The chancellor has pledged to spend £1.5 billion on compensating Equitable Life policyholders, four times the amount that was previously recommended to the government by Sir John Chadwick.
George Osborne said in the Spending Review that it was time to "right the wrong" after the previous government had "dithered and delayed" for 10 years over making payments to customers that suffered losses when the insurer almost collapsed.
Compensation payments will start next year with an independent commission advising on the allocation of funding to policyholders.
However, Osborne made clear today that the government will "cover the cost of the total relative loss suffered by with-profits annuities, estimated at £620 million". Those policyholders will receive this in the form of regular payments.
The annuity holders were particularly vulnerable to Equitable Life closing to new business in 2000 and its subsequent almost collapse because they were unable to move their funds elsewhere and were already retired.
They are also generally the oldest policyholders to have suffered from the ongoing Equitable Life saga.
Osborne said he rejected Sir John Chadwick’s advice from earlier this year that calculated a £340 million loss resulting from regulatory failure.
Instead, he said he accepted the findings from the Parliamentary Ombudsman Ann Abraham, which were made more than two years ago.
"I don’t agree with Sir John Chadwick’s compensation level. I agree with the Ombudsman that the relative loss suffered is the difference between what policyholders actually received from their policies, and what they would have received elsewhere," he declared.
However, the Equitable Members Action Group, which represents 40,000 Equitable Life policyholders, calls the £1.5 billion compensation "inadequate and unfair".
Spokesman Paul Weir says: "The total pot is only about 25% of what we have actually lost, and the Treasury has pre-empted the work of the Independent Payments Commission, by unilaterally awarding the lion's share to just one group of policyholders - post 1992 with-profits annuitants."
Laith Khalaf, pensions analyst at Hargreaves Lansdown, says the announcement opens "the final chapter in this sorry saga".
He adds: "The [Equitable Life] action groups may talk about fighting for more [money] but in the context of tax rises and spending cuts they won’t get much sympathy.
"The with-profits annuitants who have been transferred to Prudential are first in line for compensation, the rest of the 1.5 million who are possibly in line for some compensation can hopefully now put this extremely harrowing experience behind them."
Dr Ros Altmann, director-general of Saga, says it is essential that the government pays out with "no more delays".
She blasts: "The fact that not a single penny of compensation has yet been paid is an absolute disgrace and it seems the earliest payments will be made is the middle of next year, which is over a year after this government took office promising to urgently sort out the scandal.
"Enough people have died waiting for their money and the sooner this dreadful scandal is settled, the better."
The chancellor said two thirds of the £1.5 billion pot would be funded by the cuts in the Spending Review.
Looking at the budget breakdown in the Spending Review, the government will spend £520 million in the next tax year on Equitable Life expenses, £315 million in 2012-13, £210 million in 2013-14 and £100 million in 2014-15.
There are around 1.5 million Equitable Life policyholders waiting for compensation.