The Government was yesterday found guilty of misleading workers over the security of final salary pension schemes.
The findings by the Parliamentary Ombudsman Ann Abraham could lead to the taxpayer having to foot a £5 billion compensation bill for the 85,000 people who lost their occupational pension when their company went bankrupt.
But the Government rejected the majority of the Ombudsman's findings and said it would not be paying out any compensation beyond that already offered to people through the Financial Assistance Scheme.
However, that will be scant for employees of companies like United Engineering Forgings, of Bromsgrove, and Kalamazoo Computer Group, in Birmingham, which both went bust before the cut off point for the new legislation.
In her 254-page report Ms Abraham said official information about the security of final salary schemes provided by the Department of Work and Pensions and other Government bodies was "inaccurate, incomplete, unclear and inconsistent".
She said as a result of the Government's maladministration and failure to warn people about the risk to their pensions, a large number of people had lost the opportunity to make informed choices about their retirement saving.
She added that the Government had also twice weakened the Minimum Funding Requirement which supports occupational pension schemes, reducing the burden on employers, but at the same time decreasing the protection offered to members.
Ms Abrahams recommended the Government should replace in full the money and any associated benefits people had lost as a result of their employer going bankrupt with an under-funded scheme.
She said it should also offer them a consolatory payment in recognition of the "outrage, distress, inconvenience and uncertainty" they had endured.
She said her investigation, which started in November 2004, had uncovered evidence of real suffering among people who had lost their pension after their company went under.
She also said the Government should apologise to scheme trustees for the distress its maladministration had caused, and should extend compensation to other work-ers who had lost their pension in similar circumstances but who were not covered by her inquiry, which looked at schemes wound up between April 1997 and March 2004.
Finally she called for there to be a review carried out with the pensions industry to look at ways of speeding up the time taken to wind up final salary schemes.
But the Government rejected all of her recommendations, apart from her suggestion that a review should be carried out into the time it took schemes to wind up.
The report is non-binding and the Ombudsman cannot force the Government to take up her recommendations.
However, the Public Administration Select Committee, which covers the Parliamentary Ombudsman, can hold an inquiry into why the Government rejected them.
The committee's chairman Dr Tony Wright said: "We will be asking the Government to explain itself and review its decision not to accept the Ombudsman's recommendations."
The Government said it had considered the report but it did not accept that maladministration had occurred or that taxpayers should cover the costs of the pension promises made by employers.
Minister for Pensions Reform Stephen Timms said: "We have great sympathy for all those who have lost any part of their pensions saving.
"We have studied the report carefully but we reject its findings of maladministration. It simply does not make the case."