The government has announced it will establish a £400 million fund to bail out 60,000 workers who have lost their pensions.

The 20-year programme will be funded primarily by government, although companies could be asked to contribute.

The policy will be implemented through amendments to the Pensions Bill, which is currently continuing its passage through parliament.

Ministers had until 3.00pm today to meet the demands from backbenchers who had threatened to rebel unless help was forthcoming.

Pressure for a U-turn has been mounting as growing numbers of Labour backbenchers and MPs from other parties called for compensation to be paid.

Backbenchers demanded help for employees of companies such as Allied Steel & Wire, who lost their savings when their firm went under. 

Pensions minister Andrew Smith said the government's initial plan would safeguard future pension holders, but admitted that retrospective action was necessary.

"The protection the fund gives is cover for the future, and cannot help those who have already lost out," he said.

"The severe losses that some individuals have already suffered in insolvent pension wind-ups has caused considerable hardship.

"The government will therefore make available £400 million of public money to be paid in instalments over 20 years with the
possibility of further contributions from industry, to provide assistance in such cases."

Ministers say the operation of the scheme will be worked out in consultation with stakeholders.

Announcing his plan Smith conceded that the government had no option but to act to help the 60,000 workers whose pensions disappeared when their firms went bankrupt.

"I've met many of those affected and am convinced that taking action is the right thing to do - it will also be a huge boost to
wider confidence in pensions," he said.

The announcement, which followed intense lobbying, was welcomed by trade unions.

TUC general secretary Brendan Barber said it was "an important victory" for workers.

"The task now is to make sure that each individual who has lost out gets a fair deal from the funds announced today," he said.

"Yet this is not the only pensions issue. The retreat from good salary-related pensions continues, fewer people have any access to a pension at work and the state pension is not keeping up with earnings."

The opposition had also called for the government to act.

Shadow chancellor Oliver Letwin said the government should use unclaimed assets in financial institutions to compensate the pensioners who have lost out.

The deal has been thrashed out during recent meetings between Smith, Tony Blair and chancellor Gordon Brown.