Government plans to raise cap on Pension Protection Fund payments in 2017

The pension compensation limit for long-serving employees when firms go under will be increased from next year under plans set out by the Government.

A cap on the payments people are allowed to receive from the Pension Protection Fund (PPF) will be increased.

The PPF acts as a lifeboat for pension savers by paying compensation to members of defined benefit (DB) pension schemes - such as final salary pensions - when firms have failed.

The PPF provides compensation based on 90% of someone's accrued pension if they are below the scheme's normal pension age when the company becomes insolvent. PPF compensation is currently capped at £33,678.

From April 2017, the compensation limit is expected to be increased by 3% a year for every additional year of service beyond 20 years, subject to a new maximum of twice the standard cap.

PPF predecessor scheme the Financial Assistance Scheme will be brought into line with an equivalent cap from April 2018 under the plans.

An eight-week consultation on the draft regulations needed to ensure the long service cap in the PPF will operate as intended has been launched.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, said the current rules can effectively penalise long-serving employees by treating them the same as higher-earners with shorter service.

He said: "This will deliver more graduated benefits, making a distinction between long-serving middle-earning employees and those fortunate higher-earners who have hit the cap after only a few years' service."

Former pensions ministers Ros Altmann and Steve Webb have previously urged the Government to press ahead with implementing the changes.

Baroness Altmann previously said that for each week the changes are not in place, some pensioners are losing hundreds of pounds that they can never get back.