An estimated 17-20% of policyholders, or up to around 200,000 people, will never be tracked down, despite tracing attempts such as advertising and using credit reference agencies, the National Audit Office (NAO) said.
Up to one fifth of victims of the Equitable Life scandal will never be compensated because of failed attempts to trace them, a spending watchdog has warned.
For those who can be found, the Government's scheme is in danger of falling off track, having only made 35% of its total payments but already spent 72% of its £57 million administration budget, the NAO said.
Its report said that the target of paying everyone who can be traced by the end of March 2014 is "at risk" given the scale of the problems it has uncovered.
The watchdog is recommending that a new plan with a "more realistic timetable and budget" should be drawn up to provide the 664,000 payments at a value of £370 million that still need to be made. Two years into the scheme, 407,000 payments totalling more than £577 million have already been handed out.
Paul Weir, spokesman for campaigners the Equitable Members' Action group (Emag) said: "It is shocking that up to 200,000 victims may never get their money."
He added: "I am still hearing from people who are traceable, they have called the scheme and they haven't had a cheque."
Pointing out that many people who are waiting are approaching the end of their lives, he said: "The individual stories are very sad, even if the bigger issue is partly being dealt with. It's a mess."
The report said much of the £57 million admin budget has been swallowed up by up front costs such as putting IT systems in place. The Treasury is forecasting a £1.5 million overspend.
Margaret Hodge, chairwoman of the Commons Public Accounts Committee, accused the Treasury of being "naively optimistic" about the overspend and urged immediate action to stop costs "spiralling out of control".