“We are glad Ofgem has listened to our arguments on two key important points,” said Prospect Deputy General Secretary Mike Clancy. “But we still think the regulator should have left the existing system in place.”

The regulator has accepted Prospect’s argument that companies only have limited control over the pension costs associated with those employees (just over half) whose pension terms and conditions are protected by legislation introduced when they were privatised in the early 1990s.

For the next five-year control period, starting in April next year, they will have to bear 20 per cent of the cost if they overbid on their projected pension costs, rather than Ofgem’s earlier proposed 50 per cent. But if companies overestimate the costs, they will be allowed to keep up to 50 per cent of any savings they make.

Clancy said: “This is a crude attempt to incentivise companies to reduce pension costs where they can. One effect could be that companies overbid in the first place, which begs the question of how much money will actually be saved. It certainly won’t protect consumers from higher costs. And we repeat our warning that if any company does use this new system to attack defined benefit schemes, our members will not tolerate it.”

Prospect has welcomed Ofgem’s decision to use reports from the Government Actuary’s Department (GAD) to trigger any future reviews of companies’ efficiency regarding pensions payments, rather than a mechanism covering all defined benefit schemes called the PPF7800 index. “During the current consultation the GAD reviewed the existing pension provision of DNO companies and found no problems with schemes,” said Clancy. “Ofgem’s decision represents a change and we welcome it.”