This piece first appeared in Saga Magazine in October 1999
The text here may not be identical to the published text

The Benefits Agency may have paid the wrong amount of money to more than a million people who have retired, lost their job or been widowed. Some will have been paid money they are not due - others will have been wrongly denied benefit they are entitled to. Many more will simply have been paid the wrong amount - usually too little. In addition, millions of people still in work have had payments to their personal pension funds withheld. By keeping their money the Government has made £58 million in interest - but has only offered to pay them £38 million in compensation.

The biggest crisis ever to hit the Benefits Agency has been caused by problems with a new computer system which took over the job of keeping the National Insurance records. The new computer was due to be installed by April 1997 but was delayed more than a year and did not begin to function properly until around January 1999. The Inland Revenue - which took over responsibility for National Insurance from the Contributions Agency in April this year - admits there are still hundreds of problems with the system which have still not been cured.

As a result of these failures, the National Insurance contributions paid in the tax year 1997/98 were simply not recorded onto the computer. These records are used to decide entitlement to retirement pension and three other social security benefits and to work out how much should be paid. Apart from retirement pension, the benefits affected are widow's benefit, contributory jobseeker's allowance (which used to be called unemployment benefit), and incapacity benefit - which is paid to people who have stopped work because of ill-health. Every claim for one of these benefits made between April 1998 and January 1999 was assessed without knowing what contributions had been paid in 1997/98. Without that information the Benefits Agency was reduced to estimating entitlement - sometimes using paper records which are not necessarily accurate - and doing the calculations by hand. Hundreds of thousands of payments were wrong.

The Inland Revenue says that it has reduced the backlog of information about contributions made in 1997/98 from more than 19 million items to fewer than 200,000. And it says that despite some continuing problems, the records for 1998/99 are being loaded onto the computer slightly faster than they would have been under the old system. But the Benefits Agency is much less advanced in correcting the payments that were wrongly made. A spokeswoman told Saga Magazine "The recovery programme began in April and we are going ahead with it. There are no figures yet." But we understand it could take at least another six months to clear the backlog and even longer to calculate and pay compensation payments.

Reporting on the fiasco in July this year, the Public Accounts Committee of the House of Commons said "There is a basic need for the state to be able to calculate and pay people's benefits and pensions…In our view there has been a clear failure to deliver services to the citizen."

Retirement and widow's pension

The people affected reached pension age or were widowed between April 1998 and January 1999. On the whole they will have been paid too little. But not everyone will be affected and there are two separate problems.

The basic pension The first problem will affect people who already have gaps in their contribution record. You can get a full retirement pension even if you have paid no contributions at all for up to five years. So most people will not be affected by the absence of the 1997/98 tax year in their records. But those who have four years or more missing already will find the gap in 1997/98 reduces their pension by 2% or 3% - a cut of £1.33 or £2 a week.

A few people will find the missing year costs them even more. People who have paid contributions for only nine or ten years cannot get a pension at all (the exact number depends on their age, sex, and working history). But those with ten or eleven years do qualify and get a minimum pension of £16.75 a week. In some cases the missing year will mean the difference between getting that pension and getting nothing.

Additional pension The second problem affects anyone who paid into the State Earnings Related Pension Scheme (SERPS) in 1997/98. This additional pension tops up the basic retirement pension of £66.75 a week and can be worth £100 a week, though it is usually far less. It is based on earnings since 1978/79 and the loss of the earnings records for 1997/98 will always reduce its value - on average by around £5 a week. In about 15,000 cases the entire earnings record seems to have gone missing. In exceptional cases that could cost up to £100 a week in lost SERPS.

Contributory jobseeker's allowance and incapacity benefit

It is not just pensioners and widows who could have suffered because of the problems with the computer. Anyone who lost their job and claimed benefit as unemployed or because they were too ill to work may have been wrongly refused any money. The missing year of 1997/98 could make the difference between being entitled to the benefit or not. And with contributory jobseeker's allowance worth more than £50 a week and incapacity benefit currently worth more than £60 a week, those losses could be very significant. Overpayment letters

Most of the mistakes will tend to be underpayments. Though in some cases where the person said doing without the benefit would cause hardship, the Benefits Agency did try to assess the case using all the available evidence and made a payment. In some cases, this might have been more than they were due. Paying out benefits without the full information causes a problem for the Agency - if money is overpaid due to an error by its staff then the Agency normally has no legal right to recover the overpayment. So along with the estimated amounts it has been sending letters to pensioners asking them to sign and return an agreement that they will repay any money which has been overpaid. If they refuse to sign the letters, then they will not get their pension. These letters have been sent to everyone who has been sent a payment during that period, even though the vast majority will have been paid too little. But the letters have caused concern, and some people have been afraid that, if eventually it turns out they have been overpaid, they could be faced with a bill of several hundred pounds.

The MPs on the Select Committee were not impressed. "We are concerned that the uncertainty and distress this has created may have led them not to spend benefits because they might fear having to repay the money later. We expect the Benefits Agency to review the way they communicate with those affected and to review all interim and emergency payments urgently"

Compensation

When the Department of Social Security makes a mistake in paying benefits then it will sometimes pay compensation. In 1997/98, it paid out nearly £5 million to around 10,000 people. But the rules for getting compensation are very strict - for example none is paid for a faulty pension unless it is delayed or paid wrongly for several months and the amount of the underpayment must be at least £100. That would exclude many of the people who have suffered due to the computer error. So in February the Government decided to make a flat-rate payment of £10 to anyone whose benefit had been wrongly paid but who would fall outside the standard compensation procedure. By the end of May nearly £2 million had been paid out. Other people who would qualify under the standard rules of the compensation scheme will be considered at a later stage when the actual losses have been calculated. The Department of Social Security is unwilling to publish an estimate for the total compensation bill at this stage.

Personal pensions

Apart from people who have retired or stopped work for some other reason, a large group of people in work has also lost money. And the Government has made £20 million profit on the compensation they have been offered.

People who left SERPS to take up a personal pension (or in some cases a pension paid through their job) get part of their SERPS contributions paid into their personal pension fund. But while the computer system was not working the exact amount of money due to each person's fund could not be calculated and was not paid over. Instead it was held by the Treasury, earning interest. Meanwhile, millions of individuals had less in their pension funds where it would have normally been invested on the stock market. Because each fund is separately controlled, and invested in a different range of shares, the total loss to each individual is hard to calculate. So the Treasury decided to pay a flat rate of compensation for the loss of investment growth. The amount was half a percent of the unpaid money for each month from October 1998.

The unpaid contributions eventually totaled more than £2 billion. And, the compensation amounted to £38 million. But the Select Committee discovered that the unpaid contributions had in fact been invested in Government bonds and that the Treasury had made £58 million in interest on it - that is £20 million more than the compensation paid out. One reason for the difference was that the unpaid money was being held from May 1998 but the compensation was calculated only from October - missing five months investment growth. The MPs said

"We find it difficult to understand how in these circumstancess, the compensation payable to pension providers can be fair and we are concerned that pensioners may suffer reduced pensions as a result. We have asked the Inland Revenue to conduct a thorough review of these calculations."

There is no news yet on the response to that request.

October 1999

e-mail Paul Lewis on paul@paullewis.co.uk