There are fears that the compensation scheme will respond too slowly to requests for assistance as the volume of cases of pensions mis-selling that are referred to it increases. Moreover, the maximum payout of pounds 48,000 has remained unchanged since the ICS was set up as long ago as 1988.
The mis-selling scandal has involved up to 2 million people who claim they have been mis-sold a pension. Total compensation and costs could top pounds 11bn.
The problem began in 1988, when the Tory government encouraged employees to opt out of their occupational pension schemes and buy private pension plans instead.
The first stage of the pensions mis-selling review - giving priority to those at or near to retirement - conducted by the Financial Services Authority (FSA), is nearing an end. The cost of this may reach pounds 4bn. Now it has started stage two, during which it will seek compensation for an estimated 1.8 million younger people, who were mis-sold a pension by independent financial advisers (IFAs).
The IFA Association, in evidence to the Treasury select committee on Thursday, said over 1,000 firms out of 3,500 could go bust. According to the FSA, IFAs could be responsible for reviewing 42 per cent of the total cases in stage two, costing up to pounds 2.5bn.
Bill Day, pensions officer at the GMB, said: "It is absolutely scandalous. It seems quite unsatisfactory that thousands more victims will be woefully compensated."
Malcolm Bruce, the Treasury spokesman for the Liberal Democrats, said: "The Government may have to intervene to ensure that the costs of compensation are covered by the industry."
Jim Cousins, a Labour member of the Treasury select committee, said: "The ICS needs to be reviewed for accountability and the statutory basis on which it operates." His colleague, David Kidney MP, said that the law should be changed to prevent professional indemnity insurance policies becoming null and void when a firm collapses.
Philip Riley, a solicitor with Ringrose Wharton in Bristol, represents several hundred pensions victims and said the ICS was in grave danger of failing these people. "The ICS has to look at its cap again; it is too low."
A spokeswoman for the FSA said the cap was generous when compared with the minimum recommended by the EU - pounds 13,300 - for investment compensation schemes in Europe. She said the FSA had issued a consultation paper in December, although it is unclear what Howard Davies, the head of the FSA, may do at present. The issue of compensation may be included in the Financial Services Bill this autumn.
Douglas Ovenden became a victim of pension mis-selling in 1988, when he opted out of his occupational pension scheme at the Devonport Royal Naval Dockyard in Plymouth, where he worked as a fitter. Mr Ovenden, 63, was wrongly advised to buy a personal pension. As a result his total losses to the value of his pension top pounds 73,000. The IFA who advised him has gone bust.
Mr Ovenden has three complaints. It took the ICS two years to offer compensation. "I was becoming very uncomfortable as the procedure went into the second year," he said. "And I am very aggrieved that the maximum payment the ICS can make is pounds 48,000."
The final straw for him is that he has to place the money into the personal pension he bought from his IFA, a Guardian policy. "I was told it was one of the top- performing pensions, but it's nothing like that," he said. "I don't want to put more money into a scheme that I don't have any faith in," he said.
Because Mr Ovenden opted out, his pension is worth pounds 9,000 a year, as opposed to pounds 14,000 if he had stayed in his occupational scheme. "With compensation, I'll be lucky to get pounds 11,000 a year," he said.Reuse content