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28 Jan 2022

Watchdog says people underpaid state pensions left 'in the dark' over entitlement

Questions remain over how lump sum repayments would affect existing benefits
An elderly female pensioner on the phone

A damning report into the underpayment of state pensions said people had been left 'in the dark' over their entitlement and urged clearer guidance to be issued.

This is the latest development in the ongoing scandal surrounding the groups of women who have been underpaid their state pension by the Department for Work and Pensions (DWP).

The new report by a public spending watchdog said the state pension payment system was 'unfit for purpose' and called for clarity on how receiving a lump sum would affect people's existing benefits - such as pension credit, housing benefit, and social care.

Here, Which? looks at what issues were flagged in the Public Accounts Committee (PAC) and what the DWP is doing to put things right.

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Why were pensioners underpaid?

Many pensioners have been left short-changed due to a combination of complex rules about entitlements under the old state pension system and computer errors made by the DWP.

The DWP estimates it has underpaid 134,000 pensioners, mostly women, £1bn, with some errors dating as far back as 1985.

The scandal was first brought to light by former pensions minister Steve Webb in 2020 and prompted an investigation by DWP, which found there had been a systematic underpayment of state pensions to certain women.

In January last year, the DWP started an official exercise to correct the errors, called a Legal Entitlements and Administrative Practices (LEAP) process. This is due to be complete by the end of 2023.

So far, the DWP has found underpayments of between 1p and £128,448. It estimates 118,000 pensioners it can trace could receive payments averaging £8,900.

Who is affected?

These official errors affect pensioners who first claimed state pension before April 2016 and who do not have a full national insurance record or who should have inherited additional entitlement from their deceased partner.

The PAC report focuses on underpaid state pensions as a whole, but 90% of those who claim the type of pension affected are women.

People most likely to have been underpaid include the following categories:

  • 'Category B pensioners': those who are receiving a low basic state pension in their own right, but are entitled to increase it using their living spouse or civil partner's contributions once their partner becomes entitled to the state pension
  • 'Widowed pensioners': widows and widowers who are not entitled to a full basic state pension based on their own contributions can inherit a basic state pension from their spouse or civil partner up to the full basic rate
  • 'Category D' pensioners: men and women previously receiving no or low amounts of basic state pension, who may be able to increase it from the age 80

The groups listed below will not be compensated automatically, and will need to make a claim.

  • Married women, whose spouse or civil partner became entitled to state pension before 17 March 2008 - this is because of a law change in March 2008 that previously required women to claim for the uplift in their pension once their partner became entitled to the state pension
  • Divorced pensioners who have not informed the DWP of the divorce and whose pension could be increased using their ex-spouse or ex-partner's national insurance record.

The DWP will backdate any increased payments by 12 months from the date when the new claim is made.

Find out more: why some women are only getting one years' worth of backdated payments

What did the PAC report find?

The PAC report, published last week had several recommendations which ranged from the DWP updating its IT system to being more transparent with parliament and the committee with its correction exercise. Here we look at the main issues raised.

What is the impact of a lump sum repayment?

If pensioners receive a lump sum in arrears, this could affect their current or future entitlement to other benefits such as pensions credit, housing benefit or social care provided by local authorities.

The PAC felt this issue had not been explored by the DWP and the report said they had shown 'little interest' in the financial consequences of receiving a lump sum.

The DWP told the PAC that it is the pensioner's responsibility to advise the relevant local authority (LA) of a change in circumstances that could affect their benefits.

The committee of cross-party MPs has urged the DWP to look into this and seek assurance from LAs that people will not be treated prejudicially.

The DWP has looked into the tax implications and confirmed with HMRC that income tax will be calculated on state pension arrears for the tax year the pensioner was entitled to receive it, and not the year it was paid.

No formal plan for deceased pensioners

The report said the DWP's priority so far had been to focus on living pensioners rather than the deceased, even though their next of kin may be financially vulnerable.

For those pensioners who have died, this money is now owed to their estate.

However, the DWP has admitted it might not be able to trace the next of kin for around 15,000 deceased pensioners.

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

The knock-on effect

The correction exercise by DWP requires specialist staff and training and is expected to cost £23.4m, with over 500 staff recruited by the time it completes in late 2023.

The report found moving experienced staff to this task has created knock-on effects for new state pension delivery.

It said during 2021 there were serious delays to processing new pension claims.

The DWP admitted in retrospect staff were moved too quickly. It committed to clear the backlog by the end of October last year, however, there were more than 3,000 cases outstanding as of November 4, where it had asked for more information from claimants.

Clear guidance needed

The report said DWP has not given enough information to people who are worried they have been underpaid.

DWP only contacts those who it finds have been underpaid, however other groups of pensioners can receive arrears if they make a claim for additional entitlements.

The DWP said it cannot publish guidance for those who may have been underpaid, such as an online assessment, because it believes it cannot accurately cover all possible underpayment scenarios.

The PAC said it should improve the clarity of information on what people should do if they are concerned. This should also include groups it finds hard to reach such as the next of kin of deceased pensioners.

What is the DWP doing to resolve this?

The DWP told Which? it has introduced new quality control processes and improved training.

A spokesman said: 'Resolving the historical state pension underpayments that have been made by successive governments is a priority for the Department and we are committed to doing so as quickly as possible.

'We have set up a dedicated team and devoted significant resources to processing outstanding cases, and have introduced new quality control processes and improved training to help ensure this does not happen again.

'Those affected will be contacted by us to ensure they receive all that they are owed.'

It said it was carefully considering the content of the PAC report and would respond formally in due course.

  • Find out more: the Which? Money podcast delved into the women's state pension underpayments scandal last year