Tens of thousands of employees have seen their gold-plated final-salary company pension schemes sold off to insurance companies over the past year.

Last month Lonmin, the mining company, became the first FTSE 100 member to offload its final-salary liabilities, followed days later by Friends Provident, itself a pension company. And they won't be the last, with dozens more companies expected to follow suit to cut costs.

While companies insist that their employees' future pensions are not affected by the buyouts, the Government has expressed concern that, in some cases, there may not be “adequate capital in place to replace the certainty and security that the employer brings”. It has, therefore, rushed through an amendment to this summer's Pensions Bill to give greater protection to workers whose schemes are sold off. But will this provide a strong enough safety net?

Pension buyouts can be separated into two main categories: pensions bought by insurance companies regulated by the Financial Service Authority (FSA), such as Legal & General, and those bought by other companies not regulated by the FSA.

Workers in schemes acquired by an insurer should have nothing to worry about. In fact, the security of their pensions will increase, say experts. Clive Wellsteed, of Lane Clark & Peacock LLP, the actuarial consultant, says: “Insurance companies must hold much higher reserves than pension schemes, which is great news for the security of members' pensions. Trustees also do extensive work to ensure that the insurance companies they place business with are financially strong and well managed.”

However, the Government is concerned about the purchase of pension schemes by companies that are not insurers. One example of such a deal is the recent buyout of Telent, the rump of the collapsed telecoms group Marconi and its pension scheme, by Pension Corporation.

The Pensions Regulator was so concerned that it stepped in to appoint three independent trustees to the Telent pension scheme. It said that Pension Corporation had “acute and pervasive conflicts of interest”, since it was “managing the investment strategy of the pension scheme to generate a profit for itself”.

Put simply, the Government was worried that Pension Corporation would put Telent's pension scheme into risky investments, make its shareholders handsome profits and potentially leave the pension holders with nothing. Members would then have to fall back on the Pension Protection Fund, which compensates pensioners with 100 per cent of their pension if a scheme becomes insolvent.

Some of these fears are addressed by the amendment to the Pensions Bill. Insurance companies that are regulated by the FSA are required to back their investments with capital, but other companies are not. The amendment gives the regulator extra powers to force such companies to top up contributions if the benefits of pension scheme members are at risk.

Mike O'Brien, the Minister for Pensions Reform, says: “I am concerned that some emerging business models might not give the same protection for pension schemes as provided by a sponsoring employer or insurance capital. The most effective way to tackle this problem is to give the Pensions Regulator the power to require contributions to pension schemes when an employer's actions reduce the security of members' benefits.”

This month Pension Corporation established a new subsidary, Pension Insurance Corporation (PIC), which is regulated by the FSA. PIC has already completed a £450 million buyout of Delta, the metals company, and a £72 million buyout of the Swan Hill pension scheme. This is the final-salary fund of Swan Hill Group, which was bought by Raven Mount, the property company, in 2003.

Malcolm McClean, of the Pensions Advisory Service, believes that the Government has done the right thing in amending the Pensions Bill. “There is a serious risk that non-insurance companies that speculate with pension funds could walk away with the profits and leave pension holders high and dry. We cannot tolerate a situation where pension schemes are treated as a commodity to be bought and sold, and for others to profit at the expense of the members.”

Rachel Vahey, of Aegon, an insurance company involved in the buy-out market, says: “If your scheme has been bought out recently and you are concerned about how it is being run, contact your trustees immediately - they work on your behalf, after all. They should disclose how the scheme is funded and answer your questions. If you are still concerned, contact the Pensions Regulator immediately.”

The compensation rules for final-salary schemes

All final-salary pension schemes are eligible for compensation from the Pension Protection Fund (PPF), while all holders of insurance contracts are eligible for compensation from the Financial Services Compensation Scheme (FSCS).

After a full buyout by an insurance company, the member holds his or her policy with the insurer. If the insurer goes insolvent, the member is eligible for compensation from the FSCS. Members receive 100 per cent of the first £2,000 they have lost and 90 per cent of the remainder. There is no limit on the overall level of benefit.

After a partial buyout, the scheme continues to be sponsored by the employer. If the employer goes insolvent, the scheme is eligible for compensation from the PPF. The PPF guarantees 100 per cent of pensions in payment, and 90 per cent of those yet to be paid, up to a maximum of £27,771 a year.

If the insurance company went insolvent after a partial buyout, members would receive compensation from the FSCS and be able to seek support from the employer for any shortfall. There is, therefore, a double layer of protection against insolvency. After a full or partial buyout from a company that is not an insurer, the pension is still covered by the PPF.

However, there is no such guarantee for money-purchase schemes, which are now far more common than final-salary schemes. Here your retirement income merely depends on how well your contributions were invested.

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