PAC: “Shameful shambles” of DWP’s long term underpayment of state pensioners with “little interest” in full consequences 

The Department for Work & Pensions (DWP) estimates it has underpaid 134,000 pensioners, mostly women, over £1 billion of their State Pension entitlement, with some of the errors dating as far back as 1985.   

In January 2021, DWP started an official exercise to correct the errors, the ninth such exercise since 2018.  The errors - which mostly affect widows, divorcees and women who rely on their husband’s pension contributions for some of their pension entitlement - happened because of the Department’s use of outdated systems and heavily manual processing.  Small errors that were not recognised each time added up over years to significant sums of money.  

DWP will only contact pensioners when it finds through these exercises that they have been underpaid, and admits that many more are not receiving their due – these “risk missing out on significant sums”, with “little guidance for those currently claiming State Pension who are concerned that they have been underpaid” and people left “in the dark over their entitlement”.  

There is currently no formal plan for contacting the next of kin where a pensioner who was underpaid is now deceased. 

DWP is only paying those it has identified as having a legal entitlement to arrears, in some cases many years after the event, and has been inconsistent in paying interest. It has shown little interest in understanding the further knock-on consequences, including on social care provision, for those it underpaid.   

Fixing DWP’s mistakes itself comes at great cost to the taxpayer - expected to cost £24.3 million in staff costs alone by the end of 2023. Experienced, specialised staff have been moved away from business-as-usual and as a result DWP is already experiencing backlogs in processing new applications.

The risk remains that the errors that led to underpayments in the first place will be repeated in the correction exercise, if not also in new claims.  

Dame Meg Hillier MP, Chair of the Public Accounts Committee said: “For decades DWP has relied on a State Pension payment system that is clunky and required staff to check many databases - and now some pensioners and the taxpayer are paying in spades.  

“Departments that make errors through maladministration have a duty to put those it wronged back in the position they should have been, without the error. In reality DWP can never make up what people have actually lost, over decades, and in many cases it’s not even trying. An unknown number of pensioners died without ever getting their due and there is no current plan to pay back their estates. 

“DWP is now on its ninth go at fixing these mistakes since 2018, the specialised staff diverted to fix this mess costing tens of millions more to the taxpayer and predictable consequences in delays to new pension claims. And there is no assurance that the errors that led to these underpayments in the first place will not be repeated in the correction exercise.  

“This is a shameful shambles. The PAC expects DWP to set out the step changes it will make to ensure it is among their last.” 

PAC conclusions and recommendations  

7.                   For decades, the Department has been relying on a State Pension payment system that is not fit for purpose. The lack of effective measures to mitigate against the system’s intrinsic vulnerability to error constitutes a fundamental control failure in a critical part of the Department’s responsibilities. The Department’s administration of State Pension has limited automation and requires the use of multiple systems. It is not fit for purpose and with such an outdated system the department should have had a more rigours risk assessment process. The underlying IT system that is it relies on to manage millions of pensioner records dates back to 1988 and is heavily manual. Despite the complexity of State Pension entitlements and the increased risk posed by manual processes, the Department’s existing quality checks failed to identify the systematic underpayment of thousands of pensioners. The Department repeatedly missed opportunities to upgrade and instead added new functionality by introducing additional systems on top of the first, some of which are also increasingly out-of-date, increasing the complexity of its administration. The complexity and age of existing systems make it difficult for the Department to adequately monitor risks on the State Pension. 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. This makes it impossible to identify whether particular groups are more vulnerable to administrative errors. But some events, such as birthdays. which trigger a change of entitlement are foreseeable.  

Recommendation: As a matter of urgency, the Department should consider whether there are cost-effective ways to upgrade its IT systems and enhance its administrative processes to ensure the quality and timeliness of management information and reduce the risk of repeated errors. In prioritising what IT infrastructure to upgrade, it should factor in the opportunity cost of not upgrading old systems, including the cost of errors and underpayments to the citizen.  

8.       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.  

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.   

9.                   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.  

10.               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 2023. Moving experienced staff from business-as-usual into the correction exercise has created knock-on effects for new State Pension delivery and, in retrospect, the Department admits that staff were moved too quickly. One impact was that during 2021 there were serious delays in the processing of new pension claims from people who had just reached state pension age. The Department committed to clear the backlog of new State Pension claims by the end of October 2021 but over 3,000 cases remained outstanding as at 4 November 2021, where the Department asked for more information to be provided by claimants. There is also a risk that, as more pensioners are paid under the new State Pension system, the Department’s focus will shift away from the more complex old State Pension system, potentially leading to more errors.  

Recommendation: The Department needs, in the short term, to minimise the knock-on effect of moving experienced staff to work on the correction exercise on other service areas and, in the long term, to ensure that it retains expert staff on the old State Pension rules so long as they are needed to administer the benefit over the following decades.  

11.               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.  

12.               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 compatible with Managing Public Money’s requirement of restoring the pensioner to the situation they would have been in had the errors not occurred.  

13.               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 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. 

Full inquiry info including evidence received https://committees.parliament.uk/work/1517/underpayments-of-the-state-pension/