The Equitable Life Bill paves the way for the Government to make "fair and transparent" payments to policyholders who lost money due to the problems at the society.
It also give the Treasury statutory authority to "incur expenditure" to pay them redress.
The compensation will cover both existing and former policyholders of Equitable who suffered losses as a result of Government maladministration.
The Government had already signalled its intention to help the affected policyholders in its coalition agreement, when it said it would implement the Parliamentary Ombudsman's recommendations to make payments to people who suffered through the collapse of the mutual.
The Parliamentary Ombudsman called for policyholders to be paid redress in 2008 after finding 10 instances of maladministration by regulators and Whitehall officials in relation to Equitable in the period leading up to December 2001.
But the then-Labour government rejected many of her findings and said it would make ex-gratia payments to people who had been "disproportionately affected" by the problems at the society.