State Pension underpayment ‘scandal’ underlines UK pension complexity

23 September 2021

The Department for Work and Pensions has underpaid more than £1 billion worth of state pensions after the “complex” pension rules led to a catalogue of human errors.

An inquiry by the National Audit Office (NAO) revealed that around 134,000 pensioners had missed out on average £8,900 each as a result of the errors.

However, this figure could rise further, with the public spending watchdog admitting that current estimates were “highly uncertain.”

In its findings, the NAO said: “The final value of the underpayments and the number of pensioners affected will only become clear once the Department has completed its review of all affected cases.”

The NAO inquiry found that the errors affected around 53,000 pensioners who should have benefitted from their spouse’s or civil partner’s national insurance record, 44,000 widow and widowers who should have inherited more state pension entitlement from their deceased partner and 37,000 pensioners who should have received an increase in their pension on their 80th birthday.

According to the NAO, the payment issues were due to “repeated human errors over many years” as a result of the complex state pension rules and a lack of understanding.

Under current processes, pension caseworkers must review information across at least three systems, understand which of the state pension rules apply to each claim and then accurately interpret them in order to assess a pensioner’s eligibility.

Tom Selby, head of retirement policy at AJ Bell, called the findings “nothing short of a national scandal.”

Selby said: “Tragically, of the 134,000 people underpaid by an average of £8,900 each, around 40,000 are estimated to have died before being compensated. Furthermore, those lucky enough to still be with us may have been living in penury when they should have been enjoying their retirement. The 94,000 people still alive who are owed money need to get it back as soon as possible. They also deserve answers about how this was allowed to happen over such a long period of time.

“Once compensation has been paid, the Government needs to undertake a comprehensive review of its processes to ensure these mistakes are never repeated. Trust in pensions is fragile at the best of times and failures such as this will not help. Sadly, it will likely take years if not decades to rebuild the confidence lost as a result of this scandal.”

Andrew Megson, executive chairman of My Pension Expert, said the findings should serve as a ‘wake-up call’.

“The Government has allowed a combination of complicated pension legislation, tax, government processes, underinvestment and legacy processes to fester for decades. And under these circumstances, major mistakes are inevitable.

“This has to be a wakeup call for the Government, as well as the entire pension sector. Both parties have been complicit in allowing layer upon layer of regulation to isolate consumers from their pension, which we all know has led to a widening pension engagement gap. As such, pensioners are ill-equipped to understand the complex systems and, more importantly, where mistakes have been made, and we see major mistakes going unnoticed before it’s too late.”

Megson added: “I urge the Government to commit to an interrogative and transparent audit of the state of UK pensions, as well as the processes of the DWP. Doing so will enable it to understand how legislation and processes can be simplified — not to mention develop a plan to implement positive and sustainable change. Only then will they be able to restore confidence in the pension system.”

The NAO said the errors were first brought to the DWP’s attention by individual pensioners, as well as former pensions minister Sir Steve Webb and Tanya Jefferies of who provided the Department with example cases of underpayment. While the demographics of pensioners likely to be affected will not be known for certain until the DWP completes its correction process, it’s estimated that 90% of those affected are women.

Sarah Pennells, consumer finance specialist at Royal London, said: “The number of women affected and the amount underpaid are eye-watering. Women are more likely to rely on their state pension in retirement. So the fact that many thousands have missed out on money that’s rightfully theirs, because of mistakes and a complex system, is heart-breaking.”

Pennells added: “Although the new state pension is designed to be simpler, it is not straightforward for everyone. People currently working will have built up some of their state pension entitlement under the old system, pre April 2016, and some under the new system. If they were contracted out of National Insurance, because they were in a final salary pension scheme, some of their state pension will be paid by their workplace pension – which they may not be expecting. The state pension may be universal, but it is far from universally understood. For those who need further guidance and support, the Money and Pensions Service is a good place to start.”

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