Pension Protection Fund payments are to take account of an individuals length of service, paying an extra 3% for every year of service over 20 years, pensions minister Steve Webb has announced yesterday.
The PPF steps in where a pension scheme collapses paying out a capped level of compensation to those eligible. However, long service had not previously counted.
According to the Department for Work & Pensions, someone who had contributed to a pension scheme for 40 years and accrued a pension pot of £50,000, would receive £45,000 - rather than the current capped amount of £31,380.
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 their long service recognised in the form of higher compensation.'
But the Confederation of British Industry condemned the move as a burden on business.
CBI director for employment and skills Neil Carberry, said: 'This will come as a bitter blow to firms struggling to drive economic growth and fund their own pension schemes.'
He said the PPF was paid for by businesses and cost more than £600m a year. The levy paid into it was already expected to rise and 'an even greater levy will hold back business investment and growth'.
He added: 'Businesses support the PPF, and would have expected more engagement before this announcement was made.'
Robert Hawkes, head of PPF Services at Barnett Waddingham said the changes affected only a small number of people but the principle made sense.
'Longer-serving members will have had less time to accrue pension benefits elsewhere,' said Hawkes.
'There is also the feeling that those who earn benefits above the cap in a short period of service are likely to be at the executive end of the membership scale and in some cases may have been involved in the decision making for the scheme.'