Peter Hain, the Work and Pensions Secretary, was last night fighting the Chancellor over plans to help workers whose pension schemes went bust.

Mr Hain wants to announce before Christmas a rescue package for 125,000 members of final salary pension funds that have collapsed or are unable to meet their obligations.

But Alistair Darling, the Chancellor, has baulked at the £600 million cost, triggering the first serious Cabinet clash over policy since Gordon Brown became Prime Minister.

The row follows a review of the pension fundholders’ plight by Andrew Young, the deputy government actuary. Publication has been put on hold because of the dispute.

His final report is said to identify savings of £350 million in administering the residual schemes. It also suggests that the practice of buying annuities be scrapped and that the schemes’ assets, worth £1.7 billion, be pooled to pay pensions over 60 years.

The report puts the cost of more generous pension payments at between £900 million and £950 million. The Department for Work and Pensions has pledged to match administrative savings and has committed itself to topping up the £350 million sum to £700 million. This leaves a gap of between £200 million and £250 million, which Mr Hain is said to argue will be recouped from higher tax receipts from pensioners and lower benefit payments.

The Treasury issued a terse statement, saying: “The recommendations need careful consideration because of their public spending implications.”

The DWP said that it had yet to receive Mr Young’s final report and could not comment on its findings but admitted that ministers had seen drafts. Mr Hain plans to announce his plans when the report is published.

Most of the 125,000 pension-hold-ers whose funds collapsed before an industry-funded protection scheme began are still of working age. About 10,000 have passed retirement age.

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