Army pensions may be run by Germans

War pensions and administrative preparations for war may soon be run by a German firm under a privatisation scheme being considered by the Ministry of Defence.

Two foreign companies, Siemens of Germany and EDS, which is American- owned, have been shortlisted by the MoD to run the newly created Armed Forces Personnel Administration Agency. A decision was to have been made by July under Tory plans for the agency.

The decision to shortlist a German company angered veterans' groups. Terry English, the controller of welfare for the Royal British Legion, said: "We understand why efforts are being made to reduce costs but this decision may cause considerable anguish amongst ex-servicemen who fought in the war. One would have hoped that they could have found a good British company to run the agency. Some of our old boys will regard it as terribly insensitive."

The new agency, which employs 1,000 civilians and 200 military staff, links together the pay, personnel and pensions provisions of the three services for the first time. According to a parliamentary answer slipped out in the House of Lords by Defence minister Earl Howe, it is also required "to support the personnel management function, in peace (including crisis), transition to war and war".

Under the Tory plans, the private company selected by the MoD would eventually take over the running of most of the services. It would be expected to develop a new computer system integrating the payrolls and pensions of the three services within the next three years.

Mark Oaten, the Liberal Democrat candidate in Winchester, was alerted to the sell-off when he canvassed two members of the agency's staff who work at Worthy Down near the town. He said: "They were very worried about the fact that war pensions and preparations for a conflict could be in the hands of a foreign company. This type of work, which involves national security, should be kept in the public sector."

The staff also fear that privatisation will result in redundancies at the three existing centres near Winchester, near Gloucester and at Gosport, and at the Army Personnel Centre in Glasgow which will be brought within the agency later.

Paddy Ashdown, the Liberal Democrat leader, is expected to draw attention to the sale today.