The British government is to set up an insurance fund to protect the pension benefits of staff in final-salary schemes if their firm goes bust.

The fund will be paid for out of compulsory levies on final salary schemes, Mr Andrew Smith, secretary of state for work and pensions, told parliament.

"We should not allow that, just because a firm goes out of business, a person who had worked for the firm finds his pension is worth next to nothing," said Mr Smith.

In Ireland, the Pensions Board confirmed that protection for pension scheme members was being examined. "The possibility of a compensation scheme is being discussed in the context of deliberations on the long-term funding of schemes," said Ms Mary Hutch, the board's information officer.

An expert group on long-term funding was established earlier this year and will publish a consultation document later this year.

At the moment, there is little protection for people who are members of pension schemes if the firm goes bankrupt.

The compensation scheme run by the Office of the Pensions Ombudsman, Mr Paul Kenny, will give financial redress to people who have lost out as a result of fraud or maladministration of a scheme but not if a scheme is wound up due to insolvency.

The only protection available is for contributions paid by employees but not remitted by the employer to the pension fund. These may be claimed under the Protection of Employees (Employer Solvency) Act.

Pension schemes in Ireland are required to meet a strict minimum funding standard, which states that firms must be able to fund the pensions of current and future beneficiaries in the event that the pension scheme is wound up. But many firms are failing to meet this target due to three years of falling markets.

Mr Kenny said Irish pension scheme members could also be in a vulnerable situation as the minimum funding standard did not take inflation into account when calculating the value of contributions made before 1991. He said there was "a lot of pain out there" as staff were being asked to make extra contributions to pension schemes to fund their retirement.

The UK fund, announced in response to a proposal in last year's pensions Green Paper, will charge a flat-rate levy plus a risk-adjusted levy to ensure well-run schemes do not have to cross-subsidise their less well-funded peers.

Analysts have welcomed the insurance scheme, but fear it won't work unless backed by support from the taxpayer. - (Additional reporting Reuters)