Ministers cave in with £1bn extra to cover lost pensions

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The Government has finally caved in to pressure to properly compensate the 130,000 workers who lost their pensions when their companies went bust, agreeing to put up an extra 1bn of taxpayers' money to replace their savings.

The news means that all those who lost their pensions before May 2004 will now receive 90 per cent of what they were due, up to an annual limit of 26,000, but rising with inflation every year. An additional 11,000 people who also lost their pensions when their schemes were wound up in spite of their employer remaining solvent will also qualify for the payouts.

The Government's climb-down yesterday brings an end to more than four years of campaigning by pensioners, unions and politicians. Last year, a Parliamentary Ombudsman report found the Government culpable for the pension losses, recommending that it fully compensate all those involved. However, the Government ignored the report and the recommendations from a Public Affairs Select Committee inquiry which backed up the Ombudsman's findings.

The former government pensions adviser Dr Ros Altmann helped victims to take the case to the High Court, which also backed up some of the Ombudsman's findings, but ministers brushed this ruling aside as well.

Although the Government agreed to set up a Financial Assistance Scheme for the victims in 2004, this promised to refund only 80 per cent of the workers' lost pensions, up to a cap of 12,000 a year, with no inflation-proofing. Furthermore, the first payments were not made until the end of last year. Onlya small minority of those whoare due a payout from the FAS have so far received anything.

Yesterday's extension of the FAS also provides for workers to begin withdrawing their pension at their predetermined retirement date, subject to a minimum of 60 years of age. Previously, no payments were made from the FAS before 65.

A number of victims who joined the campaign for proper compensation died before they saw a penny of the pensions they had spent their working lives saving for.

Although the Government agreed yesterday to put up an extra 935m of taxpayers' money to fund the FAS on top of the 1.9bn it had already pledged most of the compensation will be funded from the residual assets left in the troubled pension schemes. A change in the regulations, to prevent the defunct funds from having to buy annuities, will ensure that the remaining assets can be used to maximum effect.

Peter Hain, the Secretary of State for Work and Pensions, said: "All those who lost their pensions had done the right thing by saving for later life. They played by the rules, only to see their pension savings disappear through no fault of their own. Some I have spoken to were within weeks of retirement, having paid their contributions for 30 years or more, when they were so cruelly deprived of their pension.

"So I'm delighted that we are able to announce a settlement that will provide justice for the 140,000 people affected when their schemes were wound up, including members of schemes where the company is still solvent. This builds on the substantial steps we've already taken to put right the unfairness they experienced. Although the Government has been criticised over this matter, these are huge amounts and it is right that we have been able to maximise the return from residual assets in the schemes which collapsed so that the public purse has had value for money too."

Dr Altmann said she was delighted at the result, although acknowledged that it still fell short of the Ombudsman's recommendation. "Finally we have won it is unbelievable ... these people really deserve it," she said.

"It is not 100 per cent, it is not what the Parliamentary Ombudsman recommended, but it is pretty much on a par with the Pensions Protection Fund. It will allow those affected to get their lives back."