Underpaid State Pensions: NAO report reveals scale of scandal

Thousands of women have been underpaid the State Pension due to a catalogue of errors at the DWP.

Thousands of pensioners have missed out on more than £1 billion which they should have received in their State Pension.

That’s according to a new report into the underpayment scandal by the National Audit Office, which found that “repeated human errors” over many years had led to a whopping 134,000 pensioners being underpaid.

The system itself was a big factor in that serial underpayment according to the report, which said that some level of errors was “almost inevitable” because of the complex rules and significant amount of manual reviews necessary when assessing claims.

The State Pension underpayment scandal

The pensions consultancy LCP ‒ which has done sterling work on uncovering this particular issue ‒ has outlined six particular categories of women who are most likely to have been caught out by the underpayment scandal.

The biggest cohort is believed to be married women whose husbands turned 65 before 17 March 2008.

These women were entitled to an uplift in their State Pension, which essentially means that the pension they should get is based on their husband’s National Insurance record rather than their own.

However, in many cases, this uplift hasn’t been claimed because the women simply aren’t aware of it.

Along similar lines, there are widows whose pensions have not increased after their husband has died.

These women can potentially receive both the full basic State Pension and a portion of their late husband’s additional pension.

There are also widows whose pension is now correct but may have been underpaid while their husband was still alive – as well as widowers and heirs of married women, where the woman has died but was underpaid the State Pension during her life. 

And don’t forget the divorced women, who may have divorced post-retirement, and who may be entitled to benefit from the contributions of their former spouse.

These aren’t small underpayments either; some of the victims should have seen their pension payments ratcheted up by as much as 60%. That’s a potentially life-changing sum of money.

What went wrong?

According to the NAO report, the errors took place because “State Pension rules are complex, IT systems are outdated and unautomated, and the administration of claims requires a high degree of manual review and understanding by caseworkers”, which is a pretty concerning mix.

It found that caseworkers often failed to set manual system prompts on pensioners’ files so that they could review the payments at a later date, for example, once their spouse hit State Pension age or reached 80.

What’s more, the DWP was found to have missed earlier opportunities to identify underpayments and resolve the issues.

According to the NAO, it doesn’t have a system in place for 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”.

This strikes me as incredible. The DWP could be flooded with complaints about State Pension underpayments, but it has no system in place to record this fact and therefore work out that something is seriously wrong.

Putting things right

The Department for Work & Pensions reckons it will have to pay the affected pensioners that it can trace a total of £1,053 million, which works out at an average of around £8,900 per pensioner.

However, as the NAO points out these estimates are “highly uncertain” with the true value of the underpayments only likely to become clear once the department actually completes its review of all those affected.

We know that those payments have started being made already. But without wanting to be too morbid, the reality is that plenty of the women who have been underpaid are now very advanced in years.

According to the NAO, around 40,000 pensioners who were underpaid have now passed away, and the DWP currently doesn’t have a plan in place for tracing the estates of those deceased pensioners and providing the compensation they are owed.

Their later lives have clearly been impacted negatively by this scandal, and the DWP has a moral duty to identify those who have been underpaid ‒ and give them the money to which they are entitled ‒ swiftly so that these women are not forced to undergo any unnecessary financial hardship.

The NAO report makes clear the scale of the problem ‒ the DWP needs to put the mistakes right and ensure they can never be repeated.