Taxpayers and the pension schemes of Thames Water workers would both suffer if the UK’s largest water company was temporarily nationalised, the water regulator and Thames’ pension trustees have warned.

Ofwat has not disputed that placing Thames under government control in the event the debt-laden company collapsed could end up costing taxpayers billions of pounds.

Some 12,000 current and former employees could also see future pension entitlements reduced, according to documents seen by the BBC.

The future of Thames Water is in the balance as the Court of Appeal considers whether a £3bn emergency loan to the troubled utility giant can go ahead.

Thames and the majority of its lenders have backed a plan that would see the company, which has a £20bn debt pile, borrow a further £3bn to keep it afloat long enough to complete a restructure.

The supplier serves about a quarter of the UK’s population, mostly across London and parts of southern England, and employs 8,000 people. It is expected to run out of cash completely by mid-April.

The £3bn rescue loan was approved following a crucial High Court battle last month, but a smaller group of lenders worried they stood to lose the most and Liberal Democrat MP Charlie Maynard, who argued that piling on more debt was not in the public interest, launched an appeal.

The Court of Appeal has been hearing arguments over whether the loan should be granted, with a decision expected early next week.

Documents seen by the BBC revealed Ofwat rejected claims from Maynard that Thames adding to its debt pile would mean higher bills and also that a collapse into administration would result in a negligible cost to taxpayers.

In a letter to the court, the water regulator insisted that Thames would be barred from recovering any additional interest payments from customer bills.

It said that it had seen “no evidence to support” a figure put forward by Maynard that administration would cost the government as little as £66m.

The regulator did not comment on Thames’s estimate that it would cost taxpayers up to £4bn.

Environment Secretary Steve Reed has previously said government intervention in Thames Water would “cost billions and take years”.

Separately, the trustees for some 12,000 Thames Water pension scheme members have expressed concern that they “could be significantly and detrimentally impacted” should the company enter administration.

If Thames were to collapse, those members would likely be transferred to the lifeboat Pension Protection Fund, which provides lower future benefits than those promised by the original scheme.

Thames is hoping that the additional £3bn in borrowing will provide it with enough time to start addressing the many problems it has.

The company has faced heavy criticism over its performance in recent years following a series of sewage discharges and leaks.

Since the dire state of the company’s finances first emerged about 18 months ago, the government has been on standby to put Thames into special administration.

But regardless of what happens to the company in the future, water supplies and waste services to households will continue as normal.

The company’s first priority, if the loan is approved, would be to reduce its huge debt pile, by requiring lenders to accept a discount in what they are owed.

Second would be to appeal a decision by Ofwat that it can only raise bills by 35% above inflation over the next five years. Thames has argued it needs to increase by 53% over the period.

Its third move, which is connected to both of the above, would be to attract new investors to pump money into a business that has attracted public anger and regulatory fines.

While the government, the regulator and the pension trustees are keen to avoid a collapse, there are many who think that Thames Water needs to be put out of its misery – rather than lurching from one financial and operational crisis to another.

What Ofwat and the pension trustees point out is that is likely to come at a cost to both taxpayers and workers.