Roughly 200,000 women could be in line for payouts averaging £13,500 after a UK government review found systemic underpayment of their state pension for up to two decades.
The Department for Work and Pensions on Wednesday revealed details of the underpayments, and estimated the bill for rectifying the problem at about £2.7bn.
The underpayment error centres on state pension uplifts, or cash increases, for certain married women, widows and over-80s dating back to 1992.
The issue primarily relates to the way in which the “old” state pension system (for those who reached pension age before 6 April 2016) had special provisions for married women.
Under these old rules, married women who had a poor pension in their own right could claim a 60 per cent basic state pension based on their husband’s record of contributions.
Processes that should have meant that their pension was automatically increased at a certain point did not take place in many cases.
“The action we are taking now will correct the historical underpayments that have been made by successive governments and anyone impacted will be contacted by us to ensure they receive all that they are owed,” said the DWP.
The issue was brought to the attention of the DWP in 2020, after Steve Webb, former pensions minister, tabled a freedom of information inquiry to the department that revealed large numbers of women were being paid state pensions below the expected rate.
The DWP subsequently set up a special unit employing more than 100 civil servants to investigate the issue, but Wednesday was the first time the DWP had disclosed the full scale of the problem.
“This figure [£2.7bn] is truly mind-numbing,” said Webb, now partner with Lane, Clark & Peacock, an actuarial consultancy.
“When I first looked into this issue a year ago I had no idea it would explode into such a huge issue. Repayments of £3bn over the next five years could imply huge numbers of women have been short-changed, potentially for a decade or more.”
Webb added: “The government needs to devote serious resources to getting these repayments out quickly as these women have waited long enough.”
The scale of the underpayments initially came to light on Wednesday in the details of an Office of Budget Responsibility report, published alongside the Budget, which forecast the cost of addressing the underpayments at about £3bn over the six years to 2025-26, with costs peaking at £700m in 2021-22.
According to the OBR, the state pension administration error identified in March 2020 suggested that a small number of people had been underpaid in the category BL, where their pension is derived from their partner or spouse’s national insurance record.
“The underpayment affected married women whose husbands reached pensionable age before 2008 and who were unknowingly entitled to ‘enhanced pension’ that would have boosted their payments by up to 60 per cent,” said the OBR report.
Subsequent DWP investigations between May and December 2020 uncovered a systematic underpayment of state pensions, meaning tens of thousands of married, divorced and widowed people may have been underpaid, the OBR said.
Officials said the estimate of 200,000 people affected, predominantly women, was uncertain as it required an assessment of hundreds of thousands of cases, which may take many months to complete.
However, the government’s estimate for remedying the underpayments of £2.7bn is based on roughly 200,000 claimants with average payouts of £13,500, though the sums could vary between individuals.
The government said it would write to those who were affected but that the work would take some time. Its repayment programme commenced in January.
Baroness Ros Altmann, a former pensions minister, called for an investigation into the underpayments. “It is important we find out what went wrong and why the underpayments were not detected for so long,” she said.
“The state pension is so complicated it is not surprising that a problem has arisen, so they need to understand what went wrong.”