A new report by the National Audit Office (NAO) has found that "repeated human errors over many years" have contributed to the underpayment of 134,000 pensions, valued at over £1bn.
It concluded that the blunder by the Department for Work & Pensions, which disproportionately affects women, was said to be "almost inevitable" given complex rules and the high degree of manual review necessary when assessing claims.
The errors affect pensioners who first claimed State Pension before April 2016, do not have a full national insurance record, and should have received certain increases in their basic State Pension.
The errors were brought to the DWP’s attention by individual pensioners, concerned experts and the media.
The Department started exploring the ‘potential for error’ from April 2020 and confirmed that there was a significant issue in August 2020. It started to review cases from January 2021 and will contact pensioners if it finds that they have been underpaid.
The DWP estimates that it will need to pay the affected pensioners it can trace a total of £1bn, representing an average of £8,900 per pensioner affected.
It has not assessed the demographics of pensioners likely to be affected, but most are likely to be women. The true value of the underpayments will only become clear once it has completed its review of all affected cases.
"Many of these women had no idea that they were even entitled to a higher pension and so did not ask about it and while the DWP has begun making repayments it is likely going to take some time before all those affected have been identified," said Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.
The errors occurred because state pension rules are complex, IT systems are outdated and unautomated, and the administration of claims requires a high degree of manual review and understanding by case workers.
This makes some level of error in the processing of State Pension claims "almost inevitable", said he NAO.
The department’s caseworkers often failed to set (and later action) manual IT system prompts on pensioners’ files to review the payments at a later date, such as their spouse reaching state pension age or their 80th birthday.
Caseworkers also often made errors when they did process prompts because frontline staff found instructions difficult to use and lacked training on complex cases.
“The impact of the underpayment of state pension on those pensioners affected is significant. It is vital that the Department for Work & Pensions corrects past underpayments and implements changes to prevent similar problems in future," said Gareth Davies, the head of the NAO.
The Department’s approach of measuring, identifying and tackling the largest causes of fraud and error means it missed earlier opportunities to identify underpayments, said the NAO. It does not have a means of 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.
Quality assurance processes focused on checking changes to case details, such as a change of address or the death of a spouse, rather than the overall accuracy of the payments.
Watch: Is a UK state pension enough to survive on retirement?
In January 2021, the Department started reviewing cases at risk of underpayment in a Legal Entitlements and Administrative Practices (LEAP) exercise. This exercise was originally expected to take over six years to complete, but following a ministerial decision to recruit additional staff, the Department revised the completion date to the end of 2023.
The department expects to increase the number of full-time staff working on the LEAP exercise from 184 in March 2021 to 544 by the end of January 2022, a move that will cost £24.3m in staff costs.
Between 11 January and 5 September 2021, the Department reviewed 72,780 cases it had identified as being at risk of having been underpaid or who contacted it querying their payment, and paid £60.6m of arrears to 11% of these cases. The Department is prioritising individuals who fall into “at risk” categories, such as those who are widowed or over age 80.
The DWP may find it particularly difficult to correct underpayments of pensioners who have died. It does not know how many pensioners who have died have been underpaid as, for data protection reasons, it does not usually keep records for more than four years after a pensioner’s death, and if married, their spouse’s death.
As at August 2021, the Department had not approved a formal plan to trace the estates of deceased pensioners, said the NAO.
"While this issue affected women on the basic state pension which was replaced in 2016 it still serves as an important reminder to make sure you and your loved ones receive what you are entitled to," said Morrissey.
The DWP didn't immediately respond to Yahoo Finance UK's requests for comment.