The cap on compensation paid by the Pension Protection Fund (PPF) will be increased for long-serving employees, the Government announced.
Long service is not currently taken into account when a person whose defined benefit pension scheme collapses and is then taken over by the PPF.
The Government is set to increase the maximum level for those receiving capped compensation by 3% for every year of service over 20 years.
Pensions minister Steve Webb said: "It cannot be right that someone who has been with a company for much of their working life – and relies heavily on that for their pension income –gets the same in compensation as someone with far shorter service and who could also have other pension income to fall back on.
"I want to ensure that those who are or could be affected will in future have long service recognised in the form of higher compensation."
The proposal means that someone who has contributed to a pension scheme for 40 years and accrued a pension of £50,000 would receive £45,000 instead of the current capped amount of £31,380.
The Department for Work and Pensions said that the revised compensation cap will not be backdated, but anyone covered by the change who already receives the capped compensation will get the increase once the legislation is in place.
The revised cap will also affect any scheme that does not enter the PPF, but only where it begins to wind up or enters the PPF assessment period after the revised cap is introduced.
Neil Carberry, CBI Director for Employment and Skills, said: "This will come as a bitter blow to firms struggling to drive economic growth and fund their own pension schemes.
"The fund is paid for by business, not the Government. At a cost of over £600m a year, it is already more than double the original plan, and the levy is likely to rise again this year. An even greater levy will hold back business investment and growth.
"Businesses support the PPF, and would have expected more engagement before this announcement was made."
Commenting earlier on in the week when there was speculation that the PPF cap may become linked to service, Broadstone's actuarial director John Broome Saunders said that the proposal may bean that the cap on benefits for shorter-service members could increase.
He added: "It could also dramatically change the behaviour of some trustees of schemes with struggling employers.
"We have seen several cases where trustees who are also long-serving senior employees, have diligently tried to prevent schemes falling into the PPF, to ensure that their personal benefits are not reduced as a result of the PPF cap. If a more generous cap is to apply to such members, then their reticence to facilitate entry into the PPF may evaporate."
First published 26.06.2013
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