State pension underpayments and the payment of interest

Robert Thomas, University of Manchester

Should people underpaid their state pensions receive not just arrears for those underpayments, but also the interest on them in order to make up for inflation? The Department for Work and Pensions (DWP) thinks not, but the Public Accounts Committee (PAC) thinks they should. The recent Parliamentary and Health Service Ombudsman (PHSO) report strongly suggests that the DWP’s blanket approach of not paying interest is likely to amount to maladministration. Such a blanket approach is contrary to the ombudsman’s Principles for Remedy and Managing Public Money. This blog looks at these matters and what the DWP should do.

First, the background. In 2020, it came to light that the DWP had for many years underpaid around 134,000 people their full state pension entitlements. It then established a LEAP (Legal Entitlements and Administrative Practices) exercise to identify the underpayments, which is still on ongoing. The basic LEAP principle is that when government fails to give someone their legal entitlements, then it must undertake a LEAP exercise to review all of the cases and to pay people their entitlements. According to the National Audit Office, the average payment has been £8,900 and underpayments have ranged from between £0.01 to £128,448.37, with the earliest dating back to 1985.

However, the nominal value of the underpayments is not the same as their true value, once we take into account inflation. The effects of inflation over so many years will have significantly eroded the value of these payments. The result is that many pensioners will have been underpaid the true value of their state pensions, some potentially by a considerable amount.

When the DWP first started addressing state pension underpayments, it did make special payments of interest on top of the arrears owed to pensioners. Up to January 2021, the DWP paid out £306,165 in special payments. However, when the LEAP correction exercise commenced in January 2021, DWP senior officials and ministers decided to stop routinely making interest payments. This reason was that this would be consistent with the other LEAP exercises the DWP has undertaken. Another obvious reason is financial; the department does not want to  increase its financial costs. The special payments were made before the DWP understood the full consequence of its failures.

The DWP’s permanent secretary was questioned repeatedly by the Public Accounts Committee at its hearing on whether the DWP should pay interest, but he held firm to the department’s line:

‘The law says what [the pensioners] are entitled to, and this is what they are entitled to. We are paying what they are entitled to. I am not paying blanket compensation on top of what they are entitled to.’

In January 2022, the Public Accounts Committee highlighted that the department was now treating pensioners inconsistently as regards interest on their underpayments – depending upon when the DWP considered their case (whether before or after January 2021). The upshot was that the department was not fully restoring pensioners to the position that they would have been in had it paid them correctly in the first place. As the Committee stated in its report:

‘we do not think there is a convincing justification for treating those in scope of the exercise differently to those contacting the Department prior to it. With underpayments going as far back as 1985, the Department is unlikely to be restoring the pensioners to a position as if the issue never occurred, as would be expected according to the principles of Managing Public Money.’

The Committee therefore recommended that the DWP should, in response to its report, ‘set out how its payment of arrears without interest or further compensation is compatible with Managing Public Money’s requirement of restoring the pensioner to the situation they would have been in had the errors not occurred’.

The key principle, as stated in Managing Public Money, is that when public bodies have caused injustice or hardship because of maladministration or service failure, they should consider providing remedies so that, as far as reasonably possible, they restore the wronged party to the position that they would be in had things been done correctly.

The case for the DWP paying interest (and compensation) payments now needs to be seen in light of the PHSO’s recent investigation concerning the DWP’s flawed transfer of people to Employment and Support Allowance (ESA). The consequence was that around 118,000 people did not receive their full ESA entitlements. That was the ‘initial maladministration’, as reported upon by the PAC in 2018.

During the LEAP exercise that followed, Ministers in 2018 adopted a blanket recommendation to rule out compensation and interest payments. The ombudsman found that this also amounted to maladministration, the ‘secondary maladministration’. The blanket decision not to compensate or pay interest was contrary to both the ombudsman’s Principles for Remedy and the DWP’s own guidance on financial redress.

The ombudsman’s investigation concerned a complainant who had suffered serious harm as a result of being significantly underpaid for ESA entitlements. Her complaint for compensation and interest was rejected by the DWP without having her individual’s circumstances considered. That amounted to maladministration because each case should be considered on its own merits. The ombudsman’s Principles for Remedy require that public bodies should ‘consider fully the individual circumstances’. Similarly, the DWP’s own guidance states: ‘Injustice and hardship resulting from maladministration should be addressed on a case by case basis’. This means that a blanket across-the-board refusal of compensation is wrong.

The ombudsman recommended that the DWP pay the complainant both compensation and interest. It was also recommended that the DWP take a proactive approach for all of the other people in a similar position as the complainant, although this recommendation was rejected. This is perhaps something that should be pursued by the House of Commons Public Administration and Constitutional Affairs Committee (PACAC), which often follows up on the ombudsman’s special reports.

Importantly, the PHSO’s ESA report shifts the ground as regards whether the DWP should pay interest on state pension underpayments. It is arguably also maladministration for the DWP not to pay interest or compensation (e.g. consolatory payments for distress) for underpaid pensioners.

When someone who has been underpaid their state pension receives their repayments, this will not amount to the true value, unless interest is added to them. Given the DWP’s response to the ombudsman’s ESA investigation, it might seem unlikely that the DWP will adopt a proactive approach toward paying interest. The only other option is then for pensions to pursue the matter through individual complaints.

Yet, there are major drawbacks to this. Underpaid pensioners are an elderly and vulnerable cohort of people. Making complaints requires knowledge and expertise and providing full information and evidence. There is also the time factor. The DWP is currently taking months to respond to complaints. From the DWP, it can then take a year or so for a complaint to be dealt with by the Independent Case Examiner. Only then can the matter be escalated to the PHSO. Complaining is not an effective remedy for elderly pensioners.

The other option is for someone to take a judicial review challenge on the ground that the DWP has treated people inconsistently and/or for arguably unreasonably departing from its and the Treasury’s guidance on restoring people to the position they would otherwise have been. This sounds fine in principle, but there are obvious problems with judicial review in terms of costs and delay. There is also the difficulty in succeeding on grounds of review such as irrationality and the broad margin of discretion provided to public bodies in the field of social welfare.

In essence, the key underlying issue is this: how should we allocate the cost of governmental maladministration? Should it fall upon the individuals concerned or upon government, and hence society as a whole? The DWP would argue that it is bearing the cost of the underpayments, but this is only partially correct. Unless those arrears include interest, then, given the effects of inflation, people will nonetheless remain underpaid. Putting even this cost on affected individuals is unjustifiably harsh given that they bear no responsibility at all for the DWP’s failures.

What then is the answer? It is simply that the DWP should now pay an appropriate rate of interest on state pension underpayments. As the PHSO recommended in the ESA case, the DWP should take a proactive approach. Individuals should not have to pursue matters through an arduous complaints process, that would amount to another life-draining source of bureaucratic frustration. People adversely affected by faulty administration should be compensated properly and the DWP should do this within a reasonable period of time.

For a forthcoming paper on LEAP, see R Thomas, ‘Legal Entitlements and Administrative Practices: LEAP Exercises and Benefits Administration’ (2022) 29 Journal of Social Security Law (forthcoming).