By Lesley Curwen BBC Radio 4's Money Box

Andrew Smith, Secretary for Work and Pensions, announced plans for the Pensions Protection Fund

The government announced in June it has decided to guarantee final-salary pensions.

Its new scheme is modelled on an American system which protects workers whose companies go bust.

But there are serious doubts about the way that US system is working.

The UK's new Pensions Protection Fund is to be launched in 2005, when all British employers offering final-salary pensions must pay premiums to insure those benefits.

When a company fails, the PPF will take over the pension scheme, paying out most or all of promised pensions up to a capped level.

All these features are common to the US Pension Benefit Guaranty Corporation.

American employers pay in 19 dollars a year for each worker, plus top-up payments if the scheme is under-funded.

That is how the UK system will be paid for too.

Deficit burdens

But the PBGC has a big problem.

Its funding has dropped from a 9.7 billion dollar surplus in 2000, to a record deficit of 5.4 billion dollars.

This July, the US government watchdog, the General Accounting Office, labelled the PBGC as "high risk".

One reason is the huge fall in the value of pension investments because of lower share prices.

[The pension schemes] get more and more financially weak and they enter this death spiral Vince Snowbarger, Assistant Executive Director of the PBGC

The other is that many American pension schemes have been starved of contributions from employers.

Often companies contribute the bare legal minimum, or take contribution holidays.

And they are able to delay making the top-up payments they owe, by using creative accounting and technical loopholes.

Vince Snowbarger, Assistant Executive Director of the PBGC, says: "they get more and more financially weak and they enter this death spiral."

Once the firms go bust, they burden the insurance scheme with deficits.

Bankruptcy fears

So could the same thing happen here? The UK government has not made up its mind how the new PPF scheme will measure funding levels.

The UK's present Minimum Funding Requirements are stricter than the American version, but those are about to be dropped to allow each scheme the chance to set its own funding.

In the United States, retired workers who dependon the PBGC are getting nervous.

The PBGC will be in the same condition as us at Bethlehem Steel - bankruptcy Retired steel-worker Sam Batts

There is no suggestion of any immediate crisis at the PBGC.

But there is not enough money to meet liabilities stretching thirty years ahead. And things could get worse.

Retired steel-worker Sam Batts is worried the PBGC could go bankrupt.

He was a furnace-man at a Baltimore plant owned by steel giant Bethlehem Steel. "We thought we could weather any storm," says Sam.

But the company filed for bankruptcy in 2001.

Sam is now 55, and suffers from asbestosis. His pension scheme was rescued.

But he fears his monthly payments will come under threat if big airlines and car-makers go bust.

Sooner or later, he believes, "the PBGC will be in the same condition as us at Bethlehem Steel - bankruptcy."

Potential problems

Vince Snowbarger of the PBGC is more optimistic. "As we pay out," he says, "we will get premiums and assets coming in."

But the insurance scheme has estimated weak US firms are operating pension plans with as much as 35 billion dollars of un-funded benefits.

If they all became insolvent at once, Vince Snowbarger admits, "it would be a very serious problem".

The options would be to reduce pensions, increase employers' premiums, or ask for a government bail-out.

In theory the PBGC has no right to expect the taxpayer to step in.

Rescue plan?

David Walker says US pensioners are unlikely to lose out

When asked if the government would allow pensioners to lose out, Comptroller General of the US, David Walker, said: "From a political and practical standpoint, that's highly unlikely to happen."

So the state would rescue Sam Batts and others whose pensions are protected by the PBGC.

Here in the UK, the government is clear there would be no public money behind our PPF insurance scheme.

That has led some to question the viability of the UK system.

'Disappointed'

So is the basic plumbing of the US scheme flawed?

I would caution the UK to avoid the kind of outcome we now find ourselves in Peter Fisher, US Treasury Under-Secretary Peter Fisher

US Treasury Under-Secretary Peter Fisher concedes: "we are disappointed with it. It has not produced the levels of funding we would like to see."

Various reforms have been proposed, including higher premiums and making pension schemes reduce share investments.

Should the UK be copying the American model?

Vince Snowbarger of the PBGC told Money Box: "I'm not sure what alternatives there are.

"I think the question the UK needs to determine is whether government should be in the business of guaranteeing pension expectations."

There is a consensus that the UK must tread carefully to avoid making the same mistakes as the American pension insurance system.

Treasury Under-Secretary Peter Fisher warns: "I would caution the UK to avoid the kind of outcome we now find ourselves in."