Finance and Sustainable Growth Secretary John Swinney
Memorandum on Public Service Pension Payments
Statement to Parliament
December 16, 2008
This memorandum advises Parliament of the overpayment of pensions to a small minority of pensioners who are members of public sector occupational pension schemes.
The issue I describe affects the UK as a whole. It primarily concerns public service pension schemes with a range of funding mechanisms and governance arrangements. In many cases the legal and financial arrangements underpinning these schemes are reserved and in recognition of this a written statement on the issue has been issued today by the UK Government.
However, because the issue also impacts upon a number of public service pensioners living in Scotland and will naturally be of concern to them, and because Scottish Ministers have some delegated powers for some pension schemes, I judge it appropriate to draw the issue to the attention of this Parliament.
The Issue
The issue concerns the overpayment of occupational pensions to a small proportion of retired public service employees throughout the United Kingdom. This has arisen as a result of the incorrect indexation of an element known as the Guaranteed Minimum Pension or GMP. The impact is that some pensioners have received larger than expected increases to their pensions year on year.
The problem dates back to 1978 when public service occupational pension schemes contracted out of the State Earnings Related Pensions Scheme (SERPS). The conditions of contracting out provided scheme members with a guarantee of a minimum amount of occupational pension. This GMP was available to everyone who was a member of a contracted out scheme between 1978 and 1997 and who would otherwise have been entitled to SERPS.
Public service pensions are uprated in April each year in line with the Retail Price Index. The occupational pension scheme pays for all the uprating before state pension is claimed, but thereafter part of the uprating is paid by the state scheme, depending on the GMP entitlement.
To enable the correct pension increases to be applied, pension scheme administrators need accurate GMP information derived from the individuals National Insurance contribution record. This supply of information to the pension administrator has worked in the majority of cases. But it is now apparent that it has not worked in every instance. In those cases where someone was entitled to a GMP but where the scheme administrator was not informed of that entitlement, the scheme administrator will have paid the full annual inflationary increase to a pensioner each year instead of a sum which is adjusted to reflect the GMP entitlement. Although the size of the subsequent overpayments can start out quite small, the size of the error can compound over time.
Timeline
This issue was first identified as a potential problem in March of this year. The UK Cabinet Office then assumed the responsibility for verifying its scale and considering the response. Their focus was primarily on those schemes which are administered by central government, although consideration was also given to the potential impact on pension schemes administered by local authorities, including those for the Police and Fire services.
Within Scotland, the Scottish Public Pensions Agency, which administers the pensions for the NHS and Teachers in Scotland, immediately set about investigating the extent to which a similar problem might apply to the two schemes they administer. Because of the numbers of potential cases, and the complex range of checks that were necessary, this took until 22 April. Once they had confirmed that the problem affected some members of their schemes, Scottish Ministers were informed immediately.
It has taken several more months for all the central government public service pension schemes across the UK to complete similar exercises. More than 2 million pension records have had to be checked. In order not to cause undue concern to the vast majority of pensioners who are unaffected by this issue, the UK Government took the view that the scoping exercise needed to be completed before the appropriate remedial action could be determined and any consequent public announcement made.
Scale - People
I would now like to address the scale of the problem. Across the UK as a whole, the issue affects approximately 100,000 pensioners within the main central government schemes covering the NHS, Teachers, the Civil Service, the Armed Forces and the Judiciary. Collectively, this represents around 4.5% of the total number of pensioners in those schemes.
Within Scotland, 6009 members of the Scottish NHS and Teachers scheme are affected. This total comprises 3148 NHS and 2861 Teacher pensioners. This represents 4.8% of all pensioners across both schemes. These figures are broadly consistent with the proportion of erroneous cases existing in the NHS and Teachers schemes in England and Wales.
It is also likely that some other Scottish public service schemes which are administered by Local Government are also affected. Preliminary sample work undertaken by COSLA suggests that around 4% of pensioners in the local government, fire and police pension schemes may be affected. If these early results are scaled up across Scotland as a whole, this would represent approximately 4500 pensioners from the local government scheme; 300 police scheme pensioners; and 150 firefighter pensioners.
Scale - Money
Turning now to the financial aspects, I can inform Parliament that for the schemes for which the UK Government is responsible, the total amount of overpayments made since 1978 is approximately £126m.
Within Scotland, the total value of overpayments made to members of the NHS and Teachers scheme since 1978, projected forward to 31 March 2009, totals £7.3m. The split is approximately £5.2m for Teachers and £2.1m for NHS. The average annual overpayment is £161 for those affected within the NHS scheme and £384 for those affected within the teachers scheme. Across both schemes, 15% of the overpayments are for sums of less than £1 per month; 30% involve sums of between £1 and £10 a month; 21% involve sums of between £10 and £25 per month; and 34% are for sums over £25 per month.
Equivalent figures for the Local Government, Police and Fire schemes will be prepared by the appropriate pension schemes administrators. Given the numbers involved, the complexity of the issue and the need for data to be checked by HMRC, this may take several months to conclude.
Cause
The causes of the overpayments have been investigated by HMRC, DWP and central government pension administrators. The UK Government has concluded that there is unlikely to be any single cause. Some causes are likely to be generic across all schemes, while others could be specific to individual pension schemes. However, at one level the reason is clear. The interaction between the state pension system and the occupation pension scheme is particularly complex and was therefore vulnerable to error.
Within Scotland, the SPPA has manually checked every single NHS and Teacher case where an error exists. It has established that in more than 90% of cases the error has arisen from the lack of accurate or complete information received from HMRC. In the other cases the problem has arisen from a combination of other factors including in some cases errors by the Agency itself. Any large volume administrative process will of course be subject to some margin of error but I can confirm that the SPPA exceeded its accuracy targets for 8 of the past 9 years for which comparable accuracy data are available and met the target for the remaining one.
Solutions
I now turn to what is being done to address the issue. Not all aspects of pensions policy and management are devolved to Scottish Ministers and clearly with more powers more options would be available to me. Parliament will appreciate that although Scottish Ministers have a devolved responsibility for making scheme regulations for the NHS, Teachers, Police, Fire and Local Government schemes in Scotland, these responsibilities are legislatively constrained. These constraints include the inter-action with overarching UK pensions legislation and the requirement, in the case of the NHS and Teachers schemes, for Treasury to grant its consent for any changes in the scheme regulations taken forward within Scotland. The Scottish Government does however have authority to write off overpayments made by the NHS and Teacher schemes, and to produce regulations for the Local Government, Police and Fire schemes that will have the same effect. This is what we will do.
This means that no pensioner is required to pay back any of the overpayments they have received in good faith. This decision is the right one both from the point of view of thousands of pensioners already facing cost of living increases and from a financial perspective.
A similar decision has been reached by UK Ministers for the schemes for which they are responsible. So, for example, a retired soldier living in Scotland would not be required to pay back the overpayments they have received.
In respect of the issue of future payments, this Government strongly believes that pensioners should not be penalised for overpayments received in good faith resulting from errors which were no fault of their own. To penalise pensioners who may have entered into financial commitments on the expectation of receiving a certain amount of pension, and at a time of increasing financial pressure, is unfair.
For the Scottish Local Government, Police and Fire pension schemes, Scottish Ministers have a range of delegated powers. We shall exercise these powers to ensure that from April 2009 the amount of overpayment currently received will continue to be paid but will be frozen at the current level. The substantive pension entitlement will continue to receive the full RPI inflation indexation. Because the costs and financial planning assumptions for each of these schemes have been calculated on the basis that the current payments are correct, there is no additional cost to the schemes in taking this course of action.
These actions will be taken forward through revisions to the scheme regulations and we will be consulting on these shortly.
For the Scottish NHS and Teacher schemes, Scottish Ministers are obliged to seek Treasury consent to any changes to the scheme regulations. We have actively sought such consent which would have enabled us to adopt a similar solution to that being applied to affected members of the Police, Fire and Local Government schemes.
This consent was withheld. In consequence we are obliged to adopt the same solution being applied by the UK Government to the schemes for which it has responsibility. This is to put the correct payments in place from April 2009. This means that the majority of affected pensioners in the Scottish NHS and Teachers scheme will receive a pensions increase which is less than expected when pensions are uprated with the RPI in April 2009. A minority will see a reduction in their pension.
Operational Issues
Turning now to how we are responding to inform pensioners of these developments, I can confirm that within Scotland, the Scottish Public Pensions Agency has written to each and every one of its 129,000 NHS and Teacher pensioners informing them of the issue, the extent to which they may be affected, and the decisions of the UK Government in respect of the future payments issue. It has also written to or otherwise briefed the main employing authorities, trades unions and relevant public interest groups such as Age Concern and Help the Aged. An emergency helpline to respond to their questions and concerns has been set up and advice and guidance has been placed on the SPPA website.
Similar measures are being taken by the UK administrators of the MOD and Civil Service pension schemes and the SPPA has today briefed Local Government pension scheme administrators including advice on customer handling arrangements. COSLA are supportive of these briefing arrangements.
Conclusions
The various parties will continue to examine their processes to ensure that the problems do not recur. I will be pressing the UK Government to commission an urgent review of the causes to ensure that robust remedial action is taken so that the public have the assurances that everything possible is being done to prevent any future recurrence.
Within Scotland, the SPPA have been on the front foot since the issue was first identified. They were the first pensions administrator in the UK to scope the scale of the problem for their schemes and the first to develop robust remedial action. This has been reinforced by the introduction from September this year of new pensions casework handling technology which further automates complex administrative and calculation processes facilitates the development of more effective electronic data exchange processes with HMRC and others.
Where we have the powers, we are protecting affected pensioners in the Local Government, Police and Fire schemes. Without these powers, we are at least ensuring that historic overpayments are not reclaimed. We will work with all administrators and agencies involved to assist with the communication and explanation of these matters to the individuals affected. Where there are changes to pensions, we will hold off from making these until April 2009 so that all pensioners from whatever scheme can continue to receive current payments through the winter months.
It is deeply frustrating that we are unable due to legislative constraints to adopt the solution which we would have preferred to utilise in Scotland for affected members of the NHS and Teachers schemes. The result is that people affected by the same problem are treated differently. This has deprived those Scottish pensioners affected by the issue of a common sense pragmatic solution that would not have placed them at a financial disadvantage.