140,000 workers who lost pensions to receive £2.9 billion government rescue package

The scheme, the biggest of its kind, will restore 90 per cent of the value of pensions to workers whose employers went bust.

The announcement was warmly welcomed by trade unions, which have been campaigning for five and a half years to persuade the Government to step in and restore the lost savings.

Work and Pensions Secretary Peter Hain said the money, which will mainly come from taxpayers, will deliver justice to workers "cruelly robbed" of their pensions.

Union leaders announced that they will go ahead with legal action against the Government as a result of today's move.

A number of workers who used to be employed by steel company ASW in Cardiff and Sheerness in Kent, who started the campaign after their firm went out of business, travelled to London today to meet Mr Hain before the announcement was made public.

One of them said: "This is a great early Christmas present."

Mr Hain said up to 140,000 people will be eligible for extended help under the Financial Assistance Scheme (FAS), which was set up by the Government to tackle the pensions crisis involving workers but was criticised by unions for not going far enough.

The unions Community and Unite launched legal action, taking the Government to the European Court of Justice after complaining that ministers published misleading information about the security of company pension schemes and were not doing enough to compensate workers.

Michael Leahy, general secretary of Community, said that unions had now achieved what they have been campaigning for and so will not pursue legal action.

"We are extremely pleased that, after five and a half years of campaigning, this issue has been brought to a successful conclusion.

"Peter Hain has always been extremely sensitive to this issue and his announcement today means that Christmas has come early for thousands of workers. We have now achieved what we set out to achieve."

Mr Hain said workers involved had done the right thing by saving for later life, only to see their pensions 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 am 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."

Mr Hain said the total commitment to workers caught up in the scandal was worth £12.5 billion, adding: "Although the Government has been criticised over this matter, these are huge amounts and it is right 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."