The NAO said the speed at which the Treasury set up the scheme had hindered its efficiency and effectiveness.

It said data for making payments was old and incomplete and many practical issues had to be overcome including having to trace over one million people and confirm their identity.

The report said: “As there is still a large number of payments to be made, the scheme runs the risk of failing to meet payment targets and overrunning on costs.”

It added the Treasury had been given a “difficult challenge” in terms of setting up the complex scheme in a short space of time but not enough preparation work was done before launch.

The government’s target of making the first payment by June 2011 was met, but further payments to former policyholders have been severely delayed.

It was initially planned that £500m should have been paid out by the end of 2011-12. This target was missed. By March 2013, the scheme had made 407,000 payments, totalling £577m. The scheme has made only 35% of its total payments and spent 72% of its original administration budget.

Amyas Morse, head of the National Audit Office, said: “Previous NAO work on government compensation schemes has shown that they can be difficult to set up and administer. In the case of Equitable Life, the government failed to take on board the lessons.

“Not enough preparation was done in the short lead up to the scheme and problems emerging from poor data caused delays. The Treasury and National Savings and Investments will find it hard to make the remaining payments by the deadline given the scale of the challenge.

“They now need to produce a realistic plan indicating how and by when they will make the remaining, more difficult payments.”
The scheme’s objective of paying all traced former policyholders by the end of March 2014 is at risk.

The Treasury plans to close the scheme in April 2014 having made all the payments to Investors and groups, and the first two annual payments to those who held an annuity. However, a large number of payments remains to be made in the final year of the scheme.