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NAO investigation: DWP underpaid more than £1bn in State Pensions

Author: ICAEW Insights

Published: 21 Sep 2021

The Department for Work & Pensions estimates that it underpaid 134,000 pensioners more than £1bn in State Pensions - almost £9,000 per pensioner.

A National Audit Office (NAO) investigation into the underpayment of State Pensions has revealed that pensioners lost out on payments due to repeated human errors, ‘some level of which was almost inevitable given the complex rules and high degree of manual review necessary when assessing claims,’ according to the NAO report.

The errors affect pensioners who first claimed State Pension before April 2016, do not have a full national insurance record and should have received certain increases in their basic State Pension. The issues were brought to the Department for Work & Pensions (DWP) by individual pensioners, concerned experts and the media. The DWP started exploring the ‘potential for error’ from April 2020 and confirmed there was a significant issue in August 2020. It started to review cases from January 2021 and will contact pensioners if it finds that they have been underpaid.

The department estimates it will need to pay affected pensioners a total of £1,053m, representing an average of £8,900 per pensioner. The DWP has not assessed the demographics of pensioners likely to be affected but according to the NAO, most are likely to be women. The DWP’s estimates are highly uncertain, and the true value of the underpayments will only become clear once it has completed its review of all affected cases.

Gareth Davies, head of the NAO, said: “The impact of the underpayment of State Pension on those pensioners affected is significant. It is vital that the DWP corrects past underpayments and implements changes to prevent similar problems in future.”

Why did the errors occur?

According to the NAO report, the errors occurred because State Pension rules are complex, DWP IT systems are outdated and unautomated, and the administration of claims requires a high degree of manual review and understanding by caseworkers. 

This makes some level of error in the processing of State Pension claims almost inevitable. The department’s caseworkers often failed to set (and later action) manual IT system prompts on pensioners’ files to review the payments at a later date, such as their spouse reaching State Pension age or their 80th birthday. Caseworkers also often made errors when they did process prompts because frontline staff found instructions difficult to use and lacked training on complex cases.

The department’s approach of measuring, identifying and tackling the largest causes of fraud and error means it missed earlier opportunities to identify underpayments. It does not have a means of reviewing individual complaints or errors, such as how many people are complaining about the same issues, to assess whether the errors have a systemic cause. Quality assurance processes focused 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.

LEAPS were needed to unearth the underpayments

In January 2021, the department started reviewing cases at risk of underpayment in a Legal Entitlements and Administrative Practices (LEAP) exercise. This exercise was originally expected to take over six years to complete, but following a ministerial decision to recruit additional staff, the DWP revised the completion date to the end of 2023. 

The DWP expects to increase the number of full-time staff working on the LEAP exercise from 184 in March 2021 to 544 by the end of January 2022. It expects the administration of the LEAP exercise to cost £24.3m in staff costs.

Between 11 January and 5 September 2021, the DWP reviewed 72,780 cases it had identified as being at risk of having been underpaid or who contacted it querying their payment and paid £60.6m of arrears to 11% of these cases. The department is prioritising individuals who fall into “at-risk” categories, such as those who are widowed or over age 80.

Alison Ring, ICAEW Public Sector Director, said: “It is disappointing that a fifth Legal Entitlements and Administrative Practices (LEAP) process within the last three years had to be put in place to review all cases at possible risk of being underpaid. 

“Government must learn lessons from previous underpayment errors made and put in place measures that prevent this from happening in the first place, as not only are people being underpaid but in the long run it costs more to fund and administer,” she continued.

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