The key problem with the new National Insurance Recording System is that the computer has no information about the national insurance contributions people paid for the whole of 1997/98. Entitlement to retirement pension, widow's benefits, the non-contributory jobseeker's allowance paid for the first six months of unemployment, and incapacity benefit depends on the amount of national insurance contributions paid in particular tax years. So without the information for 1997/98 claims for these benefits made since 6 April 1998 cannot be calculated accurately. The information is slowly being loaded into the computer, but people claiming today could be paid the wrong amount if their information is still missing.

The £170m system was supposed to be fully operational by February 1997. But it is now not expected to be working properly until April this year at the earliest. As a result, up to 500,000 people who reached pension age and claimed their pension from 6 April 1998 could be getting the wrong amount and well over a million claims to other benefits including jobseeker's allowance, widow's benefits, and incapacity benefit may be incorrect as the information they are based on is incomplete.

The Benefits Agency estimates that it could take up to two years to sort out the mess and be sure that all payments are correct. Only then can claims for compensation be considered. Two weeks ago, social security minister Hugh Bayley [2 y's correct] had to assure MPs that where a pensioner died before the matter was resolved, any underpayment would be paid to their estate.

The problem will affect people who claimed their retirement or widow's pension since 6 April last year and already have a gaps in their contribution record. A full pension is paid even where five years' contributions are missing. But after that, every year missed reduced the pension by 2 or 3pc - £1.30 or £1.95 off the basic retirement pension of £64.70 a week. Many people have gaps due to education or caring for children. They could all be affected. And for people with a very poor contribution record the loss could be a lot more. People who have paid national insurance contributions for less than ten or eleven years get no pension at all. For them an extra blank year in 1997/98 could cost them the minimum pension paid to those with poor contribution records - up to £17.46 a week.

The second problem with pensions is calculating SERPS - the State Earnings Related Pension Scheme. Anyone who was paying into that during 1997/98 will not get any extra pension relating to their earnings in that year. That could cost them up to £5 a week in lost SERPS. Some people whose records seem to have been misplaced completely - around 15,000 over the year - may find that the Department cannot pay them any SERPS at all at the moment. In exceptional cases they could lose more than £100 a week.

Altogether the Department reckons up to 200,000 pensioners who claimed this year may be getting the wrong weekly payment.

People who have been underpaid would normally only get compensation if the wrong pension was paid for more than eight months, the underpayment was at least £100, and the compensation due - effectively the interest earned on that underpayment - amounted to at least £10. Most of the pensioners affected would not be compensated under these stringent rules. So last week Alastair Darling announced that anyone who fell outside the existing scheme but had experienced what he called 'unreasonable delay' would get a fixed compensation payment of £10. The details will be announced later.

Other problems could affect people who have opted out of SERPS into a personal pension. Some of their national insurance contributions are paid into their pension fund. Those payments have not been made on time - or at all in some cases - in 1998/99. The Department of Social Security has already agreed to pay an extra 0.5% a month on the missing contributions to compensate for the loss of investment growth during the time the payments were missing. But the Government admits that amount may not reflect the true loss.

13 February 1999

e-mail Paul Lewis on paul@deadline.demon.co.uk