Thirty-Third Report - Underpayments of the State Pension

The Department’s complacency about the level of underpayments inherent in its approach to administering State Pension has led it to fail pensioners. The Department’s highly manual systems and complex State Pension rules has led to calculation errors and the underpayment … Read more The Department’s complacency about the level of underpayments inherent in its approach to administering State Pension has led it to fail pensioners. The Department’s highly manual systems and complex State Pension rules has led to calculation errors and the underpayment of thousands of pensioners. The Department, however, argued that low annual error rates on State Pension led it to focus assurance attention elsewhere, despite the detrimental impact on those underpaid. In addition, its quality assurance arrangements were inadequate and missed opportunities to detect, correct or prevent these errors. The Department hopes that, over time, it will become better at identifying small-scale errors that may mask more systemic issues. However, errors continue to be made even when re-assessing pensions awards as part of the correction exercise, leaving thousands of pensioners still not receiving what they are due. And examples such as the absence of regular reporting on State Pension enquiries make us concerned that senior management is not focused on designing a data strategy that detects errors in a more systematic way. 6 Underpayments of the State Pension Recommendation: The Department should start treating underpayments on State Pension as seriously as overpayments and set out to the Committee in its Treasury Minute response to this report what it is going to do both to prevent future errors and to strengthen its detection of systemic issues that lead to errors. Show less

The Department has not given people who are worried they have been underpaid enough information to find out what they should do, with the risk that many may still miss out on money they should receive. The Department’s communications strategy … Read more The Department has not given people who are worried they have been underpaid enough information to find out what they should do, with the risk that many may still miss out on money they should receive. The Department’s communications strategy is to only contact those who it finds have been underpaid under the State Pension regulations. Other groups of pensioners can receive arrears if they make a claim for additional entitlements to the Department, but the Department has provided very little information on which pensioners should do so. The Department maintains it cannot publish guidance for those who may have been underpaid, such as an online assessment of whether it is worth a pensioner contacting the Department about their pension, because it believes it cannot accurately cover all possible underpayment scenarios. Furthermore, the Department’s priority so far has been to focus on living pensioners rather than the deceased, even though some of their next of kin may be financially vulnerable. The Department does not have a plan to trace the estates of the deceased where no up-to-date records of spouses or next of kin are held. Recommendation: The Department should improve the clarity and availability of information on State Pension underpayments, and what people who are concerned that they have been underpaid should do. This should include information for groups the Department finds hard to reach such as the next of kin of deceased customers. Show less

Correcting the State Pension underpayments comes at a great cost to the taxpayer and requires experienced specialist staff that are in short supply. The correction exercise requires specialist staff and training and is expected to cost the Department £23.4 million, … Read more Correcting the State Pension underpayments comes at a great cost to the taxpayer and requires experienced specialist staff that are in short supply. The correction exercise requires specialist staff and training and is expected to cost the Department £23.4 million, with over 500 staff recruited, by the time the exercise completes in late Show less

The Department has not been sufficiently transparent to Parliament about the State Pension underpayments. Until recently, the Department has been reluctant to provide details of the volume or value of State Pension underpayments or the backlog in processing new State … Read more The Department has not been sufficiently transparent to Parliament about the State Pension underpayments. Until recently, the Department has been reluctant to provide details of the volume or value of State Pension underpayments or the backlog in processing new State Pension applications to the general public or Parliament. We note that the Department’s routine position is that it does not have the information even when some details are available or may be obtained without excessive cost. Despite a campaign by the former pensions minister, Sir Steve Webb and ThisisMoney.co.uk, from January 2020, the Department did not consider underpayments to be a significant issue until August 2020, meaning that it missed opportunities to identify and resolve the problem sooner. Recommendation: The Department should provide periodic updates to this Committee and the Parliament on the progress of the State Pension LEAP exercise and the speed of processing the backlog in the new State Pension. Show less

In paying pensioners, a lump sum of their arrears, the Department may not be fully restoring them to the position that they would be in had the Department paid them correctly in the first place. The payment of a lump … Read more In paying pensioners, a lump sum of their arrears, the Department may not be fully restoring them to the position that they would be in had the Department paid them correctly in the first place. The payment of a lump sum of arrears may affect the pensioner’s current or future entitlement to other benefits such as Pension Credit, housing benefit or social care provided by local authorities. The Department has demonstrated little interest in accounting for financial consequences of receiving a lump sum in its pensions reassessment and considers it to be the pensioner’s responsibility to advise the relevant authority should their circumstances and eligibility for benefits change. The Department added special payments of interest on top of arrears payments to those who contacted the Department about underpayments before January 2021 but chose to stop paying interest once the formal correction exercise began. The Department argued that it took this decision, jointly with ministers, for consistency with previous correction exercises and to comply with the principles of Managing Public Money. However, we do not think there is a convincing justification for treating those in scope of the exercise differently to those contacting the Department prior to it. With underpayments going as far back as 1985, the Department is unlikely to be restoring the pensioners to a position as if the issue never occurred, as would be expected according to the principles of Managing Public Money. Recommendation: The Department should establish the full extent of the impact on pensioners of receiving a lump sum of arrears of benefit, particularly for larger sums of arrears. It should seek assurance from local authorities that people are not treated prejudicially compared to how they would have been treated had they received the money over their proper period of entitlement. It should, as part of its Treasury Minute, set out how its payment of arrears without interest or further compensation is c Show less

Given the nature of the underpayments identified there must be a risk that similar, unidentified errors exist elsewhere in the State Pension caseload. For example, the NAO report states that “the Department did not find any significant evidence that it … Read more Given the nature of the underpayments identified there must be a risk that similar, unidentified errors exist elsewhere in the State Pension caseload. For example, the NAO report states that “the Department did not find any significant evidence that it had failed to properly process cases where a pensioner had notified it of their divorce”. However, Sir Steve Webb has told us he believes the scope of the 8 Underpayments of the State Pension correction exercise is too narrow. He believes that the exercise should be extended to included divorced women as he has identified several cases of underpayments to date where similar manual processing errors have occurred. Recommendation: The Department should write to the Committee to explain how it has assessed the risk of systemic underpayments to divorced women. It should also explain how it will review other detected underpayments to assess whether there is a systemic cause and take steps to extend the correction exercise as required. The Department should provide this Committee with a detailed description of the lessons learnt from this episode, including how it responds to concerns and queries from the public. Underpayments of the State Pension 9 1 Administration of State Pension Show less

On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department for Work & Pensions on the issue of underpayments in State Pension1

In addition, the customer information contained in the legacy system is difficult to obtain, taking several weeks to scan, and demographic data—such as income distribution or ethnic background—are not available.15 The Department told us that, while it was not 7 … Read more In addition, the customer information contained in the legacy system is difficult to obtain, taking several weeks to scan, and demographic data—such as income distribution or ethnic background—are not available.15 The Department told us that, while it was not 7 Q 30 8 C&AG’s Report, para 2.3 9 Qq 39, 47, C&AG’s Report, paras 10, 2.3 10 Qq 49, 52 11 C&AG’s Report, para 11 12 Q 31 13 Qq 33, 39 14 Q 39 15 Q 123; C&AG’s Report, paras 1.11, 3.9 Underpayments of the State Pension 11 sure of the impact on other types of demographic groups, it hopes that ethnic minorities should not be disproportionately affected ‘because of the way the system works in practice’. The Department said that 90% of the underpayment cases it was seeing were women, because of the types of state pension claim that were affected.16 Following our evidence session, the Department wrote to us explaining that it had amended its complaints process and introduced a new case management tool which allows more detailed information to be recorded about complaints.17 Quality assurance arrangements Show less

We challenged the Department on the adequacy of its quality assurance mechanisms.18 Despite the complexity of State Pension entitlements and the increased risk posed by manual processes of calculating an award, the Department’s own internal analysis found that existing quality … Read more We challenged the Department on the adequacy of its quality assurance mechanisms.18 Despite the complexity of State Pension entitlements and the increased risk posed by manual processes of calculating an award, the Department’s own internal analysis found that existing quality checks failed to identify the systematic underpayment of thousands of pensioners.19 There are three levels of quality assurance in State Pension. The quality of a caseworker’s work is assessed by team leaders (Tier 1) and by a central team (Tier 2). The rate of official error is assessed as part of estimating fraud and error across all benefits (Tier 3). However, as the NAO found, “since 2009, Tier 1 and Tier 2 processes focussed on checking changes to case details, such as a change of address or the death of a spouse, rather than the overall accuracy of the payments; and the small sample sizes of Tier 2 and Tier 3 relative to the basic State Pension caseload made it difficult to identify the errors”. In addition, conversations with caseworkers as part of the NAO investigation showed they feel that the Department has too few staff trained on State Pension processes to manage the caseload and perform the expected quality assurance procedures.20It is a fundamental principle of financial control and assurance that more attention should be focussed on those areas where there is intrinsically a higher risk of failure due to human error. The Department failed to apply this principle here even though it was aware of the system’s very high vulnerability to human error. Show less

The Department told us it changed its quality assurance framework over the LEAP exercise and business-as-usual State Pension processing.21 Following our evidence session the Department explained that, as part of its quality strategy review it reviewed its training products, amended … Read more The Department told us it changed its quality assurance framework over the LEAP exercise and business-as-usual State Pension processing.21 Following our evidence session the Department explained that, as part of its quality strategy review it reviewed its training products, amended the instructions used by front-line staff to ensure they are clearer and put in place a checking regime. It added that it is using the findings of checks to identify individual training needs and improve processes and instructions.22 Show less

When we asked the Department what positive assurance it obtained that the system was working and that it was paying people on time and the right amount, it set out the three quality assurance tiers and that said that its … Read more When we asked the Department what positive assurance it obtained that the system was working and that it was paying people on time and the right amount, it set out the three quality assurance tiers and that said that its focus was on areas with higher error rates. The Department added that the Department responded to the issue significantly more quickly than previous correction exercises as a result of governance improvements. The Department said that, over time, it hoped to become better at identifying small-scale 16 Q 123 17 Q 3, Letter from Permanent Secretary of the Department for Work & Pensions to the Chair of the Committee of Public Accounts, dated 15 November 2021. 18 Qq 30–33, 35–39, 84–89 19 C&AG’s Report; para 11 20 C&AG’s Report; paras 2.10, 2.11 21 Q 40 22 Q 2; Letter from Permanent Secretary of the Department for Work & Pensions to the Chair of the Committee of Public Accounts, dated 15 November 2021. 12 Underpayments of the State Pension errors that may mask more systemic issues and to use more innovative analytical methods coupled with human quality assessment to improve customer experience.23 For instance, in its follow-up letter to us after the evidence session the Department said that it deployed automation of some processes to improve the processing of letters sent out to customers.24 However, the management information is still lacking in areas such as reporting on State Pension enquiries and complaints and the Department acknowledged that it ‘will not eliminate all official error anywhere across the Department’ despite the exercise it is going through’.25 23 Qq 35, 41 24 Q 2; Letter from Permanent Secretary of the Department for Work & Pensions to the Chair of the Committee of Public Accounts, dated 15 November 2021. 25 Qq 100, 113–117 Underpayments of the State Pension 13 2 State Pension correction exercise Show less

A Legal Entitlements and Administrative Practices (LEAP) exercise is a systematic review of cases at risk of being underpaid to help the Department ensure it has met its legal responsibilities. The Department for Work & Pensions (the Department) uses LEAP … Read more A Legal Entitlements and Administrative Practices (LEAP) exercise is a systematic review of cases at risk of being underpaid to help the Department ensure it has met its legal responsibilities. The Department for Work & Pensions (the Department) uses LEAP exercises to make key decisions in situations where a mistake has been made that affects a large volume of cases. The exercise weighs the individual impact on each claimant against the overall impact on the Department and tries to establish a proportionate response. The LEAP guidelines do not have any legal standing, but adherence to it can be used in future litigation to show that the Department has taken a rational approach to the decision.26 Show less

The Department began a LEAP exercise for State Pension underpayments in January 2021, which was originally expected to take more than six years to complete. Following a ministerial decision in March 2021 to recruit additional staff, the Department revised the … Read more The Department began a LEAP exercise for State Pension underpayments in January 2021, which was originally expected to take more than six years to complete. Following a ministerial decision in March 2021 to recruit additional staff, the Department revised the completion date to the end of 2023.27 Cost to taxpayer Show less

The Department currently has just over 200 people conducting the LEAP exercise. The State Pension correction exercise requires specialist staff and training and is expected to cost the Department £23.4 million, with over 500 staff employed, by the time the … Read more The Department currently has just over 200 people conducting the LEAP exercise. The State Pension correction exercise requires specialist staff and training and is expected to cost the Department £23.4 million, with over 500 staff employed, by the time the exercise completes. The Department redeployed its more experienced caseworkers from its Retirement Services division to the LEAP exercise and backfilled their posts from elsewhere in the Department or through new joiners. This placed additional strain on its normal State Pension operations, which already have backlogs as a result of COVID-19 and the prioritisation of new Universal Credit claims during the early part of the pandemic.28 The Department acknowledged that it moved staff ‘possibly too quickly’ and committed to clear the backlog of new State Pension claims by the end of October 2021. It told us that it has seen an increased number of applications for new State Pension in recent months, likely because those who wanted to defer their pension were now claiming it sooner and because of age equalisation effects.29 However, over 3,000 cases remained outstanding as at 4 November 2021 where the Department asked for more information to be provided by claimants.30 Accuracy of the LEAP exercise Show less

We asked the Department about the findings of the NAO financial audit of the Department’s 2020–21 accounts, which identified nearly 200 of 1,500 cases where the LEAP reviewers had incorrectly assessed arrears on married women’s entitlement.31 The NAO concluded that, … Read more We asked the Department about the findings of the NAO financial audit of the Department’s 2020–21 accounts, which identified nearly 200 of 1,500 cases where the LEAP reviewers had incorrectly assessed arrears on married women’s entitlement.31 The NAO concluded that, given the complexity of the rules governing State Pension entitlement, it is likely that at least some errors will continue to be made in the correction exercise, particularly with more complex cases. The NAO also found that it is possible that some pensioners who have contacted the Department to find out if they have been 26 C&AG’s Report, Figure 8 27 C&AG’s Report, para 4.5 28 Qq 59, 65–67; C&AG’s Report, para 4.5 29 Qq 62, 67 30 Q 2; Correspondence with the minister for Pensions and Financial Inclusion – delays to payments for state pensions 31 Q 79; C&AG’s Report, para 4.7 14 Underpayments of the State Pension underpaid were wrongly reassured that their payments are correct.32 The Department told us that since the errors were discovered it has strengthened its quality assurance over the LEAP exercise.33 It wrote to us following the evidence session setting out that the financial accuracy rate in the correction exercise improved over time from 87.4% in Q1 of 2020–21 to 96% as of October 2021, although it acknowledged that ‘there is clearly room for continued improvement’.34 The Department said its main focus has been on upgrading and improving its system for managing new State Pension, though it acknowledged that there will be a ‘long period’ where the old State Pension systems continue to be necessary.35 Clarity of communications Show less

The Department decided to contact pensioners reviewed as part of the State Pension LEAP exercise only if a correction was made to their basic State Pension.36 Other groups of pensioners can receive arrears if they make a claim to the … Read more The Department decided to contact pensioners reviewed as part of the State Pension LEAP exercise only if a correction was made to their basic State Pension.36 Other groups of pensioners can receive arrears if they make a claim to the Department, however, the Department has provided very little information to such pensioners on how to do so. There is no legal obligation on the Department to seek out these pensioners or pay them arrears. The Department will backdate any increased payments by 12 months from the date when a new claim is made. These groups include: • married women, whose spouse or civil partner became entitled to State Pension prior to 17 March 2008; • divorced pensioners who have not informed the Department of the divorce and whose pension could be increased using their ex-spouse or ex-partner’s National Insurance record; and • individuals more than 80 years old who are not already in receipt of basic State Pension, or who currently live abroad and have not yet claimed the uplift.37 Show less

When we asked if the Department is able to provide greater clarity to those who think they may have been affected, the Department said that it cannot publish guidance for those who may have been underpaid, such as an online … Read more When we asked if the Department is able to provide greater clarity to those who think they may have been affected, the Department said that it cannot publish guidance for those who may have been underpaid, such as an online questionnaire, because it believes it cannot accurately cover all possible underpayment scenarios. It said it did not want ‘to miss customers who are eligible for a payment’ and would be unwilling to provide misleading information. However, there remain 153,000 records for which the Department says that ‘it is unable to trace’ the information on the national insurance records of their partner, meaning these pensioners may miss out on an uplift.38 It said it updated information on GOV.UK and on the phone system and promised ‘to continue to explore whether it is feasible to broaden out the guidance’.39 Show less

Until recently, the Department did not keep records on pensioners for more than four years after the date they died due to its data retention policy.40 However, it said it has now 32 C&AG’s Report, paras 18, 4.11 33 Qq … Read more Until recently, the Department did not keep records on pensioners for more than four years after the date they died due to its data retention policy.40 However, it said it has now 32 C&AG’s Report, paras 18, 4.11 33 Qq 79, 80 34 Qq 1, 83; Letter from Permanent Secretary of the Department for Work & Pensions to the Chair of the Committee of Public Accounts, dated 15 November 2021. 35 Q 39 36 Q 77; C&AG’s report, 4.17. 37 C&AG’s Report, para 1.16 38 Q 97 39 Qq 151, 152, 154 40 C&AG’s Report, para 4.14 Underpayments of the State Pension 15 started retaining such records for longer.41 The Department’s priority so far has been to focus on living pensioners rather than the deceased, even though some of their next of kin may be financially vulnerable.42 In some cases, information on next of kin of the deceased is missing, and the Department still does not have a plan to trace them.43 Show less

The Department told us that it began exploring the potential for underpayments from April 2020, following a number of complaints by individual pensioners and a campaign by the former pensions minister Sir Steve Webb and Tanya Jefferies of Thisismoney.co.uk from … Read more The Department told us that it began exploring the potential for underpayments from April 2020, following a number of complaints by individual pensioners and a campaign by the former pensions minister Sir Steve Webb and Tanya Jefferies of Thisismoney.co.uk from January 2020, who provided the Department with example cases of underpayment.44 The Department then published an estimate of the underpayments in May 2020. The Department said that it did not consider it to be a significant issue until August 2020, when a scan of its IT systems revealed that many more people could have been affected than it thought previously.45 The Department first provided a detailed breakdown of State Pension underpayments to the public and Parliament in its 2020–21 Annual Report and Accounts, published in July 2021.46 This was followed by a progress update in October 2021, published shortly before our evidence session.47 When the Chair of the Work & Pensions Select Committee tabled a parliamentary question on 15 October 2021 concerning the breakdown of men and women in the backlog for new State Pension applications,48 the Department responded that ‘this information is only available at disproportionate cost’ to the Department. During the course of our evidence session the Department clarified that some of the data requested was available at an aggregate level, though had only recently been available.49 Financial justice Show less

Managing Public Money (A4.14) states that ‘when public sector organisations have caused injustice or hardship because of maladministration or service failure, they should consider providing remedies so that, as far as reasonably possible, they restore the wronged party to the … Read more Managing Public Money (A4.14) states that ‘when public sector organisations have caused injustice or hardship because of maladministration or service failure, they should consider providing remedies so that, as far as reasonably possible, they restore the wronged party to the position that they would be in had things been done correctly’.50 The payment of a lump sum of arrears may affect the pensioner’s current or future entitlement to other benefits such as Pension Credit, housing benefit, or social care provided by local authorities. The Department told us that it remains the pensioner’s responsibility to advise the relevant authority should their circumstances and eligibility for benefits change. HM Revenue & Customs states that income tax is calculated on arrears of State Pension for the tax year in which the pensioner was entitled to receive it, and not in the year in which a lump sum is paid. Where arrears of State Pension are paid, income tax will only be due on any income that exceeds the personal allowance for the respective tax year.51 However, the Department told us it does not have a clear understanding of all financial consequences of receiving a lump sum on social care provision.52 After our 41 Q 158 42 Q 161 43 Qq 177, 178 44 Qq 108–110; C&AG’s Report, 3.3, 3.5 45 Q 111 46 Department for Work & Pensions, Annual Report and Accounts 2020–21 47 GOV.UK, State Pension underpayments: progress on cases reviewed to 30 September 2021 48 Parliament.UK, State Retirement Pensions, question for Department for Work and Pensions, UIN 56659, tabled on 15 October 2021 49 Qq 68, 69 50 GOV.UK, Managing Public Money, A.4.14 51 C&AG’s Report, para 1.15 52 Q 165–167 16 Underpayments of the State Pension evidence session the Department wrote to us explaining how pensions arrears would affect adult social care provision, benefit entitlement and tax. Specifically, on social care, the Department confirmed that the responsibility to interpret the corresponding regulations sits Show less

Some of those who contacted the Department prior to the LEAP exercise starting in January 2021 received special payments of interest on top of their underpayment.54 The Department chose to stop paying interest on arrears, citing value-for-money considerations and comparability … Read more Some of those who contacted the Department prior to the LEAP exercise starting in January 2021 received special payments of interest on top of their underpayment.54 The Department chose to stop paying interest on arrears, citing value-for-money considerations and comparability of treatment in other LEAP exercises.55 When we challenged the Department on the fairness of this treatment, it stood by its decision not to pay blanket compensation under LEAP exercises and said that ‘it was not seeing the pre-January cases in the context of the wider principle, because they had not begun a LEAP exercise’.56 We asked the Department about whether it had considered the effects of inflation on underpayments, given some of the errors go back decades. The Department told us that it was seeking only to pay people ‘what they are entitled to’, which did not include an element of compensation.57 Potential for further errors Show less

Since our evidence session Sir Steve Webb has also drawn our attention to a potential systemic error affecting divorced pensioners. The NAO report states that “the Department did not find any significant evidence that it had failed to properly process … Read more Since our evidence session Sir Steve Webb has also drawn our attention to a potential systemic error affecting divorced pensioners. The NAO report states that “the Department did not find any significant evidence that it had failed to properly process cases where a pensioner had notified it of their divorce”.58 However Sir Steve believes the scope of the correction exercise is too narrow and should be extended to included divorced people for the following reasons. He told us that in October 2021 the Department published figures which show that there are 720,000 divorced women on the old state pension system. Although a divorced woman could be entitled to up to a full basic pension of £137.60, 40,000 divorced women are on less than £82.45 per week, suggesting there could be many divorced women losing out. In his view the type of error which caused the underpayments occurs when there is a change of circumstances (husband retires, husband dies, pensioner turns 80) and no pension reassessment takes place; exactly the same issue can arise when someone phones up to report a divorce. He told us that in recent months he has identified several individual cases of divorced women who were being paid the wrong amount (or no pension at all) and in each case the Department has accepted that money is due and has paid substantial arrears.59 53 Q 4, Letter from Permanent Secretary of the Department for Work & Pensions to the Chair of the Committee of Public Accounts, dated 15 November 2021. 54 Q 132 55 Q 133; C&AG’s Report, para 4.3 56 Q 139 57 Qq 144–148 58 C&AG’s Report, para 3.7 59 Letter from Sir Steve Webb to the Chair of the Committee of Public Accounts, dated 7 Dec 2021 Underpayments of the State Pension 17 Show less