The Financial Services Compensation Scheme (FSCS) provides an £85,000 safety net to protect customers when financial companies fail.

But the scheme is now calling on the regulator to raise its limit for pensions.

It comes as the cap on payouts has left savers and investors undercompensated by almost £1 billion over the last six years.

Almost half of this relates to pensions advice claims, according to the FSCS.

The total number of claims where the customer’s loss was over the relevant limit was almost 3,600 in the 2021/22 financial year with 1,379 of these relating to pensions, with a value of £137m.

In a report the FSCS said the £85,000 limit is appropriate for most products, but the cap should be reviewed and raised for pensions.

The FSCS noted it had seen one customer with a pension transfer value of £800,000 lose virtually all their money after poor investment advice. The cap on compensation meant they were still left “significantly out of pocket and with a large hole in both their pension pot and retirement plans”.

The Financial Ombudsman Service can tell a functioning business to pay up to £375,000, and the FSCS said it would like the gap to be reduced.

Tom Selby, head of retirement policy at AJ Bell, said: “Given the scale of uncompensated losses, the FSCS understandably wants to see the pensions compensation cap increased above £85,000.

“However, the FSCS faces a delicate balancing act as the funds used to pay compensation come directly from financial services firms via an annual levy.

“In 2022/23 that levy is expected to be £625 million, and any increase in the pensions compensation cap would inevitably increase the pressure on the overall levy.

“If the compensation limit for pensions were to be increased, this should be as part of a broader review of how the FSCS is funded.

“As things stand, good firms doing the right thing by their customers are forced to fork out for huge FSCS levy bills in order to compensate the wrongdoing of a few bad apples.”

Caroline Rainbird, chief executive of FSCS, said: “FSCS is keen to play a positive and proactive role in shaping the long-term future of the UK’s compensation regime, and we believe our submission to the FCA’s compensation framework review demonstrates our commitment to being a leading and thoughtful voice in this important debate.”