The supermarket's pension fund is facing a "funding deficit" when the next valuation is completed in March, the company admitted in a statement.

It said all 33,000 members of its final salary scheme, already closed to new business, would need to increase their contributions to 7% from the end of March 2004 or switch to an alternative career average scheme.

The supermarket chain is introducing this increasingly popular types of hybrid pension scheme, where benefits are based on a career average earnings adjusted with inflation.

This type of scheme is cheaper for it to run and, as an incentive to workers, needs a lower contribution rate from them.

Scheme comparison

Workers will pay 4.25% into the new scheme, the rate currently paid by final salary members.

What's a career average scheme? They remove the link to final salary. The risk of salary inflation, therefore, is effectively passed to members whilst the employer retains the investment and mortality risks. Benefits are calculated as a proportion of salary each year, and this is indexed in line with inflation. The total pension is then calculated as the sum of each year's revalued benefit Source: Mercer

The company has already taken a number of steps by closing its final salary scheme to new members and introducing a stakeholder plan.

The difference between the scheme would mean a member of staff who had been on the final salary scheme for six years and retired with an annual pay cheque of �12,000 would receive �1,200 in the existing final salary scheme, but �1,154.50 a year in the new career average plan.

The group also announced that death in service benefits would increase, but those who retire early due to ill health will receive less pension.

Staff now have six months to decide whether they want to opt for a career average pension or remain in the final salary scheme.

Some reports have claimed Sainsbury's pensions gap could be as high as �1bn.