Denyer pleaded guilty to stabbing and strangling Elizabeth Stevens, 18, Debbie Fream, 22, and Natalie Russell, 17, over a seven-week period in the Melbourne bayside suburb of Frankston in 1993.
He was sentenced to life in jail with no parole, but that was reduced on appeal in 1994 to a non-parole period of 30 years.
The Adult Parole Board rejected Denyer's parole application in May but the families feared he would make more attempts, lobbying for legislation to keep him locked up indefinitely.
Opposition corrections spokesman Brad Battin welcomed the government's change of heart.
Corrections Minister Enver Erdogan announced the government's long-awaited parole reforms package would state Denyer cannot be released from prison unless he is incapacitated or terminally ill.
"What we have heard is that the parole period and the parole system was having a really traumatising effect for many of these families," he told reporters on Tuesday.
Similar legislation was used on Hoddle Street shooter Julian Knight and Russell Street bomber Craig Minogue but the government had previously been opposed to adopting the same approach.
A coalition-backed bill with similar language was put to an upper house vote in June but Labor, the Greens and Legalise Cannabis MPs teamed up to defeat it.
Opposition corrections spokesman Brad Battin welcomed the government's change of heart but said it could have spared the families months of pain and anguish.
"They've had enough," he said.
The backflip followed advice from the solicitor-general that any High Court challenge from Denyer was unlikely to be successful.
Attorney-General Jaclyn Symes met with the families of the victims on Monday and denied the government caused them pain by not supporting the Liberals' bill.
"We've done the right thing in taking the time to get the package right," she said.
"We will benefit more families and I think rushing ahead four months ago was not the right thing to do."
Under legislation to be introduced in parliament on Wednesday, murderers, child killers and serious sexual offenders could be classified as restricted prisoners by the parole board.
Crossbench MP David Limbrick said his goal was to ensure Paul Denyer could never harm another woman.
They would be unable to apply for release between five to 10 years after serving their non-parole period.
Prisoners serving a life sentence would also be banned from reapplying for parole after a rejected application.
The changes are set to capture 32 people in custody, including Jill Meagher's murderer Adrian Bayley and Bourke Street rampage killer James Gargasoulas.
Crossbench MP David Limbrick, who was in a relationship with Ms Russell at the time of her murder, was pleased with the wider reforms but said his ultimate goal was to ensure Denyer could never harm another woman.
"This has been a traumatic saga for all of the friends and families of victims over the last 30 years," he said.
Frankston MP Paul Edbrooke said the legislation would be relief to his scarred community.
"There's still people that check the rear of their cars before they start driving," he said.
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