National Audit Office report into errors in Employment and Support Allowance

The error related to people who may have been entitled to income-related ESA but were instead only awarded contribution-based ESA, and therefore may have missed out on premium payments. 

The average underpayment is likely to be around £5,000 but some people will be owed significantly more. A review of a sample of 1,000 cases suggests that 45,000 claimants  entitled to the enhanced disability premium only may be owed around £2,500 and that around 20,000 claimants who are entitled to the severe disability premium may be owed around £11,500 each. A small number could be owed around £20,000.  

The Department has committed to correcting its error and paying arrears by April 2019. It has redeployed staff to review around 300,000 cases, at a cost of around £14 million, to identify people affected and pay arrears where due.

Eligible claimants will only be paid arrears as far back as 21 October 2014, the date of a legal tribunal ruling. The Department estimates that there may be approximately £100 million to £150 million of underpayments accrued before 21 October 2014, which it cannot pay, in addition to the £340 million it will pay for the period after 21 October 2014.

The error happened because the Department's process for converting people's benefits to ESA did not reflect its own legislation, which from 2010 obliged the Department to assess people's entitlement to both income-related ESA and contribution-based ESA on conversion. In practice it did not always do this.

It took several years for the Department to realise the significance of the error. The Department identified the issue in individual cases at least as early as 2013. However it did not recognise the issue as systemic until early 2014 when staff identified the error as a major cause of ESA underpayments in preparing its 2013-14 financial year fraud and error statistics. In June 2014, the Department issued new advice designed to prevent further errors occurring but did not take steps to assess existing cases. The Department later updated its formal guidance in February 2015. This guidance improved the process for people in the ESA 'support group' for those with the most limiting illnesses and disabilities but the NAO found it did not cover people in the work-related activity group (who are required to undertake activity such as training or CV skills courses).  

From June 2014 and throughout 2015, the Department did not address existing errors. During this time, two key Upper Tribunal cases helped to clarify the law on ESA claims, including conversion cases. The Department did not recognise at the time that the first of these decisions on 21 October 2014 should have triggered a formal exercise to identify people whose legal entitlements might be affected. Similarly, a further decision in June 2015 prompted discussion but no clear action.

From May 2016, the Department's fraud and error team prompted the Department to take action after identifying an ongoing and significant issue with underpayment of ESA premiums. However, in the first briefing to Ministers on this issue in February 2017, the Department recommended undertaking further analysis and seeking further legal advice, while reserving its position on the potential response. In July 2017, the Department recognised that it had a legal responsibility to identify the people affected.  They began contacting people and making payments from August 2017.

In late 2017 two Departmental internal reviews identified lessons. They concluded that a stronger grasp of the legal obligations and risks would have led to more informed discussions in 2014 and recommended that decisions involving legal risk should be made by managers of appropriate seniority; and, that the Department's finance staff could have been notified more quickly so they could understand the implications for the Department's financial reporting and its budget.

Amyas Morse, head of the National Audit Office, said today:

“The facts of this case are that tens of thousands of people, most of whom have severely limiting disabilities and illnesses, have been underpaid by thousands of pounds each, while the Department for several years failed to get a proper grip on the problem. The Department has now committed to fixing this error by April 2019, but not everyone will be repaid all the money they have missed out on.”

Notes for Editors

1.      1. Employment and Support Allowance (ESA) is a benefit that the Department for Work & Pensions (the Department) pays to people who have limited capability to work because they are disabled or ill. In 2016-17, the Department paid out around £15 billion in ESA to approximately 2.4 million people. There are two main types of ESA: contribution-based, which is based on National Insurance contributions; and income-related, which is a means-tested benefit. Income-related ESA can be paid on its own, or as a top up to contribution-based ESA.

2.      2. Not everyone who has been affected by the error will receive the full amount they have been underpaid. This is because of the effects of Section 27 of the Social Security Act 1998. Under section 27, when the Upper Tribunal or court considers an appeal under social security legislation and establishes the relevant points of law, the law as established takes effect from the date of the court’s decision. In this case it was on the 21 October 2014 that the Upper Tribunal decided that contribution-based ESA and income-related ESA were a single benefit and that the Department must assess people for both elements when determining their entitlement to ESA. The Department is therefore proceeding on the basis that it can only legally pay arrears as far back as the date of this ruling.