The government has announced a £2.9bn rescue package for workers who lost their pensions when their employers went bankrupt.

Under the scheme announced by work and pensions secretary Peter Hain, the 141,000 workers will receive 90% of the value of their funds, giving them equality with employees who are covered by the Pension Protection Fund.

The settlement will benefit the 130,000 people who are already registered for the Financial Assistance Scheme (FAS) and an additional 11,000 staff who belong to a failed scheme provided by companies that are still trading.

The government had initially pledged to match any savings arriving from a review into how to make the best use of failed company pension scheme assets.

"We believe this represents a just and final settlement," said Hain. "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," he added.

Payments will be backdated to 14 May 2004, when the FAS was created. The total cost to the government will be £12.5bn.