Ministers backed down yesterday and gave another £900 million towards a rescue package for workers who lost their pensions when their companies failed.

The move by Peter Hain, the Work and Pensions Secretary, brought to £2.9 billion the total allocated by the Government to the scheme.

The climbdown, after a five-year battle, was hailed by campaigners as a victory, while the pensions industry said it marked the beginning of steps to rebuild confidence in occupational pensions.

Mr Hain announced that about 129,000 people whose final salary schemes failed would have enhanced benefits equal to 90 per cent of those they had been due, in line with a more generous industry-funded protection plan introduced for schemes that failed after 2005.

Ros Altmann, a pensions consultant and former Downing Street adviser who led the pensioners’ campaign, said: “Finally we have won – it is unbelievable. I am delighted, these people really deserve it.”

Another 11,000 people whose schemes were wound up by solvent employers are to receive a similar deal. Pensions paid under the arrangement will be capped at £26,000 a year, but increased annually in line with inflation and enhanced with options to take a tax-free lump sum and early payments for ill health.

Mr Hain gave a further £935 million for pensions enhancement, in addition to £2 billion announced by Gordon Brown in his final Budget as Chancellor in March, which made provision for workers to receive 80 per cent of their pensions.

These sums have been used to supplement £1.7 billion in residual assets held by the collapsed pension schemes.

The Government will take over these assets and pay the workers’ pensions directly, rather than requiring them to buy annuities.

This change was recommended in a report by Andrew Young, the directing actuary, who said the Government could save £300 million by taking over the funds’ investments and paying pensions directly.

The Government had previously undertaken to match any such savings.

His report also justified extending the payments to the 11,000 workers whose schemes were wound up by their solvent companies, saying directors in such cases had met their legal, but not their moral duties to their employees.

Ann Abraham, the Parliamentary Ombudsman, who last year called for a better deal for pensioners affected by the shutdown of their schemes, said the new measures were “broadly equivalent” to the protection scheme introduced from 2005.

However, Ministers were heavily criticised for taking five years to solve the problem.

Michael Leahy, general secretary of Community, the trade union, said the dispute had caused “unnecessary suffering and anguish and undermined public confidence in the UK pension system”.

The climbdown has come too late for some workers who lost their pension.

Marlene Cheshire, 63, was left struggling when her husband, Dave, died two years ago. Mr Cheshire worked for Dexion, a shelving company, for 31 years, but was made redundant in 2003 when the company went bankrupt. The couple were expecting a pension of about £200 a week, but received nothing.

Mrs Cheshire said: “I just burst into tears this morning [when I heard the news]. It’s been a very emotional day. I just wish Dave was here to share it. It’s not fair. I haven’t really had any retirement, I’ve been worried all the time, but there’s been a lot of support.

“The Government should have paid up earlier – maybe it might have helped Dave.”

Mrs Cheshire added: “For two years Dave campaigned, right up until a couple of months before his death. Even after he had radiotherapy, he still went and made speeches.”

Mr Hain said the announcement would bring the controversy to an end, calling it “a just and final settlement” and defended the Government’s role in the saga.

He said: “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.”

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