THE government may have to pay more than £5 billion in compensation after a 15-month investigation by the parliamentary ombudsman into the plight of workers who have lost their pensions.

A report by Ann Abraham, delivered to the government last month, is understood to accuse ministers and officials of a catalogue of mistakes and of misleading the public and parliament.

A Whitehall source said the report found the government “guilty of maladministration”.

The Treasury and other departments are now in heated negotiations with Abraham over the size of the bill for compensation. It could be the biggest so far, exceeding the £4 billion paid out over BSE.

More than 85,000 people lost their pensions as more than 400 companies went bankrupt or closed their pension schemes. Most of the schemes involved foundered after the crash in share values in 2000.

In the past firms had to ensure that there was enough money in company pension funds. Labour changed the rules so that companies could could pay less money in but did not warn the public that savings were no longer secure.

When a scheme shuts, pensions are still paid to those who have already retired but those still working can be left with nothing, even if they have paid in thousands of pounds.

A Whitehall source who has read the ombudsman’s report said: “The evidence shows very clearly that the government should have warned people of the dangers but did not. In fact, ministers repeatedly assured people that their pensions were safe when, internally, they were being told the opposite.”

The scandal centres on the minimum funding requirement (MFR), a formula for calculating how much firms must invest in final salary funds to guarantee workers’ pensions. This legally binding formula was changed twice by Labour, once in 1998 and again in 2000, ending the guarantee of a pension if the fund closed.

The ombudsman has uncovered a report commissioned by ministers in May 2000 — seen by The Sunday Times — which states: “There is a large and worrying gap between the level of security which the MFR actually delivers and the public’s perception of what it will deliver . . . it is important that members (of pension schemes) are not misled into thinking that their benefits are fully secured.”

Other documents confirm that officials and ministers knew that pensions were not secure.

However, the ombudsman’s report highlights an answer given in March 2002 by Malcolm Wicks, then a minister in the Department for Work and Pensions (DWP), to a Commons question that: “Legislation is in place to ensure that the pension rights that individuals have already built up in schemes are protected.” This was misleading.

The report, due to be published next month, also highlights misleading leaflets issued by at least three government departments and agencies. One, produced by the DWP in 2002 and 2003, states in a section entitled “How do I know my money is safe?” that: “You are protected by a number of laws designed to make sure schemes are run properly.”

Ros Altmann, a pensions adviser who has campaigned for pension scheme victims, said yesterday: “What has happened to these people is a travesty and Labour would have campaigned vigorously for compensation when in opposition. Gordon Brown must find the money to compensate these people who have been misled by the government.”

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