Ms Collins said the replacement bill ensured victims could still claim on the compensation while recognising the legitimate claims of prisoners whose human rights were breached.
"There was a concern that [the previous] bill may have gone too far and caused unintended injustices by preventing prisoners ever receiving compensation as a remedy for breaches of their rights."
Her decision disappointed Sensible Sentencing Trust spokesman Garth McVicar, who said it should be even easier for victims to claim against compensation and all the surplus should go into the general Victims' Fund.
"So I'm disappointed Judith has gone that way. I suppose she got cold feet. We support abiding by human rights legislation, but we don't believe prisoners should have any financial rewards for breaches of those."
Kim Workman, the spokesman for Rethinking Crime and Punishment, said it was the right decision to allow prisoners to keep some of the compensation. However, even the current regime went too far against their rights.
"It's a human rights issue that when people are victimised, regardless of whether they are prisoners or not, they should be entitled to pursue compensation," Mr Workman said.
Labour MP Charles Chauvel agreed with the decision not to go ahead with Mr Power's bill but believed there were problems with the regime Ms Collins had settled for. He said there was no provision for those payments to the victims to be taken into account in the prisoner's sentence in any way - something that should be considered.
He also questioned why the Government did not include the ability for victims to use the claims process to claim against other "windfalls" prisoners received, such as Lotto winnings or money left in a will.
Ms Collins said it was considered too difficult to monitor and take such payments before the money was spent. Victims could instead take a civil action for damages in the courts in such cases.
Her new bill effectively makes permanent a law change made by Phil Goff as Justice Minister in 2005 after several controversial payouts of compensation to prisoners - including five who were ill-treated under the old Behaviour Management Regime at Auckland Prison.
That law was intended to be temporary until its impact was assessed. It restricted compensation to exceptional cases.
Payments to prisoners:
25 claims by victims have been finalised in the 40 compensation payments to prisoners since 2005.
$247,250 Total compensation for those 25.
$46,949 Awards to victims for claims.
$43,793 Reparation payments.
$27,075 Other payments, such as fines.
$47 Legal aid costs.
$133,070 Final amount for prisoners.
