming for the armies of new workers taking out money purchase schemes such as stakeholder pensions. A pot of £100,000 may sound like a lot of money but it’s not going to buy you a champagne lifestyle in retirement, particularly if you want to ensure your pension is safe from the ravages of inflation.

It also explains why so many employers running final salary schemes are looking to ever more creative ways to slim down benefits for their members and thereby reduce their mounting liabilities.

In some cases, the members of these schemes probably won’t even notice that their benefits are being cut. But make no mistake. Employers are selecting from a whole menu of changes to their pension schemes in moves that in some cases are having a significant negative impact on benefits.

Let’s take inflation protection first. The Pensions Act 1995 required pension schemes to ensure that retirement incomes on pension benefits accrued after April 1997 rose in line with RPI up to an annual cap of 5 per cent. However this has since been relaxed and now any pension built up from April 2005 is only subject to a lesser cap of 2.5 per cent. With RPI nudging close to 5 per cent, if your scheme only honours increases up to the 2.5 per cent cap, you will be losing out in real terms.

There is now talk in the industry of removing the cap altogether. Under one proposal being considered, members would be given the choice of giving up their inflation protection for a higher starting pension. Under this voluntary option, employers would not be saving any money, they would just be passing on the open-ended inflation risk to the member. But some pension schemes would like to see the cap removed altogether with no financial compensation offered to pension members.

Elsewhere, pension schemes are introducing other changes to reduce the costs of honouring their pension promises. This can mean that only a percentage of future pay rises – say the first 3 per cent – is taken into account for pensions purposes. Others are lengthening the periods over which final salary benefits are calculated from, say, the last three years to the last five years. As salaries tend to rise annually, this effectively cuts benefits. In more extreme examples, some companies are moving to career averages, trimming the positive impact of salary rises later in life.

These are just a flavour of some of the changes taking place. Given that final salary pensions are voluntary benefits offered by employers, companies have every right to explore all avenues to lighten the financial burden. And even with many of these changes, there is no doubt that the best final salary schemes are the gold standard of pensions.

But with growing numbers of companies exploring ways to water down their benefits, the days when employees could blindly assume that their final salary scheme was giving them the best retirement deal are disappearing fast.

rob.budden@ft.com