A potential scandal is brewing in the world of defined benefit pensions, which could see tens of thousands of pensioners asked to repay money received in error. There are suggestions that some individuals may be held liable for up to £50,000. Could this really happen, might you be affected – and what could you do about it?
Faulty data supplied to HMRC by employer pension schemes could be soon to cause major problems for a minority of members now receiving their pensions. Mistakes in data entry have caused a small but significant number of these pensions to be overpaid, in some cases by as much as £50,000 over the course of a member’s retirement. According to figures from the Pension Protection Fund, up to 46,300 people may have received these overpayments, and could – in theory at least – be asked to pay the money back.
One tiny error = big problems
The problem has arisen due to some scheme members being ‘contracted out’ of the State Earnings-Related Pension Scheme (SERPS) when contributing in their workplace pension. From 1978 to 1997, companies offering DB schemes could achieve a reduction in their (and their employees’) National Insurance contributions by taking employees out of the additional State Pension. The idea was that this would result in lower overall State Pension, but a higher workplace pension which would more than compensate.
But mismatches between HMRC records and employer schemes suggest that some scheme members were listed as contracted out when they weren’t. The records date from a period when all data entry was manual. Former pensions minister Sir Steve Webb, now policy director at Royal London, explained: ‘If you typed a National Insurance number wrong, or put a decimal point in the wrong place, and you are doing this for million and millions of people, even a 0.1 error still gives you thousands of people with the wrong numbers.’
A member incorrectly listed as contracted out of the Additional State Pension would end up receive a higher pension from their workplace pension than they were actually entitled to. The question now is whether or not pension schemes will try to recoup the money that has been paid out in error. Conversely, there may be many pensioners who have not received the full payments they were entitled to – though it is believed that overpayments exceed underpayments.
Sir Steve went to say that trustees face a dilemma when it comes to resolving this issue, in that they have a duty to the existing scheme members as well as to those whose pension are already in payment. ‘The trustees aren't allowed to pay money that they shouldn't pay. It will increase the margins, the deficits and it will have an impact on other members.’ However, the alternative option of schemes clawing back money from pensioners is unlikely to play well in the media. HMRC have already indicated that it is not a matter for them, saying, ‘Pension scheme administrators are responsible for the quality of their records, including data on contracting-out.’
Schemes have until October 2018 to check their data, and it may take another two years to work out how many pensioners have received incorrect benefits. The Pensions Administration Standards Association (PASA) has found that currently 13 per cent of affected schemes are recouping the overpayments.
Could you be affected?
If you were in a DB pension scheme between 1978 and 1997, there is only a very small chance that you are among those who may be affected. Even if you are, it is still far from certain that all schemes will take any action to recover the money. However, it may be worth talking to a financial adviser who specialises in DB schemes, as they can calculate the amount you should have been entitled to receive under the scheme, and see if this matches up to your actual payments. There is even a small chance that you could have been underpaid, which makes it all the more worthwhile to find out.